IMF Staff Concludes Visit to West Bank and Gaza

IMF Staff Concludes Visit to West Bank and Gaza


IMF Staff Concludes Visit to West Bank and Gaza







August 29, 2022







End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.





  • The Palestinian economy experienced a strong post-COVID rebound in 2021, but unemployment and poverty remain persistently high. Economic growth is expected to moderate this year.
  • The economy is facing formidable challenges that require comprehensive and coordinated reform. Efforts are required from the Palestinian Authority, Israel, and the donor community.
  • The mission is encouraged by the authorities’ ambitious reform goals, centered on containing the public sector wage bill.





Washington, DC:
An International Monetary Fund (IMF) staff team led by Mr. Alexander Tieman
held discussions from August 16–28, 2022, to assess recent economic
developments in the West Bank and Gaza. The IMF team met with Prime
Minister Mohammad Shtayyeh, Finance Minister Shukry Bishara, Palestine
Monetary Authority Governor Feras Milhem, Minister of National Economy
Khalid Al-Esseily and other members of the Palestinian economic team.

At the end of the mission, Mr. Tieman issued the following statement:



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. 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.


“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—while direct spillovers from Russia and Ukraine are limited,
indirect exposures, particularly on food and fuel imports via Israel, are
substantial. Inflation is projected to rise significantly, driven by higher
food, fuel, and construction material prices.


“Despite a difficult environment, the 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. Contributing to these outcomes are 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.

“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.


“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. Boosting confidence through the
implementation of Palestinian-led reforms could attract donor funds, easing
the adjustment burden on the population and private sector companies and
thus helping pave the way for faster economic growth, job creation and
poverty alleviation. In this regard we welcome the recent receipt of the
EU’s 2021 donor funds.


“The mission is encouraged by the 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. It 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. The mission understands 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. The
mission also discussed initiatives to contain net lending and reform the
health sector. The mission welcomed the Ministry of Finance’s initiatives
on all these reforms. For the reforms, the approach should be to first
focus on “stop gap” measures that can be implemented in the short term,
followed by a gradual and carefully sequenced implementation of ambitious
medium term reforms, which will require strong sustained political
commitment. In addition to these fiscal reforms, the Palestine Monetary
Authority is leading the efforts to strengthen the anti-money laundering
and countering terrorism financing (AML/CFT) framework in the Palestinian
territories in line with international best practice, including through
recent amendments to the AML/CFT law that criminalize terrorism financing
and a decree that transcribes terrorism financing-related UN security
resolutions into national legislation. The IMF stands ready to provide
technical assistance to support the authorities’ reform efforts.



The mission encourages further progress on Israeli-Palestinian
cooperation.

It notes the positive economic impulse from the increased number of permits
for Palestinians to work in Israel and settlements. The mission also saw
progress on the e-VAT pilot, which should be expanded expeditiously to
include all traders. It is further encouraged by the initiative to start
paying Palestinian workers in Israel and settlements electronically, which
will diminish the inflow of physical shekel cash into the West Bank and the
Gaza Strip, thus reducing the excess cash problem faced by Palestinian
banks. However, progress on the outstanding fiscal files has been slow
since the May meeting of the Ad Hoc Liaison Committee. The mission urges
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). Likewise,
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 is grateful for the open and constructive discussions
with the Palestinian authorities

, as well as representatives from the government and central bank of
Israel, the private sector, and the international community, which have
enriched our understanding of the situation. The team will remain closely
engaged to help the authorities address the economic and financial
challenges.”


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Wafa Amr

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson




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