Speech

Statement by Rodrigo de Rato, Managing Director of the International Monetary Fund, at the London Meeting on Supporting the Palestinian National Authority

March 1, 2005

I would like to join the other distinguished delegates in thanking Prime Minister Blair and his government for hosting this important conference. It takes place at a most opportune time, and I am confident that it will contribute to strengthening economic development and governance in the Palestinian National Authority.

The political transition in the Palestinian National Authority and the election of President Abbas have opened an important opportunity for the peace process to move forward. The recent steps taken by both the Palestinian authorities and the Israeli government, including the cease-fire announced at the summit between President Abbas and Prime Minister Sharon in Sharm el-Sheik, provide an encouraging political context for moving forward toward achieving the goal of two states, living in peace, side by side.

The road ahead is difficult and will require perseverance by all parties to overcome major obstacles. In particular, to fulfill its obligations under the Roadmap and deliver tangible benefits to the Palestinian people, the Palestinian National Authority needs to further strengthen its institutions, improve governance, and lay the foundations for a viable Palestinian State. The success of this reform process hinges on achieving a significant improvement in the living conditions of the Palestinian population to muster the necessary political support.

The last four years of conflict have had an enormous human cost and a very negative social and economic impact. The Palestinian economy went through a severe recession, leaving real income per capita in the West Bank and Gaza in 2004 more than 35 percent lower than in 1999. As the economy has been unable to create enough jobs for the rapidly growing labor force, unemployment remains very high at 26 percent, with a particularly acute situation in Gaza, where it is running at 35 percent. About half of the Palestinian population is living in poverty and social indicators have deteriorated markedly. The situation has stabilized recently. Also, the banking sector has been very resilient and has the potential to finance the development of private sector activities when the business environment improves. This would require efforts on the part of Israel to lift existing closures and restrictions on the movement of goods and people throughout the West Bank and Gaza.

The deterioration in the macroeconomic and social conditions has led to a worsening of the fiscal situation, which is highly dependent on external budget support. Budgetary revenue declined sharply at the start of the conflict, in line with the drop in economic activity, while expenditure pressures have increased because of the fast growing population, rising poverty, and the destruction of essential infrastructure. At the same time, in light of pressures to reduce unemployment, public employment has increased, resulting in the wage bill crowding out other expenditures, including the delivery of basic public services. Although donors covered an important portion of the budgetary financing needs in the last four years, shortfalls in external budget support have undermined budget execution and the ministry of finance has experienced difficulties in paying salaries on time.

In spite of the overall difficult environment, the Palestinian National Authority has continued to implement reforms aimed at institution building with the support of the international community. Important progress has been made — with technical support from the Fund — in improving transparency and accountability in the public finances. In 2004, reforms in this area included the payment of all security personnel salaries through bank deposits instead of cash, the publication of the first annual report of the Palestinian Investment Fund, and major improvements in government procurement practices. All budgetary and treasury operations have been codified, and a revised income tax in line with best international practices has been approved. In addition, a change of leadership in the Petroleum Authority contributed to a significant increase in budgetary revenues in 2004. Looking ahead, President Abbas has laid before us an ambitious program of reforms for the coming months. We welcome this program, which seeks to improve the delivery of public services and to create a more transparent environment for investment decisions. We are confident that the new government, made up largely of professional technocrats, will be able to deliver on the President's program.

Many of the Palestinian reforms will require strong support and assistance from the international community for their successful implementation. Substantial external budget assistance is necessary to allow the Palestinian National Authority to continue to function and mobilize political support. Based on preliminary fiscal projections, financing needs to cover the budget deficit on current operations will amount to about US$500 million in 2005. Moreover, US$140 million is required to repay commercial bank debt and additional resources are needed for pensions, social safety nets, restructuring of security agencies, and the repayment of arrears. This entails even more generous financial assistance than in the recent past. I would like to note, however, that such a large amount of external budget support should be accompanied by measures to rationalize public expenditure and increase its efficiency.

For its part, the IMF will continue to support the Palestinian National Authority in strengthening its economic performance and building sound economic and financial institutions. We have worked closely with Finance Minister Salaam Fayyad in the past and we look forward to enhanced cooperation in the future. The Fund will also enhance its technical assistance delivery, including through the IMF's Middle East Technical Assistance Center in Beirut, focusing on modernizing tax administration, strengthening the Palestinian customs office, and improving the payments system and banking intermediation to facilitate private sector development. Moreover, the Fund will continue to report periodically to donors on macroeconomic and financial developments and progress in the structural area, including through its active participation in international fora such as the Ad-Hoc Liaison Committee and the Task Force for Palestinian Reforms.

Let me conclude by stating that I believe that the program of reforms which the Palestinian National Authority intends to implement under the leadership of President Abbas deserves the full support of the international community. I wish the Palestinian authorities the best of success in their endeavors.