The IMF and Its 2022 Report on the Palestinian Economy

-       A team of IMF experts led by Alexander Tieman conducted discussions from 16 to 28 August 2022 to assess recent economic developments in the West Bank and the Gaza Strip..

-       At the conclusion of the experts' visit, the head of the delegation, Mr. Tieman, on 29-8-2022, issued a statement assessing the Palestinian economy, and describing its current and future situation, as follows:

·      In the area of diagnosing and assessing the state of the Palestinian economy, Mr. Tieman said:

-       The Palestinian economy experienced a strong recovery in 2021 from the COVID-19 pandemic, while unemployment increased and remains very high, particularly in Gaza. Following a sharp recession in 2020, real GDP grew by 7.1% in 2021, with the start of the COVID vaccination campaign and the easing of movement restrictions. The contribution of private consumption to growth was 5.5 percentage points, partly attributable to higher employment of Palestinian workers in Israel. Gaza, however, recorded growth of only 3.4%, due to slow progress in reconstruction efforts following the (hostilities) that took place in May 2021. Despite an 8% increase in the employment rate during the year, the unemployment rate rose to 26.4% at the end of 2021. The Gaza Strip continues to experience persistently high unemployment rates, which reflect constraints on the movement of people and goods and are largely also related to the widening of poverty.

-       He added that the outlook for 2022 points to an economic slowdown amid rising concerns about inflation, with growth expected to fall to 4%, reflecting waning consumption and investment due to lower real incomes amid higher prices, persistent fiscal vulnerabilities, and rising uncertainty due to Russia's invasion of Ukraine. Despite limited direct exposures to Russia and Ukraine, there are many indirect effects, notably on food and fuel imports, via Israel. The projections also indicate a sharp rise in inflation rates as a result of higher prices for food, fuel, and construction materials.

-       He added that, despite difficult conditions, the authorities succeeded in containing the fiscal deficit. The fiscal deficit fell to 5.2% of GDP in 2021 and to 0.4% of GDP in the first half of 2022. In the coming phase, the mission expects the deficit to increase in the second half of the year to reach 3.5% of GDP by the end of 2022. Contributing to these outcomes was a large increase in revenues that far outpaced nominal GDP growth, and restrictions on current spending. However, these restrictions also include an undesirable reduction in social transfers and weak capital spending. With grants targeted to support the budget declining by 40% in 2021 compared with 2020, public debt (including arrears owed to suppliers and the Palestine Pension Agency) rose from 34.5% of GDP in 2019 to 48.4% of GDP at the end of 2021, or 20.6% of GDP excluding arrears. Meanwhile, the banking sector maintained its stability, with adequate capitalization.

·      As for the nature of the challenges facing the Palestinian economy now and in the future, the head of the IMF experts' delegation added, completing his press statement, saying:

-      The Palestinian economy faces enormous challenges. In the medium term, the outlook is affected by the fiscal position, major political, security, and social disruptions, rising inflation, constraints on movement and incomes, and unfinished structural plans. Most fiscal challenges are structural in nature — the Palestinian Authority bears a large public wage bill, spends a large share of its budget in Gaza and East Jerusalem but collects almost no revenue in these areas, or in parts of the West Bank under Israeli civil and security control, known as Area (C), and the Palestinian Authority and Israel disagree on the level of revenues that Israel should transfer to the Palestinian Authority. Unless fiscal policy is adjusted, public finances cannot be sustained, and economic growth is expected to gradually decline over the medium term to its potential rate estimated at about 2%.

·      On the subject of the proposed measures, solutions and reforms to face these challenges, he added:

-      Overcoming these challenges will require implementing ambitious reforms over several years and close cooperation between the Palestinian Authority, the Government of Israel, and donors. The Palestinian Authority needs to implement spending reforms — centered on the wage bill, net lending, and health sector reform — while continuing to broaden the tax base and undertake structural reforms to improve the business environment. In the context of joint cooperation between Israel and the Palestinian Authority, they should work to resolve outstanding financial issues to boost Palestinian revenues and reduce Israeli-imposed restrictions on the movement of goods, people, and investment to unleash potential economic growth. Donor funds can be attracted by strengthening confidence, which in turn is achieved through implementing Palestinian-led reforms, helping to ease the adjustment burden on households and private sector firms, thereby paving the way to accelerate economic growth, create jobs, and reduce poverty. In this regard, we welcome the recently provided EU grants for 2021.

·      Regarding the targeted reform plan by the Palestinian Authority, Mr. Tieman clarified saying:

-       The mission is optimistic about the justified reforms targeted by the authorities. The objectives are as follows:

-      To achieve a substantial reduction in the public sector wage bill, manage net lending, continue health care reforms, and improve the business environment, which, as a result of these reforms over time, will create fiscal space to settle arrears, increase social spending, and invest in development...

-      It will also allow for the full payment of public sector wages again, instead of partial salary payments as is currently the case — a temporary and emergency fiscal measure, albeit one that underscores the need for reforms.

-      The mission recognizes that a number of detailed plans to reform the wage bill, including opening the door to early retirement, are currently being prepared. This is an important first step, which should be followed by policies to achieve the following:

-      Contain the wage bill in the future, including limiting new hiring, wage increases, reforming the allowances system, and conducting a functional review of public sector employment over the medium term.

-       The mission also discussed initiatives aimed at containing net lending and reforming the health sector.....and welcomed the Ministry of Finance's initiatives regarding all these reforms.

·      With regard to the measures required to overcome the challenges in the short and medium term, he added in his press statement the following:

-       Reforms should initially focus on "filling the gap" measures that can be taken in the short term, followed by the gradual implementation of ambitious reforms over the medium term, according to a careful sequence, which will require strong and sustained political commitment. In addition to these fiscal reforms, the Palestine Monetary Authority is leading a set of efforts currently to strengthen the anti–money laundering and counter-terrorism financing framework in the Palestinian territories, including through recent amendments to the Anti–Money Laundering and Counter-Terrorism Financing Law that criminalize terrorist financing and align with international standards, and the issuance of a decree to incorporate UN Security Council decisions regarding terrorist financing into domestic legislation. The IMF stands ready to provide technical assistance to support the authorities' reform efforts.

·      Regarding the recommendations by the IMF team concerning Israeli-Palestinian cooperation, the head of the experts' team explained in his statement saying:

-       The mission urges further progress on cooperation between the Israeli and Palestinian sides. It notes that the increase in the number of permits issued to Palestinians to work in Israel and the settlements had a positive role in boosting the economy. The mission also noted progress in the electronic value-added tax project, which was implemented on a pilot basis and should be rapidly expanded to cover all traders. It is optimistic about the initiative launched to begin paying the wages of Palestinian workers in Israel and the settlements electronically, which will help reduce inflows of physical shekels into the West Bank and Gaza Strip and thus limit the excess liquidity problem facing Palestinian banks. However, progress on outstanding financial files has remained slow since the meeting of the dedicated liaison committee in May. The mission urges the two sides to reach an agreement quickly on lowering handling fees and exempting fuel shipments from them, while continuing to focus on other financial files, such as transit fees at the King Hussein Bridge and taxes from Area C, as well as the transfer of customs administration (including bonded warehouses). Only limited progress has been made toward resolving the important correspondent banking relationships that have long remained pending. Intensive discussions between the Israeli and Palestinian ministries of finance would help advance these issues, with trade and movement matters needing to be addressed more broadly during meetings of the Joint Economic Committee (JEC)..!