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FEATURE STORY

Economic Monitoring Report to the Ad Hoc Liaison Committee

January 21, 2014

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STORY HIGHLIGHTS
  • The system of restrictions constrains investment, raises costs for doing business, and hinders economic cohesion.
  • Restrictions on access and movement negatively affect the PA’s capacity to deliver public services.
  • The Palestinian Authority will need to make continued efforts on the reforms which are within its control to strengthen its fiscal position and enhance its capacity to deliver essential public services.

The Ad Hoc Liaison Committee (AHLC) meeting of September 2013 comes at a time of deteriorating economic conditions in the West Bank and Gaza and continuing fiscal challenges for the Palestinian Authority (PA). However, the renewed talks between the Government of Israel (GoI) and the PA, and proposed plans for a substantial economic package aimed to boost private sector investment, could reverse the current trend, if coupled with a significant easing of restrictions by the GoI, continued reforms by the PA, and a commitment of ongoing financial support from the international community.  

The economic situation has deteriorated since the last report in March, 2013. For the first time since 2002, economic output in the West Bank contracted during the first quarter of 2013, and almost one out of three participants in the labor force in Gaza was unemployed during the first half of 2013. Lower than anticipated growth contributed to the PA’s revenues falling below the budget target. A sizeable financing gap of approximately USD320 million is forecast by the end of 2013 despite an increase in donor budget support in the first half of 2013 compared to the same period last year. Absent additional donor assistance, the PA will need to find ways to close the financing gap either through relatively costly borrowing from domestic commercial banks or accumulating further arrears to the pension system and private sector.  The latter would, however, have negative consequences for liquidity, growth and subsequently tax revenues. In addition, the provision of public services may be negatively affected by unrelenting fiscal challenges. The economic situation, however, stands to gain from potential agreements in the context of the resumed political negotiations and the intention to bring large scale private investment to the West Bank and Gaza. 

As noted in previous reports, the most significant impediment to economic viability in the Palestinian Territories is the multi-layered system of restrictions imposed by the GoI. The system of restrictions constrains investment, raises costs for doing business, and hinders economic cohesion. Restrictions on access and movement also negatively affect the PA’s capacity to deliver public services. While some actions have recently been taken by the GoI to relax certain restrictions, stronger measures to significantly ease pervasive remaining obstacles that currently prevent private sector led economic growth are warranted. 


" The economic situation stands to gain from potential agreements in the context of the resumed political negotiations and the intention to bring large scale private investment to the West Bank and Gaza.  "

In addition, the PA will need to make continued efforts on the reforms which are within its control to strengthen its fiscal position and enhance its capacity to deliver essential public services. The PA has already made substantial achievements on institution building. The impressive human development outcomes in the West Bank and Gaza are good indicators of reasonably well-functioning public institutions. On the other hand, in recent years fiscal space available for the delivery of essential public services has gradually diminished mainly due to slowed economic growth and decreased donor aid. Therefore, pressing on with reforms to strengthen the PA’s fiscal position is essential to ensure the necessary fiscal space to boost growth and provide essential public services to the Palestinian people. 

In particular, reforms to enhance domestic revenues, controls over the civil service wage bill, outpatient referrals and broader health expenditures, and deficits in the electricity sector, and rationalization of the social safety net program and the public pension system are expected to yield high returns for strengthening the PA’s fiscal position and enhancing its capacity to provide essential public services. These reforms will require strong political commitment, effective change management, and relevant technical and financial resources. The reform efforts by the PA, to be fully effective, should be combined with better cooperation by the GoI. Moreover, continued financial support by the donor community would be essential to ensure that necessary fiscal space is available for providing basic services to the Palestinian people. 



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