I would like to start by reinforcing the messages which we heard from Prime Minister Fayyad. In recent years, the Palestinian Authority has illustrated its strong commitment and determination to steer the economy despite the challenges it faces, and has focused on building institutions and ensuring continued service delivery. We know such achievements are hard won and recognize your leadership in delivering on this difficult agenda. The World Bank believes that the PA is, in several regards, well-positioned to take the reins of its state hood as the political dynamics allow. Going forward there is an opportunity for all parties – Palestinians, Israel, and the international community – to rise to the challenge and ensure that the institutional underpinnings of the future state are solid.
Under the prevailing constraints, real economic growth of close to 7 percent in 2009 is a manifestation of the region’s potential, to achieve high and sustainable growth. I would like to draw attention to four key points:
(i) Continued pursuit of economic reforms and the building State Institutions to stimulate much needed confidence in the economy, while providing public goods and improving governance.
(ii) Creating an enabling environment for attracting domestic and foreign investments which are currently very low. Israeli easing of movement and access restrictions in the West Bank has been of some help in this regard. Continued efforts to improve access to markets in East Jerusalem and Israel are of paramount importance for the Palestinian private sector.
(iii) Removal of barriers both in terms of access to land, including in Area C, as well as goods and services, will be a prerequisite for enhancing private sector investment. This ultimately has to be the major driver of economic growth.
(iv) And finally, encouraging regionally balanced and equitable growth across the West Bank and Gaza.
With Palestinians achieving a third consecutive year of GDP growth, it is of considerable concern that Gaza has been left behind – with a falling per capita GDP and a population sustained only by high levels of international aid. The social distress in Gaza is worrisome, requiring more reflection on how aid transfers could be better balanced. Scaling up involvement in Gaza is critical. Rebuilding its infrastructure and reviving its formal economy can only be achieved if all stakeholders work towards this common goal.
I would like to turn now to some specifics of institutional reform. One of the key attributes of an effective state is prudent management of public finances. The PA has taken tough measures over the last few years that are now yielding results. Let me highlight four areas where progress has and will continue to take place:
(i) In terms of public financial management, the PA has launched a new budget classification and program-based budgeting system, while efforts are underway to computerize it. Carrying forward these reforms along with the ratification of a public procurement law that is fully aligned with international best practices will bring greater discipline and confidence in the system.
(ii) Regarding social assistance, the unification of the two largest PA-administered cash assistance programs and strengthening of the targeting system is underway. Going forward, the Ministry of Social Affairs will be working to institute a uniform level of payment to households. The resulting improvements in efficiency will enhance sustainability and facilitate the scaling up of coverage if vulnerabilities grow.
(iii) The PA is keen on reforming the pension system. It is in the process of preparing an action plan and choosing a policy reform option that will reduce unfunded public pension liabilities while creating the preconditions for enhanced coverage.
(iv) Finally the PA has substantially reduced subsidizing electricity consumption. However the “net lending” phenomenon continues to persist. We recommend that the PA and municipalities take concerted action to address this issue.
We should all recognize the efforts that were needed to make this progress and continued donor support is warranted to keep the PA’s economic reforms on course, while meeting budget requirements for this year.
Fiscal stimulus supported by donor assistance has undoubtedly played a significant role in contributing to economic growth. Assistance to the budget reached nearly $1.4 billion in 2009 bringing the three year total to over $4 billion. The 2010 budget commits the PA to resuming the path to less dependence on donor support for recurrent expenditures. Nonetheless, as the current budget discussion illustrates, for 2010 the deficit stands at $1.2 billion.
There remains a need not only for sustained donor funding, but also for more predictable funding. I would like to stress that until the PA is able to support sustained economic growth, which is critical to mobilize the desired level of domestic revenues, support for its public expenditures, in particular capital investment, is vital. In the World Bank we will continue to do our part to meet PAs financing requirements. We would like to do more in the areas of social and economic investment in Gaza and the West Bank but remain constrained by the broader political impasse. We urge others in the international community to commit themselves to securing the funds necessary to support the PA’s budget.
Looking forward, we are all acutely aware that real headway can only be made through reviving the private sector -- in the West Bank but especially in Gaza – as the foundation for sustainable growth and ultimately reducing Palestinian dependence on external aid. The PA’s reforms and Israel’s loosening of its security restrictions have had a positive impact on investor confidence. These positive trends must be sustained and accelerated in 2010 and beyond. The World Bank, for its part, stands ready to continue to work with the PA and our partners in the international community to build the institutions for a future state.