Poorest Palestinian households are hit hardest by mounting inflationary pressure
JERUSALEM, September 18, 2022– Despite some signs of recovery, the Palestinian economy has not yet rebounded to its pre-pandemic level. The ongoing restrictions on movement and access, the long-term effects of fiscal distress, combined with a rapid increase in prices are contributing to a slower economic recovery. Growth is projected to reach 3.5% in 2022, down from 7.1% in 2021. Rapid inflation is hitting the poorest Palestinian households hardest, with the cost of some basic food commodities projected to rise as high as 80% by the end of the year.
The World Bank’s Palestinian Economic Monitoring Report to the Ad Hoc Liaison Committee (AHLC) will be presented in New York on September 22, 2022, during a policy-level meeting on development assistance for the Palestinian people. The report examines current economic and fiscal trends in the Palestinian territories and analyzes the impact of food price spikes accelerated by the war in Ukraine.
“The war in Ukraine has exacerbated already elevated price pressures in the Palestinian territories. Combined with the negative effects induced by COVID-19, price shocks have directly affected the supply of basic food commodities, undermining the welfare of Palestinian households, particularly the poorest and most vulnerable,” said Ferid Belhaj, World Bank Vice President for the Middle East and North Africa. “We are encouraged by the PA’s progress in its reform agenda, and concerted positive efforts, including with the Israeli partners, are still needed to create fiscal space for vital social assistance and economic development.”
Prices were already high relative to incomes due to the tight economic relations between the Palestinian economy and that of Israel which disproportionately affect the smaller Palestinian economy. The rapid inflation has driven further up food and fuel prices, which account for a higher proportion of expenses in poor households. The West Bank and Gaza is the second highest importer (by share) of food in the region, with a substantial proportion of wheat flour and sunflower oil imports coming from Ukraine and Russia. Between January and April 2022, the food component of the Palestinian Consumer Price Index (CPI) rose steeply to its highest point in the past six years.
“The Palestinian economy continues to face enormous challenges that may affect its long-term macroeconomic stability. The compounded effects of the COVID-19 pandemic and the Ukraine war, clashes in the West Bank and recurring conflicts in Gaza, on top of the fiscal stress amplify the destabilization risks. Adding to that, donor aid remains insufficient to close the financing gap which may reach 3.3% of GDP in 2022, reducing the PA’s ability to meet its recurrent commitments,” said Stefan Emblad, World Bank Country Director for West Bank and Gaza.
The Palestinian Authority’s (PA) fiscal deficit declined by 70 percent in the first half of 2022 compared to the same period in 2021. This was due to strong revenue growth and maintained spending as increases in certain expenditure items were offset by a strong decline in spending on the National Cash Transfer program, at a large social cost.
The PA has accumulated a large stock of arrears to the private sector, the pension fund, and its public employees. Even though direct borrowing by the PA from the domestic banking sector is gradually declining, PA and public sector employees combined still account for close to 40 percent of total banking sector credit --posing destabilization risks. Non-performing loans and classified loans have also risen since 2018.
“Close cooperation between the Palestinian Authority, the Israeli government, and the international community will be vital to reorient the economy toward long-term sustainability, significantly boost the PA’s revenues and support Palestinian households to cope with the rising prices,” said Emblad
Palestinian reforms are needed on both the revenue and expenditure sides for a more sustainable fiscal position. Spending reforms should target the wage bill, the public pension system, and the untargeted transfers. Better management of health referrals and unplanned subsidies to Local Government Units are also key priorities. Encouragingly, the PA has recently re-dedicated itself to wage bill reform. On the revenue side, the PA’s revenues compare well to other fragile countries at the same level of development. However, more can be done especially since the PA collects insignificant revenue from Gaza due to the internal divide. Reforms are also needed to widen the tax base in the West Bank to cover high earning professionals such as doctors, lawyers, engineers, etc. Alongside this, legislation must be strengthened to penalize non-payers.
A stable and predictable continuation of donor assistance to the PA through budget support operations will be critical as it carries on with its reform agenda. The PA continues to make progress in improving the public financial management (PFM) and it has also recently strengthened the Palestinian Anti-Money Laundering and Combating Financing of Terrorism (AML/CTF) framework. Building on these efforts will be an important aspect of the partnership with the donor community. The PA and the international community should work together to review the most effective form of direct assistance to the poorest and most vulnerable, including reviving the National Cash Transfer Program.
The PA’s reforms are necessary but not sufficient to put the Palestinian territories on a sustainable development path. Cooperation by the Government of Israel (GoI) remains essential to reduce economic restrictions and sources of fiscal leakage, and to help create greater fiscal space for social assistance. Granting Palestinian businesses access to Area C could boost the Palestinian economy by a third and increase revenues by 6% of GDP. The GoI could also transfer the revenues it collects from businesses operating in Area C and Allenby Bridge exit fees per the 1995 interim agreement. It could also lower the 3% fee charged for handling Palestinian imports.