Press Release No. 22/72

IMF Staff Concludes Visit to West Bank and Gaza

March 10, 2022

• The Palestinian economy is recovering from the depth of the 2020 recession but will only reach its pre-pandemic level in 2023.
• Under unchanged policies, the economic and fiscal outlook is dire and the Palestinian Authority has had to resort to running large arrears.
• Overcoming these challenges will require comprehensive and coordinated reform, with efforts required from the Palestinian Authority, Israel, and the donor community. The PA’s 2022 budget presents an opportunity to start reforms.

Washington, DC: An International Monetary Fund (IMF) staff team led by Alexander Tieman conducted virtual discussions from February 17 to March 3, 2022 to assess recent economic developments in the West Bank and Gaza. The IMF team met with Prime Minister Mohammad Shtayyeh, Finance Minister Shukry Bishara, Palestine Monetary Authority Governor Feras Milhem, Minister of National Economy Khalid Al-Esseily and other members of the Palestinian economic team.

At the end of the discussions, Mr. Tieman issued the following statement:

The Palestinian economy is recovering from the depth of the 2020 recession. The COVID-19 pandemic and the Palestinian Authority’s (PA) emergency spending cuts associated with the cessation of economic and security relations with Israel between May and November in 2020 resulted in an economic contraction of 11.3 percent in 2020. As COVID vaccines became available in late spring 2021, the Palestinian economy partially rebounded, growing by an estimated 6 percent in 2021 overall and by 7 percent in the West Bank. Meanwhile, in part due to the May 2021 conflict between Israel and Hamas, the economy in Gaza is estimated to have grown by just 2 percent. Despite the recovery, Palestinian GDP is projected to reach its pre-pandemic level only toward the end of 2023. The banking sector has rebounded from the COVID-induced shock, with profitability and capital adequacy at the end of 2021 largely back to pre-pandemic levels and in the context of an increasing liquidity cushion, as deposit growth far outpaced slow credit growth.

The economy faces a fiscal crisis. Against the background of repeated political and security shocks and despite the Ministry of Finance and Planning’s good revenue performance, the combination of the COVID-19 pandemic, declining donor support, and spending priorities have resulted in high deficits. With limited financing options, the authorities have accumulated large domestic arrears. Public debt (including arrears to suppliers and the Palestinian Pension Agency) increased from 34.5 percent of GDP in 2019 to 49.3 percent of GDP in 2021 (or 20.9 percent excluding arrears). The fiscal challenges are largely structural in nature—the PA spends a considerable part of its budget in Gaza and East Jerusalem, but raises virtually no revenue in these areas or in West Bank areas under Israeli civil and security control, known as Area C; the PA and Israel disagree on the amounts of revenue that the latter should transfer to the former; and economic growth is chronically weak. Under unchanged policies, the economic outlook is dire with debt on an unsustainable path and per capita GDP projected to decline. This is against the backdrop of already persistently high unemployment and poverty, particularly in Gaza.

Overcoming these challenges will require transformational reform with efforts required from the Palestinian Authority, the Government of Israel, and the donor community. It will be important to develop a medium-term macro-fiscal strategy that allows the government to invest in development projects and social spending to support the Palestinian people, while being consistent with debt sustainability. The PA needs to implement spending reform—centered on the wage bill, health referrals, pensions and net lending—, further broaden its tax base, and undertake structural reform to improve the business environment. In this regard we are encouraged by the Ministry of Finance and Planning’s recent emphasis on fiscal reform. Working together, Israeli and Palestinian authorities would need to resolve fiscal leakages to boost Palestinian revenue and reduce impediments to the movement of goods and people to unleash the economy’s growth potential. Boosting confidence through the implementation of Palestinian-led reforms could attract donor funds, helping ease the adjustment burden on the population and private sector companies during the economy’s transition to a more sustainable footing. A comprehensive and joint effort would strengthen macroeconomic stability and pave the way for faster economic growth, job creation and poverty alleviation.

During the mission, progress was made in clarifying the authorities’ policy intentions. The authorities’ objectives to improve the business environment, reform the wage bill and implement a new strategy to increase revenue—including, in cooperation with Israel, commencing the e-VAT project for commerce between the Israeli and Palestinian markets — are a promising start. So are the intentions to revisit expenditure in the health system and the establishment by the Council of Ministers of a unit to manage net lending. More work is needed to translate these reform plans into concrete policy actions in the context of a carefully sequenced multi-year strategy to improve the fiscal outlook and reduce debt. In this regard, the 2022 budget presents a critical opportunity to make a head start in addressing the fiscal challenges.

The IMF team is grateful for the open and constructive discussions with the Palestinian authorities , as well as representatives from the Government of Israel, the private sector, and the international community, which have enriched our understanding of the situation. The team will remain closely engaged to help the authorities address the economic and financial challenges.