Constrained private sector growth holds back sustainable recovery
JERUSALEM, March 15, 2012 -- The World Bank's latest report on the Palestinian economy warns that a severe fiscal crisis will deepen if the recent decline in donor assistance continues and that this situation is “jeopardizing gains" made in recent years in building strong institutions.
The World Bank published its Economic Monitoring Report today, a document prepared twice a year to inform the Ad Hoc Liaison Committee (AHLC), a forum of donors to the Palestinian Authority (PA). The AHLC is due to meet in Brussels on March 21.
The report, entitled Stagnation or Revival? Palestinian Economic Prospects, analyzes the state of the Palestinian economy and the PA’s fiscal position.
The authors acknowledge important PA efforts to mitigate the crisis through improved domestic revenue collection and a reduction in expenditures. However, this will have limited impact in the absence of improved Israeli cooperation, including, among other things, sharing of relevant tax information. Additional aid in the short-term is also imperative, because the PA “simply cannot take enough steps to reduce the projected recurrent deficit to the currently expected level of aid,” says the report.
While the Palestinian economy continues to grow, indications of sustainable growth remain absent. In fact, West Bank growth actually slowed in 2011 compared to the previous year. In addition to the decline in donor support and the fiscal crisis, the slowdown can also be attributed to a largely unchanged Israeli system of restrictions preventing the free flow of commercial traffic and goods.
Gaza continued to recover in 2011, experiencing double-digit GDP growth. Examination of the factors driving growth in the territory, however, raises doubts regarding the sustainability of this trend. Much of the growth stems from a construction boom produced by increased aid inflows, the lifting of Israeli restrictions on the entry of some raw materials and increased imports through the tunnels from Egypt. In addition, the Gazan economy is still rebounding from a very low base, with the average Gazan remaining “worse off than s/he was in the late nineties.”
According to the report, growth will remain highly aid-dependent unless the Palestinian private sector has the room to grow. This will only be possible if Israel lifts remaining restrictions on access to land, water, a range of raw materials, and export markets and the PA improves the business environment and attracts needed investment through such measures as expanding land registration in the West Bank; reforming the current laws governing business; and building its own capacity to regulate the economy and ensure competition.
“Stabilization of the PA’s fiscal position compels immediate action by the donor community,” said Mariam Sherman, World Bank Country Director for the West Bank and Gaza. “But there is a lot of energy and resourcefulness in the Palestinian private sector which is the longer-term path out of crisis mode towards sustainable economic growth. Unleashing the potential of Palestinian enterprises can be achieved only if Israel and the Palestinian Authority take concrete steps to level the playing field for entrepreneurs.”