Press Release No. 14/44

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

February 6, 2014

An International Monetary Fund (IMF) team led by Mr. Christoph Duenwald, the Mission Chief for the West Bank and Gaza, visited East Jerusalem and Ramallah during January 28-February 6, 2014, 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 al-Hamdallah, Deputy Prime Minister Mohammad Mustafa, Finance Minister Shukri Bishara, Governor Jihad Al Wazir, Palestinian Central Bureau of Statistics (PCBS) President Ola Awad, and other Palestinian officials.

At the end of the mission, Mr. Duenwald issued the following statement:

“Economic activity in 2013 has been weaker than expected and fiscal strains have continued. We estimate that real GDP rose by just 1½ percent, reflecting the impact of uncertainty regarding the Israeli-Palestinian peace process and a sharp deterioration of economic conditions in Gaza. Owing to weak growth, the unemployment rate increased to 25 percent at end-2013. Despite increased donor assistance, the Palestinian Authority continued to accumulate arrears. At the same time, the Palestinian Authority reduced the outstanding stock of debt to commercial banks. The overall deficit, including development spending, is estimated at 13.7 percent of GDP, nearly 3 percentage points lower than in 2012, helped by improved revenue performance and some commendable efforts to contain spending.

“The economic outlook for 2014 and beyond depends heavily on the outcome of the peace talks. Under the status quo, where peace talks are ongoing and their result is not yet known, we project growth of around 2½ percent this year, and similar subpar growth performance over the medium term, with rising unemployment.

“A breakthrough in the peace talks could launch major donor initiatives, such as the Economic Initiative for Palestine, which could boost average annual real GDP growth to about 6½ percent in 2014-19. On the other hand, failure of the peace negotiations could trigger a political and security crisis that would lead to accelerated arrears accumulation and economic contraction, especially if donors signal scaling back their support.

“The 2014 budget envisages modest further progress in fiscal consolidation but still leaves a sizable financing gap. Wage expenditure is budgeted to rise by nearly 5 percent. The budget envisages laudable reductions of untargeted fuel subsidies and rationalization of allowances, limits the rise in operating expenditures and transfers, and targets a reduction in net lending. Following recent practice, the wage bill is again based on zero net hiring. Domestic tax revenues are expected to increase by 6 percent, based on improvements in revenue administration.

“Given the projected financing gap and substantial fiscal risks, including with regard to the wage bill, it is imperative to contain the 2014 budget deficit beyond the level envisaged in the budget. If not, accumulation of arrears will continue, thereby hurting the private sector and undermining the credibility of the Palestinian Authority. We recommend containing the overall increase in the wage bill to 2 percent (the same as last year), accelerating the reduction of poorly targeted fuel subsidies, and means testing and rationalization of transfers for recipients outside the cash transfer program. There is also scope to increase revenue by raising tax compliance through better enforcement and scaling back tax incentives. We recommend leaving corporate income tax rates unchanged to avoid revenue losses when revenue enhancing administrative measures have yet to take hold. Tax holidays should be eliminated urgently to avoid large foregone revenues in the event of successful peace negotiations that lead to increased inflow of foreign investments.

“Structural reforms are critical to improve economic outcomes regardless of the results of the peace talks. If peace talks succeed, the Palestinian Authority would need to raise its implementation capacity through improved infrastructure and institutional reforms to optimize the economic impact of new financing and investment. The Economic Initiative for Palestine and other sources of support will present difficult economic management challenges, and cannot by themselves overcome persistent fiscal deficits and aid dependency. If peace talks do not succeed, the outlook could worsen and a new financing model—aimed at lower deficits and a change in the composition of spending in favor of development—would be urgently needed. In either case, support from the international community and broad-based and comprehensive easing of Israeli restrictions will be needed to underpin the Palestinian reform efforts.”

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