IMF Staff Concludes Visit to West Bank and Gaza

IMF Staff Concludes Visit to West Bank and Gaza

August 29, 2022

End-of-mission press releases include statements from IMF staff conveying preliminary findings after a country visit. The views expressed in this statement are those of IMF staff and do not necessarily represent the views of the IMF Executive Board. This mission will not give rise to a discussion in the Council.

• The Palestinian economy has seen a strong post-COVID rebound in 2021, but unemployment and poverty remain consistently high. Economic growth is expected to slow this year.
• The economy faces daunting challenges that require comprehensive and coordinated reform. Efforts are required from the Palestinian Authority, Israel and the donor community.
• The mission is encouraged by the authorities’ ambitious reform objectives, centered on controlling the public sector wage bill.

Washington D.C.:
A team of International Monetary Fund (IMF) staff led by Mr. Alexander Tieman held discussions from August 16-28, 2022 to assess recent economic developments in the West Bank and Gaza. The IMF team met with Prime Minister Mohammad Shtayyeh, Finance Minister Shukry Bishara, Palestinian Monetary Authority Governor Feras Milhem, National Economy Minister Khalid Al-Esseily and other members of the Palestinian economic team.

At the end of the mission, Mr. Tieman made the following statement:

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The Palestinian economy experienced a strong rebound from the COVID-19 pandemic in 2021, but unemployment increased slightly and remains very high, in Gaza in particular.

After a sharp recession in 2020, real GDP grew by 7.1% in 2021 as COVID vaccinations took off and movement restrictions were eased. Private consumption contributed 5.5 percentage points to growth, helped in part by rising employment of Palestinian workers in Israel. Growth in Gaza, however, was only 3.4%, with reconstruction efforts after the May 2021 conflict advancing only slowly. Although employment increased by 8% during the year, the unemployment rate rate raised to 26.4% at the end of 2021. The unemployment rate in Gaza remains stubbornly high, reflecting restrictions on the movement of people and goods, and is closely associated with a high prevalence of poverty.

“The outlook for 2022 points to a slowing economy amid growing inflation concerns.

Growth is expected to fall to 4%, impacted by lower consumption and investment due to lower real incomes as prices rise, continued fiscal weaknesses and heightened uncertainty related to Russia’s invasion of Ukraine – while the direct spillovers from Russia and Ukraine are limited, the indirect exposures, particularly on food and fuel imports via Israel, are considerable. Inflation is expected to rise significantly, driven by higher food, fuel and building material prices.

“Despite a difficult environment, the authorities contained the budget deficit.

The budget deficit fell to 5.2% of GDP in 2021 and 0.4% of GDP in the first half of 2022. Going forward, the mission expects the deficit to increase in the second half to reach 3, 5% of GDP at the end of 2022. . Significant increases in revenue, well above nominal GDP growth, and moderation in recurrent spending have contributed to these results. However, this also includes unwanted cuts in social transfers and low development spending. With 2021 budget subsidies down 40% from 2020, public debt (including arrears to suppliers and the Palestinian Pensions Agency) fell from 34.5% of GDP in 2019 to 48.4 % of GDP at the end of 2021, i.e. 20.6% of GDP excluding arrears. Meanwhile, the banking sector remained stable, with adequate capital.

“The Palestinian economy faces formidable challenges.
The fiscal situation, high political, security and social tensions, rising inflation, movement and access restrictions and an unfinished structural program all weigh on the medium-term outlook. Fiscal challenges are largely structural in nature – the PA faces a high public sector wage bill and spends a considerable portion of its budget in Gaza and East Jerusalem, but generates virtually no revenue in these areas or in areas of the West Bank under Israeli civilian and security control. control, known as Area C, and the PA and Israel disagree over how much revenue the latter should transfer to the former. Without fiscal policy changes, public finances remain unsustainable and medium-term economic growth is expected to gradually slow to its estimated potential rate of 2%.

“Addressing these challenges will require ambitious reforms spanning several years and close cooperation

between the Palestinian Authority, the government of Israel and the donors.

The Palestinian Authority needs to implement expenditure reform – focusing on the wage bill, net lending capacity and health sector reform -, further broaden its tax base and undertake structural reform to improve the business environment. business. Working together, Israeli and Palestinian authorities should resolve outstanding tax issues to increase Palestinian income and ease Israeli restrictions on the movement of goods and people and on investment to unlock the economy’s growth potential. Building confidence through the implementation of Palestinian-led reforms could attract donor funds, ease the adjustment burden for the population and private sector businesses, and thus help pave the way for more economic growth. fast, job creation and poverty reduction. In this regard, we welcome the recent receipt of funds from EU donors for 2021.

“The mission is encouraged by the authorities’ well-justified reform objectives.

Their goal of significantly reducing the public sector wage bill and addressing net lending, pursuing healthcare reform and improving the business environment will, over time, create fiscal space to clear arrears, increase social spending and invest in development. It would also allow the resumption of payment of full public sector wages, rather than the current practice of paying partial wages – a temporary fiscal emergency measure, highlighting the need for reform. The mission understands that detailed wage bill reform plans focusing on early retirement are being developed. This is an important first step that should be followed by policies to contain the wage bill in the future, including by reducing new hiring and salary increases, reforming the benefit system and, to medium term, by undertaking a functional review of public sector employment. The mission also discussed initiatives aimed at containing net lending and reforming the health sector. The mission welcomed the initiatives of the Ministry of Finance on all these reforms. For reforms, the approach should be to focus first on stopgap measures that can be implemented in the short term, followed by gradual and carefully sequenced implementation of ambitious medium-term reforms. , which will require strong and sustained political commitment. In addition to these tax reforms, the Palestinian Monetary Authority is leading efforts to strengthen the anti-money laundering and counter-terrorist financing (AML/CFT) framework in the Palestinian territories in line with international best practices, including through through recent amendments to the AML. /CFT that criminalizes the financing of terrorism and a decree that transposes UN security resolutions related to the financing of terrorism into national legislation. The IMF stands ready to provide technical assistance to support the authorities’ reform efforts.

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The mission encourages further progress in Israeli-Palestinian cooperation.

He notes the positive economic boost from the increase in the number of permits granted to Palestinians to work in Israel and the settlements. The mission also noted progress on the e-VAT pilot, which should be extended rapidly to include all traders. He is further encouraged by the initiative to start paying Palestinian workers in Israel and the settlements electronically, which will reduce the influx of physical shekels into the West Bank and Gaza Strip, thereby reducing the problem of excess liquidity faced by Palestinian banks. However, progress on outstanding tax files has been slow since the May meeting of the Ad Hoc Liaison Committee. The mission urges the parties to quickly agree on reducing handling charges and exempting fuel shipments, while not losing sight of other tax issues such as the Allenby (King Hussein) bridge charge and the Zone C taxes, as well as customs transfer. authority (including bonded warehouses). Similarly, only limited progress has been seen in resolving the long-standing and critical issue of correspondent banking relationships. Intensified discussions between the Israeli and Palestinian finance ministries could help move these budget issues forward, while a broader discussion on trade and access is expected to take place at a meeting of the Joint Economic Committee.

“The IMF team is grateful for the open and constructive discussions with the Palestinian authorities

, as well as representatives of the government and central bank of Israel, the private sector and the international community, who have enriched our understanding of the situation. The team will remain closely engaged to help the authorities meet the economic and financial challenges.