Country Reports

Deepening rifts between key stakeholders and surging violence in Gaza further imperil prospects for peace. Protests in Gaza ahead of, and turbulence since, the Nakba day and relocation of the United States’ embassy to Jerusalem in mid-May, mark the most serious escalation since the 2014 war. Relations between the parties have hardened, amid a spate of new laws in Israel. The Palestinian Authority has expressed skepticism about the U.S. role as a neutral arbiter in the peace process. The domestic political situation remains tense and reunification plans have stalled.

The outlook is increasingly untenable. Longstanding constraints continue to act as a brake on growth, aggravated by large aid cuts and revenue losses. Gaza is suffering disproportionately, with its economy shrinking and unfolding humanitarian catastrophe. Overall GDP growth is projected to languish below 2 percent per year. The intended withholding of clearance revenues under new Israeli legislation will seriously undermine the already fragile fiscal situation. Large external imbalances will persist as restrictions impede development and add to vulnerabilities. Weaker growth and demographic pressures will substantially worsen unemployment, poverty, and per capita incomes.

The overriding challenge is to revive growth and alleviate poverty in the face of shrinking resources. More than ever this will depend on the Palestinian authorities, Israel, and donors coming together to ensure a comprehensive approach to reforms. The priority is to implement adjustment measures that help protect critical public service delivery, social spending and investment, and avoid a disorderly expenditure rollback disruptive to growth. Reforms to strengthen the fiscal framework and public institutions will help achieve this objective, promote public accountability, and reassure donors that resources will be well spent. Faster progress to systematically reduce “fiscal leakages”— based on fair and transparent discussions between the Israeli and Palestinian authorities —will be imperative. Stronger action to avert a build-up of financial sector risks and maintain correspondent banking relations will be essential to preserve financial stability and ensure banks can support economic activity. Finally, steps to shore up economic institutions, together with actions to ease restrictions on movement and access, will be crucial to stabilize Gaza and revitalize the overall economy’s capacity to grow.