Transcript of a Press Briefing on the West Bank and Gaza
IMF News, September 20, 2003
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- Published: September 20, 2003
Overview
- Event: Press briefing by Adam Bennett and Karim Nashashibi of the IMF's Middle Eastern Department with William Murray, Deputy Chief of Media Relations.
- Location and date: Dubai International Convention Centre, Dubai, United Arab Emirates; September 20, 2003.
- Purpose of the IMF study discussed:
- Measure the impact of the conflict on the West Bank and Gaza economy over the last three years.
- Assess fiscal and budgetary developments during crisis conditions.
- Document and evaluate the Palestinian reform process reactivated in June of 2002 and earlier reform efforts spearheaded by Minister of Finance Dr. Salam Fayyad.
Economic impact and resilience
- Aggregate contraction estimates and interpretation:
- Widespread estimates suggested declines reaching 50 percent of GDP; IMF assessment narrowed this to a decline on the order of 30 percent and possibly less.
- Channels of economic damage:
- Tourism halted; Palestinian workers largely unable to work in Israel; checkpoints, curfews, and roadblocks fragmented the West Bank and paralyzed trade and economic activity.
- Evidence of resilience:
- Bank deposits initially declined only by 10/15 percent and then began rising.
- Cement consumption and fuel consumption indicators showed much smaller declines than some large-estimate scenarios.
- The Nablus stock market continued to trade virtually every day for a few hours, indicating ongoing economic functioning.
- Social and coping mechanisms mitigating decline:
- Donor support (see Donor and Arab support).
- PA employment as an economic shock absorber.
- Remittances and community solidarity.
Financial sector and Palestine Monetary Authority (PMA)
- Banking sector performance:
- Banks weathered conditions relatively well due to conservative pre-conflict lending policies.
- Functioning banking system allowed daily transactions (deposits, withdrawals, checks) to continue.
- Nonperforming loans rose to 26 percent of total assets (reported); other text references nonperforming loans reaching 29 percent (ratio of nonperforming loans to total loans).
- Banks held a large portion of assets in liquid form and assets held outside and abroad, limiting systemic harm.
- PMA role and IMF cooperation:
- The IMF worked closely with PMA on bank supervision, provisioning, and applying Basel principles amid liquidity pressures.
- PMA’s role is focused on banking supervision and holding required reserves; it is not a central bank in the full sense.
- The report includes a PMA balance sheet for reference.
Fiscal developments, transparency, and reform
- Fiscal execution and revenue flows:
- Clearance revenues collected by Israelis were initially withheld but were resumed by the end of the prior year, aiding budget viability.
- Minister Fayyad enhanced openness: budgets and monthly budget execution posted on the Ministry of Finance website.
- Historical diversion of revenues:
- For the first time the study included a table covering the period from '95 to 2000 outlining diversion of revenue from the budget to a special bank account controlled by President Arafat.
- Estimated diversion amount: around US$900 million over a period of five years.
- Tally of PA commercial assets: current assets around US$700 million at today's market prices (previously about US$900 million in '99).
- Palestinian Investment Fund established to manage and privatize these commercial activities.
- Fiscal reform achievements and outstanding issues:
- Significant transparency improvements; budget process transparency described as probably equal to the best in the region.
- Advanced reforms: pension reform (quite well advanced); payment of security forces by bank transfer for about half of security forces.
- Slower progress: civil service reform (high levels of civil service employment remain a budgetary problem), local government reform and finance, and the need for national and local elections (voter registration inhibited by closures and checkpoints).
- Judicial reform: abolition of state security courts and establishment of an independent Supreme Judicial Council.
Reform agenda for market institutions and structural issues
- Legal and institutional reforms in progress:
- Drafts or pipelines for competition law, company law, securities law, intellectual property rights, and related laws intended to modernize the economy.
- Structural constraints remaining:
- Land registration is unreliable, impeding use of land as collateral and property transactions.
- Local government service provision severely affected by resource shortages and requires reorganization and elected local government.
Donor, Arab, and international support
- Donor financing role:
- Donor support financed the PA budget and functioned as a shock absorber.
- Arab contributions: about US$530 million in 2001 and about US$450 million in 2002.
- Overall donor support cited: about US$500 million in 2001 and US$460 million in 2002 (text references both the $500m/460m and the Arab-specific $530m/450m figures).
- Functional impact of PA employment:
- PA employs 130,000 people; salaries circulate through the economy and act to arrest decline, with an estimated PA-related spending impact of about US$600-US$650 million mentioned.
Estimates of financing and reconstruction needs
- Immediate budget gap:
- Reported PA budget shortfall of the order of US$250 million for the remainder of the year.
- Rehabilitation and reconstruction:
- World Bank estimate cited for quick rehabilitation work: around US$1 billion.
- IMF comment adding budget support needs implies a combined figure in the neighborhood of US$1.2 billion.
Policy implications and scenarios
- Main constraints to recovery:
- Continuation of closures, checkpoints, curfews, roadblocks, and potential effects of separation infrastructure.
- Security situation affects the likelihood of lifting restrictions.
- Recovery pathways:
- Resumption of normal movement and reduced restrictions would lessen need for sustained budget support and enable economic recovery; Minister Fayyad indicated a return to normalcy would remove need for budget support.
- Even with easing of restrictions, substantial quick rehabilitation financing (US$1 billion) would be required to repair infrastructure and productive assets.
- IMF role and engagement:
- The IMF provides advice, technical assistance, and institution building in fiscal and financial areas (budget, Revenue Department, tax administration, income tax law).
- Participation with donors in the Task Force on Palestinian Reform; co-chair of the Financial Accountability Support Group.
- The IMF works with the Palestinian Authority (not a member country of the IMF) under arrangements envisioned since the Oslo Accords and the Quartet Road Map to assist institution building toward the goal of statehood.
Key figures and data points cited in the briefing
- Date of briefing: September 20, 2003.
- Estimated economic contraction: 50 percent (popular estimate cited); IMF estimate on the order of 30 percent and maybe less.
- Bank deposits initial decline: 10/15 percent.
- Diversion of revenue to special account (1995–2000): around US$900 million over five years.
- Tally of PA commercial asset value: around US$700 million at today's market prices; about US$900 million in '99.
- Donor support totals cited: about US$500 million in 2001 and US$460 million in 2002; Arab-specific support figures cited as US$530 million in 2001 and US$450 million in 2002.
- PA employment: 130,000 people.
- PA-related spending impact cited: about US$600-US$650 million.
- PA budget deficit (remainder of year): of the order of US$250 million.
- Quick rehabilitation estimate (World Bank): around US$1 billion.
- Combined rehabilitation plus budget support estimate mentioned: US$1.2 billion (approximate phrasing in briefing).
- Relative economies: Israel described as a US$110 billion economy; West Bank and Gaza described as a $5-billion economy.
- Nonperforming loans: 26 percent of total assets (reported by Karim); 29 percent ratio of nonperforming loans to total loans (reported by Adam).
Transcript of a Press Briefing on the West Bank and Gaza — September 20, 2003.