JERUSALEM, April 27, 2017 – Foreign aid and investment alone will have limited impact on the Palestinian economy without significant changes on the ground, according to a new World Bank report. A paradigm shift is needed among all parties to break the vicious cycle of near-stagnant economic growth and ongoing political uncertainty – and this could allow foreign aid to have a much more catalytic impact.
The new World Bank report will be presented to the Ad Hoc Liaison committee (AHLC) on May 4, 2017 in Brussels, a policy-level meeting for development assistance to the Palestinian people. The report points out that actions to address past recommendations for policy changes have been inadequate. In addition, the report issues a call to address immediate risks created by economic stagnation that could endanger the social equilibrium by creating the conditions for sustainable growth.
“The Palestinian economy is failing to generate jobs and incomes,” said Marina Wes, World Bank Country Director for West Bank and Gaza,”one third of Palestinians are out of work and more than half of the youth in Gaza are jobless. Gaza is on the verge of a human catastrophe. Such a critical situation is not in anyone’s interest. Concerted efforts by all sides are needed to bring a real change on the ground, boost economic growth and provide hope and prospects for Palestinians, especially youth.”
In the face of dwindling donor aid, the report outlines a number of policy recommendations for improving economic conditions and laying the foundations for sustainable growth. With an US$800 million financing gap, the Palestinian Authority (PA) has to address government spending in payroll and pension payments, and improve its revenue collection through the domestic tax system. Actions are also needed to improve the investment climate and competitiveness, and help new companies enter the market.
Easing of Israeli restrictions on external trade, access to resources in Area C, and opening up access to Gaza is essential to expand private sector growth and employment. In addition, progress has stalled in addressing the fiscal losses from Palestinian trade taxes collected by Israel and not systematically transferred to the PA, as stipulated by existing agreements.
If both the PA and the Government of Israel (GOI) implement changes, the impact of donor aid would increase significantly. Additional donor support would be critical to assist the PA fiscal adjustment, and help with innovative financing schemes to mitigate political risks and increase private sector investment.
With the economy already struggling, the report also focuses on the energy sector as an important factor for economic growth. The inability to meet existing electricity needs, coupled with the growing demand of 3.5 percent annually until 2030, risks a human and economic disaster. Private sector investment will be crucial to meet future energy needs. However, this investment will not materialize unless the PA and GoI create a suitable enabling environment.
“While in any healthy economy, energy underpins industrial processes and economic growth, Gaza faces electricity blackouts every 8 hours. During summer and winter peaks the scarce electricity supply is increasingly rationed to 4 hours during day time. Recently, this situation has become the norm leaving Gazans without electricity during most of the day. This has created a humanitarian crisis for Gaza’s two million people, by affecting vital services such as hospitals, clinics, water supplies, and household’s daily lives,” said Wes.
The PA needs to address reforms to ensure that payment obligations to electricity suppliers are met as this will encourage the needed private generation investment. This is particularly important in Gaza to allow the construction of a high-voltage line from Israel to contribute to the relief of the energy crisis.
A priority for the two parties is also to sign the interim power purchase agreement to energize the Jenin power station (North of the West Bank). GOI can facilitate imports of energy and equipment to Gaza and ease access to land in Area C for better transmission and exploitation of solar generation.