Press Release No. 18/305

IMF Staff Concludes Visit to West Bank and Gaza

July 24, 2018

• Continued reform efforts by the Palestinian Authority to bolster fiscal sustainability and financial stability are more important than ever.
• Developments in Gaza and external pressures are weighing on the Palestinian economy and the outlook has become more uncertain.
• A lasting improvement in Palestinian growth prospects requires a comprehensive and coordinated response by all parties.

An International Monetary Fund (IMF) staff team led by Karen Ongley visited East Jerusalem and Ramallah during July 8–19, 2018, to assess recent economic developments in the West Bank and Gaza. The IMF team met with Finance Minister Bishara, Governor Shawwa, and other Palestinian officials.

At the end of the visit, Ms. Ongley issued the following statement:

“Despite still solid growth in the West Bank, the sharp decline in activity in Gaza weighed on the Palestinian economy. In the first quarter of 2018 real growth in the West Bank was close to 5 percent. However, the 6 percent decline in Gaza brought the overall growth rate down to 2 percent. With economic and financial buffers having been steadily eroded in Gaza, its economy was more vulnerable to the increasingly tense political and security situation, and cuts in donor support and transfers from the Palestinian Authority (PA) budget.

“Continued consolidation efforts by the Ministry of Finance and Planning helped to manage rising fiscal pressures. Strong growth in domestic revenues—particularly customs, VAT and income taxes—helped to offset weak clearance revenues and the unwinding of one-off factors in 2016. Together with spending cuts, this kept the overall fiscal deficit in 2017 to around 8 percent of GDP, broadly unchanged from 2016. However, these actions did not prevent the PA from having to resort to running arrears.

“With pressures on the economy continuing to mount, the outlook has become more fragile and uncertain. If things continue as they are, overall growth in 2018 could slow further to 1½ percent, weighed down by activity in Gaza declining by 4 percent. More broadly, Gaza is unlikely to register positive growth over the medium term without a profound and lasting change in circumstances. An added concern is the substantial loss of clearance revenues posed by recently approved Israeli legislation, which would seriously compromise fiscal sustainability and act as a further brake on growth.

“Given this mix of factors, lifting the growth trajectory on a permanent basis requires a comprehensive and coordinated strategy, anchored around four key elements. One, a medium-term plan to gradually reduce the budget deficit, mindful of the impact on growth. Two, a mix of revenue and expenditure measures by the PA, supported by reforms to strengthen public financial management. Three, faster and tangible progress toward reducing revenue leakages, where transparent and clearly understood mechanisms that rely on a regular exchange of the necessary information are put in place and adhered to by the Israeli and Palestinian authorities. Four, an actively engaged donor community that helps bridge the large financing gaps and assists in building necessary institutions, and abets an ongoing dialogue between the two sides.

“Maintaining a healthy financial sector will be instrumental in supporting growth, particularly given strains on growth in Gaza. The Palestine Monetary Authority (PMA) should continue to ensure that risks are scrutinized closely, with the full use of the macro- and micro-prudential toolkits and frequent on-site visits. Continued cooperation between the PMA and Bank of Israel will be pivotal in maintaining smoothly functioning of correspondent bank relations.”

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