The Palestinian economy was stagnant and the socio-economic situation already difficult prior to the breakout of COVID-19. This is attributed to restrictions by Israel (on trade, movement and access), recurrent hostilities, internal divide, and falling aid inflows. During 2017-19, annual GDP growth averaged 1.3% — lower than the population growth rate resulting in decreasing per capita incomes and increasing poverty. Growth decomposition shows that this was driven by accumulation of factors and not improvements in productivity. In recent years, gross investment has averaged about 26% of GDP, but the bulk of this has been channeled into activities in the non-tradable sectors, rather than sectors that could have served as escalators for growth. Likewise, foreign direct investment, at a mere 1% of GDP, is very low.
Estimates based on GDP per capita growth suggest that in 2020 the poverty rate spiked to 29.7%, an increase of nearly 8 percentage points from 2016 (latest available official data). As the impact of the pandemic receded, the poverty rate is estimated to have declined to 27.3% in 2021. Current poverty rates represent a poor population of approximately 1.5 million people.
Under a baseline scenario that assumes a continuation of the Israeli restrictions, persistence of the internal divide between the West Bank and Gaza and stagnating aid levels, growth is expected to hover around 3.7-3.1% over the forecast period. The poverty rate is projected to decline to 26.7% in 2022, and then to further gradually decrease to 26.1% by 2024.
On the fiscal front, revenue is projected to grow in 2022, reflecting increased tax rates on sugary drinks and single-use plastics, higher collections on tobacco excise and higher VAT revenue due to implementing an e-VAT system with Israel. Yet, these efforts would be offset by Israeli unilateral deductions from revenues it collects on behalf of the PA, projected at 1.6% of GDP in 2022. Expenditure is expected to decline with partial payments of salaries until May 2022. With grants, the fiscal deficit (on a cash basis) is expected to fall to 4.5% of GDP in 2022.
The economic consequences of the war in Ukraine and associated sanctions may also affect the outlook through mounting inflationary pressure. The ongoing pandemic may also cause risks to the outlook, especially if no additional vaccines are secured beyond mid-2022. Further, if recent clashes between Palestinians and the Israeli forces in the West Bank and in Gaza escalate, there is little room left to absorb such shocks.