Palestine’s Economic Outlook- April 2017

Recovering from the 2014 recession, the Palestinian economy expanded by about 4% in 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 down-side risks to growth and employment.

Growth in the Gaza Strip is estimated to have reached 7.4% in 2016 driven by a surge in construction activity, while the West Bank economy expanded by 3.4% mainly due to an increase in household consumption financed by bank loans.

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 2017 is projected at 3.5%: 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 near stagnation in real per capita income and an increase in unemployment.

The recent pickup in growth was driven by Gaza reconstruction and is not sustainable without an easing of external restrictions and efforts to improve the domestic business environment. Therefore, the economic outlook for the Palestinian territories remains unfavorable, with projected growth levels insufficient to improve living standards. The fiscal deficit (before grants) is projected to increase to 10% of GDP (US$1.35 billion) in 2017. At the same time, foreign aid in 2017 could fall to about US$640 million, leaving a financing gap in excess of US$0.7 billion (5% of GDP). PA actions alone will not be enough to fully close the gap. Unless donor aid is significantly stepped up, the gap will mostly be financed through arrears to the private sector and borrowing from local banks.