Economic Update and Potential Outlook
World Bank, March 15, 2006
West Bank and Gaza
Economic Update and Potential Outlook
1. This note previews the findings of the Bank’s Economic Monitoring Report #2, requested by the Ad Hoc Liaison Committee in December 2005 and due next month. It reports on developments in 2005 on the basis of recent data, and reviews the potential economic impact of various policy measures currently under consideration.
Developments in 2005
2. In 2005, real Gross Domestic Product (GDP) grew by an estimated 6.3 percent. As explained in the Bank’s December 2005 Economic Monitoring Report #11, a confluence of factors explains this level of growth, including an expansionary (but unsustainable) fiscal policy by the Palestinian Authority (PA), increased banking credit to the private sector, a relaxation of closures (permitting a higher number of Palestinian workers to find jobs in Israel), and increased Israeli demand for Palestinian exports2. Despite positive growth rates during 2003-5, Palestinian incomes remain considerably lower than their pre-intifada levels, with real GDP per capita in 2005 about 31 percent lower than in 1999.
Current Context
3. In recent weeks, both the Government of Israel (GOI) and donors have been considering a variety of economic responses to the outcome of the Palestinian Legislative Council (PLC) election of January 25, 2006, some of which are already under implementation. GOI has suspended the regular transfer of revenues which it collects on behalf of the PA; other forms of economic interaction at issue are Palestinian labor access to Israel and the Israeli settlements (ISI), and the flow of imports and exports across Palestinian borders with Israel. Donors are planning to reduce various categories of foreign assistance.
4. By way of introduction, two points are worth noting. First, the Palestinian economy is highly sensitive to external stimuli, due to its degree of dependence on Israel and on foreign assistance; consistent with this, the Ad Hoc Liaison Committee (AHLC) in December 2005 agreed that achieving desirable rates of Palestinian GDPgrowth would depend on Israel continuing to transfer revenues, rolling back the system of movement restrictions in force and maintaining or increasing labor access to Israel—and on sustained high rates of donor and private investment as well as Palestinian governance reform. It follows that suspending revenue transfers, constraining Palestinian movement and access and reducing aid flows would cause severe economic damage if the available tools were employed with sufficient vigor. Second, the impact of the suspension of clearance revenue transfers and restrictions on movement and access would be much greater than the impact of reduced aid flows. The relative impact of GOI and donor actions is borne out by the economics of the second intifada—a period in which the various restrictions placed on the movement of people, labor and goods, and on the transfer of revenues collected by GOI on the PA’s behalf, led to a contraction in real personal incomes of almost 40 percent between the third quarter of 2000 (Q3/2000) and Q3/2002—despite a doubling of annual donor disbursements in the same period.
Potential Measures and their Impact
5. Possible economic measures. Those with the greatest immediate impact are of three main types.
6. Reducing aid flows. Foreign assistance to the Palestinians is conventionally classified under three broad headings—budget support, emergency/humanitarian, and development aid. In 2005, donors contributed a total of approximately US$1.3 billion7 to the Palestinian economy, or some 22 percent of GDI. Of the US$1.3 billion, it is estimated that some US$350 million (27 percent) was provided in the form of budget support, US$500 million (38 percent) as humanitarian/emergency assistance, and US$450 million (35 percent) as developmental aid (either in the form of capital assistance or for technical assistance/capacity building).
7. Donors have by and large stressed that emergency/humanitarian assistance is not at issue in the current debate, and might even be increased to mitigate any hardships for the neediest in Palestinian society accruing from a reduction in other forms of foreign assistance. In addition, in contrast to the other forms of aid, almost all of this assistance is routed through the UN or through NGOs rather than through the PA. Potential aid reductions, therefore, would come from the c. US$800 million provided in 2005 for budget support and developmental aid.
8. Regarding the provision of aid exclusively through UN and NGO channels, the following points should be borne in mind. First, the PA delivers the vast bulk of public services8. Second, it would be difficult to ramp up emergency/humanitarian assistance levels quickly if humanitarian flows required new verification procedures; humanitarian delivery potential would also be impeded by the movement restrictions in place today at the borders and inside the West Bank (including those being experienced by donor Palestinian staff)9. Third, welfare levels cannot be divorced from PA salary payments; the case for sustaining these during the intifada was in part premised on the welfare benefits associated with such transfers10.
Assumptions Made
9. Bank staff have modeled four scenarios for the period 2006-8. They do not cover all eventualities, and are thus illustrative in nature.
