The Palestinian Economy Remains Vulnerable Amid Socio-Political Instability

JERUSALEM  – According to a new World Bank report, Palestinian economic growth is expected to soften in 2023. While the economy had continued to rebound at a rate of 4% in 2022, this was driven by the ongoing recovery of private consumption as COVID-19 mobility restrictions eased. However, increased tensions in the Palestinian territories and the spillovers from the Russian invasion of Ukraine continue to pose significant downside risks.

“Despite signs of recovery in 2022, growth remains sensitive to the escalation of tensions in the Palestinian territories and the ongoing restrictions on mobility, access and trade. Raising living standards, improving the sustainability of fiscal accounts, and reducing unemployment in a meaningful manner will all require significantly higher growth rates. Exogenous sources of risks, such as in the areas of food and energy prices, mean the overall economic outlook remains bleak,” said Stefan Emblad, World Bank Country Director for West Bank and Gaza.

The World Bank’s Palestinian Economic Monitoring Report to the Ad Hoc Liaison Committee (AHLC) highlights the challenges faced by the Palestinian economy, with a focus on fiscal reforms. The report will be presented in Brussels on May 3 and 4 during a policy-level meeting on development assistance for the Palestinian people.

2022 saw an improvement in the fiscal balances, led by a 19% increase in local tax collection and a 20% increase in clearance revenues, as well as a steady public spending. Consequently, the total fiscal deficit decreased by more than 60% (before grants). Factoring in donor contributions and the Government of Israel (GoI)’s deduction from clearance revenues, the Palestinian financing gap fared better than initial forecasts, closing the year at US $351 million, or the equivalent of 1.8% of the GDP, down from 7% in 2021.

While the Palestinian Authority (PA) continues to try to cover the fiscal gap, the large and growing stock of arrears to the private sector, the pension fund, and public employees poses risks to long-term macroeconomic stability. The exposure of the banking sector to the public sector remains high, which requires continued monitoring by the authorities.

“The Palestinian Authority should continue to advance priority reforms to increase revenues, strengthen debt management, and improve fiscal sustainability. However, the PA cannot do it alone. Donor support and cooperation by the Government of Israel are vital to achieve fiscal consolidation and put the economy on a more solid footing,” added Emblad.

The reform efforts should continue to tackle the size of the wage bill and the generous public pension system, as well as increase the efficiency of public expenditure, notably by better targeting transfers to the poorest and most vulnerable. Speeding up efforts to better managing health referrals outside the public health system and reducing net lending will also be critical going forward. The report commends the steps taken by the PA to adopt a net attrition target for public employment and clear the backlog of annual financial statements. While the attrition target is an important first step, the report acknowledges that gains may be offset as ongoing negotiations with workers unions, especially in the education sector, could result into additional pressure on the fiscal envelope.

Adequate and predictable donor budget support will be critical in facilitating the reform process and macro-economic stabilization. In addition, donor financial contributions can be directed to development projects that bolster economic growth and actions that improve public financial management and cross-cutting governance measures.

The restrictions in the West Bank and the near-blockade imposed on Gaza remain among the most important obstacles to stability, growth and private sector development in the Palestinian territories as cited by previous World Bank reports. If not eased or lifted, the Palestinian economy is expected to continue operating well below its potential.