Press Release No. 13/244

Press Release: Statement at the Conclusion of an IMF Mission to the West Bank and Gaza

July 3, 2013

A team from the International Monetary Fund (IMF) led by Christoph Duenwald visited East Jerusalem and Ramallah during June 24-July 2, 2013, to assess recent economic developments in the West Bank and Gaza, and the financial situation of the Palestinian Authority. The mission met Prime Minister Rami Hamdallah, Deputy Prime Minister Muhammad Mustafa, Finance Minister Shukry Bishara, Governor Jihad Al Wazir, and other Palestinian officials. At the end of the mission, Mr. Duenwald, the mission chief for the West Bank and Gaza, issued the following statement:

“The Palestinian economy continues to be dominated by the public sector, and persistent Israeli controls and obstacles on internal movement, exports, and imports in the West Bank, as well as the virtual closure of Gaza, thwart the private sector. Under these conditions, GDP growth is expected to continue to slow in 2013, to 4½ percent, with modest inflation of around 2½ percent. Given weak growth, little progress is expected in reducing the unemployment rate, which currently stands at 24 percent. Despite these circumstances, the banking system appears healthy.

“The finances of the Palestinian Authority (PA) remain fragile. The PA has taken measures to limit the growth of the wage bill, but overspending on energy subsidies, nonpayment of electricity bills, and shortfalls in revenues have more than offset savings. We project an overall deficit before grants of US$1.7 billion in 2013. Even if donor commitments for 2013 are fully met, a significant financing gap will remain. This gap would likely be covered by further arrears accumulation and domestic bank borrowing, which has already reached prudential limits.

“Aside from these near-term pressures, we remain concerned about the medium-term viability of the PA’s finances. The PA has typically operated a large fiscal deficit financed partly by donor aid. These deficits, for many years, exceeded available donor aid, causing the PA to resort to distortionary financing sources, such as arrears to the private sector, to cover its expenditures. At the same time, public spending is tilted towards wages, pensions and transfers, rather than much needed investment in education and public infrastructure, leaving in place impediments to private sector development.

“Reducing the deficit and redirecting the PA’s spending from consumption to investment is required to strengthen the economy’s productive capacity. Towards this end, a key measure should be a gradual reduction in the large wage bill by means of a hiring and wage freeze, as well as a rationalization of allowances for high income public sector workers, followed by comprehensive civil service and pension reform. Expanding the well targeted Cash Transfer Program would help cushion the impact for the most vulnerable. The authorities should continue to improve public financial management with a view to avoiding new arrears and strengthening cash management. On the revenue side, efforts could focus on reducing tax exemptions and improving compliance.

“The PA needs the continued support of the international community and cooperation of Israel, guided by the common objective of a more vibrant and robust Palestinian economy. Indeed, there is no substitute for a far-reaching relaxation of Israeli restrictions needed to unshackle the private sector and thereby boost growth and employment. At the same time, the donor community needs to support the transition to viable public finances with stepped up aid based on multiyear commitments.”

For information on the work of the IMF in West Bank and Gaza, please see the following link: http://www.imf.org/wbg