The International Monetary Fund (IMF) Staff Concludes Visit to West Bank and Gaza

• The Palestinian economy suffers from rising political uncertainty, declining aid flows, ongoing restrictions, and insufficient investment.
• The tragic events of the past few days highlight the uncertainties overshadowing the economy and people’s lives.
• Barring a further escalation, we expect GDP growth in the West Bank and Gaza to hover around 3 percent.

An International Monetary Fund (IMF) staff team led by Karen Ongley visited East Jerusalem and Ramallah during July 11–20, 2017, to assess recent economic developments in the West Bank and Gaza and the financial situation of the Palestinian Authority (PA). 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:

“The Palestinian economy suffers from rising political uncertainty, declining aid flows, and insufficient investment. Restrictions on the movement of goods and services continue to hamper productive investment and growth. Gaza also faces increasing economic and social hardship as a result of slower reconstruction efforts and recent spending cuts. We estimate that overall GDP growth will slow to around 3 percent in 2017, down from 4 percent in 2016. This reflects 2.7 percent GDP growth in the West Bank, and 4.5 percent GDP growth in Gaza—a slowing of more than three percentage points from 7.7 percent in 2016. However, the tragic events of the past few days highlight the uncertainties overshadowing the economy and people’s lives.

“Barring a further escalation, we expect GDP growth in the West Bank and Gaza to hover around 3 percent over the medium-term. Yet, even this will be too low to absorb the large number of youth entering the workforce in the years ahead. Any lasting and meaningful improvement in prospects for the Palestinian economy ultimately depends on commitment to the peace process and a political breakthrough. If accompanied by reduced restrictions to movement and enhanced control over resources (including in Area C), such a breakthrough would allow for rapid private sector-led growth.

“The Ministry of Finance and Planning continued to manage these difficult cirmstances skillfully. Fiscal performance during the first five months of 2017 exceeded expectations, thanks to strong revenue mobilization and spending restraint. As a result, we anticipate the recurrent deficit could reach 6.1 percent of GDP by year-end, 1.7 percentage points lower than previously projected. While the authorities made progress in clearing arrears to the private sector, continued declines in aid flows and repayment of domestic debt saw the recurrence of arrears, especially in the health sector. This highlights the harsh financing constraints currently faced by the PA.

“Building on the solid performance so far, additional steps are needed to further narrow a financing gap that remains close to 4 percent of GDP. We welcome the authorities’ determination to boost domestic revenues through improved tax administration. We encourage the authorities to avoid granting new tax exemptions and to consider new measures that could yield additional revenue and contribute to a more progressive tax regime. Efforts to reduce expenditure should focus on containing the overall wage bill, increasing the efficiency of public health spending, and enhancing cost recovery for electricity and water consumption. Support from the international community remains essential to facilitate fiscal consolidation without further weakening growth prospects. We call on donors to reverse the significant reduction in budget support observed in recent years.

“Reforms that promote sound public finances over the medium term will help ensure that consolidation efforts are compatible with improved delivery of social services. The recently finalized Public Financial Management Strategy represents a milestone in that regard. The IMF looks forward to supporting the Ministry of Finance and Planning in its implementation, in coordination with other development partners. Stronger budget preparation, strict control of expenditures, and closer integration with the development priorities of the National Policy Agenda will contribute to a more growth-friendly composition of expenditure, while creating space for additional public investment and ensuring debt sustainability.

“Efforts to safeguard financial stability and promote access to finance will complement fiscal and structural reforms. An important challenge is to strike the right balance between financial inclusion and stability of the banking system. This calls for close monitoring of still rapid credit growth, adequate loan provisioning, maintaining sufficient capital buffers, and keeping credit to the government within the regulatory limit.

“Continued cooperation between the Palestinian Monetary Authority and Bank of Israel is essential to maintain correspondent banking relations, which are vital to the effective functioning of the payments system. We note ongoing efforts to find a satisfactory solution to allay the concerns of commercial banks, but urge the PA to resist pressures to provide financial guarantees that could jeopardize fiscal sustainability. Efforts to strengthen the Palestinian anti-money laundering/combating the financing of terrorism regime with support from the IMF and World Bank are moving ahead of schedule and should be sustained, with the aim of ensuring a successful comprehensive evaluation by the Middle East and North Africa Financial Action Task Force in 2020.

“Constructive dialogue between the PA and Government of Israel is fundamental to improving economic prospects in the West Bank and Gaza. In this regard, we note the importance of high-level ministerial meetings, and look forward to tangible results based on fair and transparent discussions. Yet, we are deeply concerned by the recent flare-up in clashes in the West Bank and Jerusalem, and deplore the loss of life caused by the violence.”