The Covid-19 crisis is having a damaging impact on an already constrained economy struggling to emerge from a liquidity crisis in 2019, making the immediate prospects for the Palestinian people difficult. Necessary measures to contain the Covid-19 crisis have contributed to sharp declines in activity for an economy already facing constraints on movements and access that left it operating well below potential.
For 2020 the prospects depend on how long the Covid-19 containment measures are in place and how quickly the economy responds once they are lifted. While pre-Covid-19 we had projected 2.5 percent growth in the coming year, we now project a full year decline of at least 7.6 percent, based on a gradual return to normality from the containment, and up to 11 percent in the case of a slower recovery or further restrictions due to another outbreak. In either case, the reduction in per capita income and the rise in unemployment and poverty will be substantial. The outlook will be heavily influenced by the PA’s ability to mobilize liquidity for the private sector in the coming months.
The fiscal position of the PA, which was already extremely vulnerable following the liquidity shock in 2019, is now facing a further deterioration in the wake of the Covid-19 crisis. The liquidity shock that hit the PA in 2019 led to the PA’s deficit after aid increasing to around US$800 million or 4.6 percent of GDP.
With further domestic borrowing running into limits, the PA could focus its efforts, besides reprioritization, on mobilizing donor resources and working with the Government of Israel (GoI) to address outstanding fiscal leakages as these can be an important source of space. A positive demonstration of the potential to make progress on the fiscal leakages can be drawn from the good coordination that has taken place on health issues in response to Covid-19.