Press Release No. 18/59

IMF Staff Concludes Visit to West Bank and Gaza

February 20, 2018

• With growth slowing and scarce economic and financial buffers, the strained geopolitical situation is testing the resilience of the Palestinian economy.
• Reunifying the West Bank and Gaza under a single administration could provide a modest boost to growth, but managing the budgetary costs will not be easy.
• This will require a fundamental shift by all parties—deeper reforms by the Palestinian Authority, stronger Israeli cooperation on fiscal leakages, and revived donor engagement.

An International Monetary Fund (IMF) staff team led by Karen Ongley visited East Jerusalem and Ramallah during February 4–14, 2018, to assess recent economic developments in the West Bank and Gaza. The IMF team met with Finance Minister Shukry Bishara, Governor Azzam Shawwa, and other Palestinian officials. At the end of the visit, Ms. Ongley issued the following statement:

“Strains on the Palestinian economy became more evident during 2017. While the authorities see somewhat higher growth, staff estimates that growth slowed to close to 3 percent. Liquidity constraints and fewer economic buffers held back consumption and investment, most acutely in Gaza. At this rate, growth will not generate enough jobs or meaningfully improve living standards for the Palestinian people. The continued deterioration of the socio-economic environment is a major concern, and there is a growing risk that humanitarian conditions may be nearing a breaking point.

“One bright spot, however, was that fiscal performance in 2017 was better than expected. In the face of difficult circumstances, the authorities contained the overall deficit to an estimated 7.8 percent of GDP and the recurrent deficit to around 5½ percent of GDP. Strong performance on domestic customs and income tax helped to ameliorate the absence of the large one-off receipts (telecommunication license fees and backpay of clearance revenues) from 2016. The PA also kept overall spending in check. The authorities continued efforts to pay down the stock of arrears, but low external budget support and the PA refraining from net new bank financing, saw the recurrence of arrears.

“The resilience of the Palestinian economy in the face of long-standing political and security constraints is now being tested. It is laboring under the weight of geographic fragmentation, a difficult business environment, the steady erosion of productive capital, and restrictions on movement and access. In these circumstances, we are likely to see growth continue to stagnate at around 2⅓ percent of GDP in the years ahead.

“Even so, the outlook has become even more vulnerable to geopolitical uncertainties, the risk of further declines in donor support (for the PA or relief agencies), and unrest triggered by the dearth of economic opportunity or unfulfilled expectations of reunification.

“While a breakthrough in the peace process would be the real economic game‑changer, the prospect of reunification could provide a modest boost to growth over the medium term. However, managing the fiscal impact of the PA resuming control of government operations in Gaza will not be easy, as the costs will outweigh the near-term revenue gains. This will require comprehensive reforms by the PA, alongside a rebound in donor support and tangible progress toward reducing fiscal leakages based on fair and transparent discussions.

“We welcome the authorities actively considering reform options to help manage the costs of reunification as they prepare the 2018 budget. It will be important to undertake measures that optimize the revenue intake. However, the magnitude of the challenge also need medium-term actions to gradually reduce the overall spending and shift from an oversized wage bill to much needed investment.

“Maintaining a healthy financial sector will be instrumental role in supporting growth in Gaza once reunification processes take hold. This calls for active oversight of the banking sector, with close scrutiny of capital buffers, loan provisioning, delinquent loans, and credit exposures. Continued cooperation between the Palestinian Monetary Authority and Bank of Israel will be pivotal in maintaining smooth functioning Israeli‑Palestinian bank relations.”

For information on the work of the IMF in the West Bank and Gaza, please see the following link: http://0-www-imf-org.library.svsu.edu/wbg.