IMF Staff Concludes Visit to West Bank and Gaza

IMF News, July 25, 2016

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Mission led by Karen Ongley visited East Jerusalem and Ramallah from July 13–25, 2016 to assess recent economic developments in the West Bank and Gaza and the financial situation of the Palestinian Authority (PA).
The mission met with Prime Minister Rami Hamdallah, Finance Minister Shukry Bishara, Governor Azzam Shawwa, and other Palestinian officials.
The views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

Q1 2016: growth in Gaza picked up to 21 percent as donor-funded reconstruction gained momentum.
Q1 2016: growth in the West Bank reached 4.2 percent, reflecting resilient private consumption.
Unemployment reached almost 27 percent at end‑March.
Conditions are especially difficult in Gaza, where close to two‑thirds of young people are without a job, exacerbating social hardship and the humanitarian situation.

Fiscal pressures eased during the first half of the year thanks to strong revenue performance and improved clearance revenue transfers from the dialogue between the PA and the Government of Israel.
Authorities minimized borrowing from banks and continued repaying old arrears to the private sector.
Donor aid continued to decline, tightening the financing situation and causing some new arrears to accumulate, albeit at a slower pace than 2015.
The authorities’ actions are expected to see the recurrent fiscal deficit decline by 1.8 percentage points of GDP this year.
The financing gap stemming from reduced donor aid is large: almost $500 million.
Authorities are taking steps to repay arrears to private suppliers and to effectively manage newly issued promissory notes.

Assuming the current security landscape continues, growth will likely reach around 3¼ percent in 2016, down from 3½ percent in 2015.
Growth is projected to average 3½ percent over the medium term—assessed as insufficient to generate needed jobs or meaningfully raise per capita incomes.
IMF staff analysis: in the absence of political uncertainty and restrictions over the past twenty years, trend growth in the West Bank and Gaza could have resulted in real GDP per capita around 80 percent higher than currently, under one scenario.

Finalize and align the PA’s 2017–22 National Policy Agenda (NPA) with the 2017 budget; the NPA sets out policy priorities in three core areas: the path to independence, governance reform, and sustainable development.
Promote revenue mobilization and take steps to rationalize spending while protecting the poorest.
Strengthen public financial management (a pillar of the NPA) to facilitate more effective use of scarce finances.
Reverse the decline in donor aid to avoid too rapid budget compression and free up resources for investment.
Continue enhancing revenue predictability through ongoing dialogue with Israel.
Effectively manage newly issued promissory notes and continue efforts to repay arrears to private suppliers.

A key risk is the possible withdrawal of Israeli correspondent banking relationships, which could threaten financial stability.
The Palestine Monetary Authority (PMA) is strengthening the anti-money laundering and combating the financing of terrorism (AML/CFT) framework, in line with international standards and with international support.
Avoiding disruptions will preserve the functioning of the payment system and trade relations, help prevent informal transactions that could dampen fiscal revenues, and support continued financial sector health.
The IMF welcomes the PMA’s close monitoring of banks’ health, including their exposure to the PA, and attention to strong credit growth for private construction and consumption.

Progress on the peace process and domestic reconciliation is considered vital to economic development.
The substantial potential loss in real GDP per capita underlines the case for renewed efforts to shape a sustainable political horizon to benefit all parties.
Until political progress is achieved, reversing the decline in donor budget support would help prevent further deterioration in living conditions and free up resources for investment.

Press Release No. 16/357 — IMF Staff Concludes Visit to West Bank and Gaza (July 25, 2016).