Potential Outcomes
10. The projections show the following (see the Attachment):
11. It is also worth noting that continued withholding by GOI of Palestinian revenues under the assumptions in this model would reduce available total budget resources to between US$700-750 million in 2006. This should be compared with the PA’s 2006 draft Budget of US$1.9 billion (incorporating a salary bill of US$1.2 billion)16. A fiscal outlook of this nature is incompatible with continuity in essential government operations.
Notes
1 The Palestinian Economy and the Prospects for its Recovery—Economic Monitoring Report to the Ad Hoc Liaison Committee Number 1, December 2005.
2 In Economic Monitoring Report #1 (op. cit.), we estimated that real GDP growth might reach 8.7 percent in 2005. The economic data released since then, notably labor market data for the third and fourth quarters of 2005, show that economic developments in the second half of 2005 were less positive than anticipated.
3 Gross Disposable Income measures all resources available to the economy, including aid transfers and remittances.
4 In 2005, imports amounted to nearly US$2.8 billion (68 percent of GDP) while Palestinian exports contributed US$600 million in value added (15 percent of GDP).
5 See www.worldbank.org/ps: An Interim Assessment of Passages and Trade Facilitation, February 2006.
6 The labor flows used in this note exclude East Jerusalem ID holders. Of the 44,800, some 18,800 held valid permits, about 18,600 were clandestine/illegal entrants from the West Bank and another 7,400 were Israeli ID or foreign passport holders.
7 In the Bank’s Economic Monitoring Report #1 (op. cit.), a total of US$1.1 billion was used. This excluded approximately US$200 million contributed to UNRWA’s ‘regular’ budget (a convention generally observed since the beginning of the Oslo process in order to distinguish additional assistance accruing as a result of the Peace Process).
8 In primary and secondary education, the PA employs almost 30,000 staff (64 percent of all education personnel), runs 76 percent of all schools (1,660 of 2,190) and educates 67 percent of all schoolchildren. In health, 11,000 staff are employed to run 62 percent of all health facilities (800 of 1,290). These proportions are significantly more pronounced if refugee camps (in which UNRWA delivers such services) are excluded.
9 For these reasons, we assume that 2006 emergency/humanitarian aid flow increases are limited to 20 percent as compared with 2005.
10 See, for example, Twenty-Seven Months: Intifada, Closures and Palestinian Economic Crisis, Annex 1, World Bank, May 2003. In 2005, an average of c. 135,000 staff were employed by the PA; using a dependency ratio of 6.0 (the ratio of population to persons employed), this suggests that about 810,000 people, or 23 percent of the population, were directly supported by PA salary payments.
11 This presumes the termination of all Palestinian labor permits at the end of 2007, but with continued access by West Bank foreign passport holders. The labor figures in this scenario are composed of three elements: a) permit holders (a daily average of c. 18,800 in 2005, which we assume declines gradually in 2006 and 2007 in accordance with stated intentions, to c. 16,100 in 2006 and 12,700 in 2007); b) clandestine/illegal West Bank laborers (a daily average of c. 18,600 in 2005, reduced by half to c. 9,300 in 2006 as the separation barrier is completed, and disappearing thereafter); and c) West Bank foreign passport holders (c. 7,400 throughout).
12 In Gaza we assume that the management of Karni and Erez will remain significantly more constrained than in 2005 insofar as exports are concerned, though less so in relation to imports. In the West Bank, we assume both a tightening of border terminal management and (complementing this) that the separation barrier is completed in 2006.
13 We assume that a daily average of c. 6,000 permits is issued in 2006 and 2007, and that clandestine West Bank labor flows average 9,300 per day in 2006 and cease thereafter. West Bank foreign passport holders continue to have access to work in Israel.
14 Of this, c. US$60 million has been disbursed to date by Norway and the EC (in the latter’s case to help the PA pay utility bills owed to Israeli companies), and US$42 million has been disbursed from the Bank-administered Reform Fund.
15 In the Bank’s December 2005 projections, strong rates of economic growth were premised on a number of requirements that now appear unrealistic: a major reduction in Israeli closure measures (restrictions on border trade, movement inside the West Bank, movement and trade between Gaza and the West Bank), a maintenance of the relatively high labor flows of 2005 (averaging 45,000 per day), and a significant increase in aid levels (a further US$500 million per annum on average in 2006-8).
16 Macroeconomic Developments and Outlook in the West Bank and Gaza, prepared by the IMF for the AHLC Meeting, London, December 14, 2005.
Attachment
Illustrative Projections
March 2006 (US$ million)
Document Sources: World Bank
Subject: Assistance, Economic issues
Publication Date: 15/03/2006