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Palestine’s Economic Outlook- Fall 2016


Recovering slowly from the 2014 recession, the Palestinian economy is estimated to have expanded by 8% in Q1 2016 due to transitory factors, mainly an uptick in Gaza reconstruction. At 27%, unemployment continues to be stubbornly high. Given the ongoing constraints to economic competitiveness, medium-term growth is projected at 3.5%. Lower than expected aid and the possibility of further conflict pose downside risks to growth and employment.

Outlook
 
The recent pickup in growth was driven by Gaza reconstruction and is not sustainable without efforts to improve economic competitiveness. Therefore, the economic outlook for the Palestinian territories remains worrying. Assuming that the current restrictions remain in place and that the security situation stays relatively calm, the real GDP growth rate of the Palestinian economy in 2016 is projected at 3.3% : 2.7% in the West Bank and 5.5% in Gaza. In the medium term, real GDP growth could hover around 3.5%. This sluggish growth implies a stagnation in real per capita income and an increase in unemployment.

The fiscal deficit (before grants) is projected to decline to 10% of GDP (US$1.3 billion) in 2016. At the same time, foreign aid in 2016 could fall to under US$700 million, leaving a financing gap in excess of US$600 million (4.7% of GDP). The PA plans to implement measures to reduce this gap, but those will not be enough to fully close it. Unless donor aid is significantly stepped up, the gap will be mostly financed through arrears to the private sector and the pension fund since borrowing from local banks is very close to the maximum limit set by the Palestinian Monetary Authority. On the external side, the current account deficit (excluding official transfers) is expected to slightly decline to 21% of GDP in 2016 due to a decline in imports.

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