Moving Beyond Crisis Management in the West Bank and Gaza

IMF Blog, February 28, 2013

Source details

Over 2008–10 the Palestinian economy "had been recovering strongly," supported by generous aid and an easing of Israeli restrictions on movement and trade.
The Palestinian Authority made progress in institution-building and "prudent fiscal management," which "enhanced public-sector efficiency, reduced wasteful expenditure," and enabled a reduction in its recurrent budget deficit from US$1.7 billion in 2008 to US$1.1 billion in 2010.
By 2011 donor aid had begun to fall below amounts needed to finance the Palestinian Authority’s already tight budgets, driven by donor fatigue from a deadlocked peace process, rising global economic challenges, and competing regional aid needs associated with the onset of the Arab Spring.

Donor aid shortfalls, compounded by repeated delays in the transfer of clearance revenues (indirect taxes collected by Israel on behalf of the Palestinian Authority), have led to:
- A rapid buildup of domestic payments arrears.
- Borrowing up to domestic commercial banks’ limits.
The drop in aid, combined with persistent restrictions on trade and movement of goods and people, has:
- Hurt economic growth.
- Contributed to an increase in unemployment.
Immediate and near-term risks if financing difficulties persist:
- Forced cuts to public-sector wages and core operating expenditures, impairing government operations and risking erosion of recent institutional gains.
- Recurrent delays in public-sector wage payments have already led to strikes in ministries and government agencies.
- Potential curtailment of assistance targeted to the needy, increasing social tensions.
- Buildup of domestic arrears undermining private-sector confidence in the government’s ability to meet payment obligations.

Prepare for the possibility of continued aid shortfalls by containing the budget deficit through:
- Increased restraint on the public-sector wage bill.
- Better targeting of employee allowances.
- Continued prioritization of expenditures, with nonessential spending bearing the brunt of cuts.
- Strengthened cash management.
Strengthen revenue mobilization and the business environment:
- Continue to enhance tax administration by widening the tax base and improving compliance.
- Press ahead with civil service and pension reforms.
- Strengthen the legal framework facing businesses.

Implement the mid-2012 understandings between the Palestinian Authority and Israel to enhance collection of clearance revenue and ensure its timely transfer, given clearance revenue "represents the bulk of the Palestinian Authority’s income."
Broaden bilateral cooperation to include easing Israeli restrictions on external trade and movement of goods and people in the West Bank and Gaza to:
- Expand private-sector growth and employment.
- Reduce the Palestinian Authority’s reliance on aid.
Historical note: "Over the past two decades, real GDP per capita has been substantially influenced by the extent of such restrictions."

Re-engagement by the international community is critical to support economic development in the West Bank and Gaza, including by providing a framework for economic cooperation between Palestinians and Israelis.
More immediate donor actions recommended:
- Prompt disbursement of additional donor aid to prevent further buildup of arrears and debt to commercial banks.
- Avoid a serious disruption of the Palestinian Authority’s core operations.
- Timely disbursement of aid is essential for sustaining an orderly path of budget deficit reduction and institution-building toward a self-reliant Palestinian state.

Source: Moving Beyond Crisis Management in the West Bank and Gaza (Oussama Kanaan, Udo Kock, Mariusz Sumlinski, February 28, 2013).

Stress Tests of the Banking System
- Stress Tests of the Banking System (Markdown version)
- Stress Tests of the Banking System (PDF)