Home Reports and investigations 30/August/2022 05:16 PM

IMF: Palestinian economy is facing formidable challenges

IMF: Palestinian economy is facing formidable challenges

RAMALLAH, Tuesday, August 30, 2022 (WAFA) – The International Monetary Fund Monday said that the Palestinian economy was facing formidable challenges.

In a press statement marking the end of their mission to assess recent economic developments in the West Bank and Gaza from August 16–28, 2022, an IMF staff team led by Alexander Tieman said: “The Palestinian economy is facing formidable challenges. The fiscal situation, high political, security and social tensions, rising inflation, movement and access restrictions and an unfinished structural agenda all weigh on the medium-term outlook.”

“The fiscal challenges are largely structural in nature—the PA faces a high public sector wage bill and spends a considerable part of its budget in Gaza and East Jerusalem, but raises virtually no revenue in these areas or in West Bank areas under Israeli civil and security control, known as Area C, and the PA and Israel disagree on the amounts of revenue that the latter should transfer to the former. Without fiscal policy changes, public finances remain unsustainable and medium-term economic growth is expected to gradually slow down to its estimated potential rate of 2 percent,” the IMF team added.

They warned that “without fiscal policy changes, public finances remain unsustainable and medium-term economic growth is expected to gradually slow down to its estimated potential rate of 2 percent.”

“Overcoming these challenges will require ambitious reforms spanning several years and close cooperation between the Palestinian Authority, the Government of Israel, and donors. The PA needs to implement spending reform—centered on the wage bill, net lending and health sector reform—, further broaden its tax base, and undertake structural reform to improve the business environment. Working together, Israeli and Palestinian authorities would need to resolve outstanding fiscal files to boost Palestinian revenue and ease Israeli restrictions on the movement of goods and people and on investment to unleash the economy’s growth potential.”

They pointed that “progress on the outstanding fiscal files has been slow since the May meeting of the Ad Hoc Liaison Committee”, while urging “the parties to quickly agree on lowering handling fees and exempting fuel shipments from them, while not losing focus on other fiscal files such as the Allenby (King Hussein) bridge fees and taxes from Area C, as well as the transfer of customs authority (including bonded warehouses).”

It also pointed that only limited progress has been seen on resolving the longstanding and critical issue of correspondent banking relations.

“Intensified discussion between the Israeli and Palestinian Ministries of Finance could help advance these fiscal issues, while a broader discussion on trade and access should take place in a meeting of the Joint Economic Committee.”

The IMF team said that it was “encouraged by the (Palestinian) authorities’ well-justified reform goals. Their objective to significantly reduce the public sector wage bill and address net lending, pursue health care reform and improve the business environment will, over time, create fiscal space to clear arrears, increase social spending, and invest in development.”

They noted that this “would also allow for the resumption of payment of full public sector wages, rather than the current practice of paying partial salaries—a temporary fiscal emergency measure, driving home the need for reform.”

They voiced their understanding of “detailed plans for wage bill reform centered on early retirement are under development. This is an important first step that should be followed by policies to contain the wage bill going forward, including curtailing new hiring and wage increases, reforming the system of allowances, and, over the medium term, undertaking a functional review of public sector employment.”

“Despite a difficult environment,” the IMF team noted that “the (Palestinian) authorities contained the fiscal deficit. The fiscal deficit declined to 5.2 percent of GDP in 2021 and 0.4 percent of GDP in the first half of 2022. Going forward, the mission expects the deficit to rise in the second half of the year to reach 3.5 percent of GDP at end-2022.”

They ascribed the declining fiscal deficit to the “large increases in revenues, well above nominal GDP growth, and restrained recurrent spending.”

“This, however, also includes undesirable cuts to social transfers and low development spending. With 2021 budget grants down 40 percent from 2020, government debt (including arrears to suppliers and the Palestinian Pension Agency) increased from 34.5 percent of GDP in 2019 to 48.4 percent of GDP at end 2021, or 20.6 percent of GDP excluding arrears. Meanwhile, the banking sector remained stable, with adequate capital.”

They added that “the Palestinian economy experienced a strong rebound from the COVID-19 pandemic in 2021, but unemployment edged up and remains very high, in Gaza in particular.”

“After a sharp recession in 2020, real GDP grew by 7.1 percent in 2021 as COVID vaccinations took off and movement restrictions were eased. Private consumption contributed 5.5 percentage points to growth, helped in part by higher employment of Palestinian workers in Israel. Growth in Gaza, however, was only 3.4 percent as reconstruction efforts following the May 2021 conflict advanced only slowly,” they explained.

“Even as employment grew by 8 percent during the year, the unemployment rate increased to 26.4 percent at end-2021. The unemployment rate in Gaza remains stubbornly high, reflecting restrictions on movement of people and goods, and is closely associated with a high prevalence of poverty,” they further explained.

“The outlook for 2022 points to a slowdown of the economy amid rising inflation concerns. Growth is projected to decline to 4 percent, driven by lower consumption and investment due to lower real incomes as prices rise, continued fiscal weaknesses, and increased uncertainty related to Russia’s invasion of Ukraine,” they concluded.


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