World Bank report warns fiscal crisis could jeopardize recent gains in the oPt – IRIN article

OPT: World Bank Warns Fiscal Crisis Could Jeopardize Recent Gains

RAMALLAH, 15 September 2011 (IRIN) — The Palestinian Authority (PA) in the occupied Palestinian territory (oPt) has made substantial progress in implementing its institution-building agenda in preparation for possible future statehood, but a severe fiscal crisis and lower economic growth than anticipated for 2011 threaten these important gains, according to a World Bank Report sent to a forum of PA donors.

According to the Bank, lower-than-expected aid flows in the first half of 2011 had an immediate impact on the Palestinian economy. Real GDP growth, steadily increasing in 2009-2010 and previously projected to reach 9 percent in 2011, is now expected to be 7 percent.

The PA remains vulnerable to reductions in aid flows and a shortfall in external financial support, mostly from Arab donors, in the first half of 2011 has contributed to the fiscal crisis.

The PA 2011 budget called for external budget support of US$967 million based on assumptions of strong growth in domestic revenue collections, but my mid-year the PA had only received $293 million — mostly from European donors. Arab donors provided less than $80 million in the first half of 2011, compared to $231 million in 2010, the Bank said in its report sent to the Ad Hoc Liaison Committee (AHLC — PA donors) on 12 September.

Foreign donations account for just over a quarter of the total Palestinian budget of $3.7 billion used to pay salaries and for other government spending, International Monetary Fund representative Udo Kock told IRIN in July.

“Ultimately, sustaining the PA’s reform momentum and maintaining its achievements in institution-building is dependent on the revival of the private sector,” said Mariam Sherman, World Bank country director for the West Bank and Gaza. “This would grow the tax base and gradually reduce dependence on external assistance.”

Trade Restrictions

However, the private sector remains stifled by Israeli restrictions on access to natural resources and markets, according to the Bank.

West Bank and Gaza trade remains largely isolated from global markets due to restrictions imposed on the movement of goods to, from, and within oPt.

Israel still does not allow any Palestinian development in the 60 percent of the West Bank comprising Area C, reports the Bank, and still prevents all exports from Gaza except for a limited amount of agricultural goods, while Rafah (the only official crossing between Gaza and Egypt) remains closed to cargo.

In areas where government effectiveness matters most — security and justice; revenue and expenditure management; economic development; and service delivery — Palestinian public institutions compare favourably to other countries in the region and beyond, reports the Bank.

The PA also sent its own report to the AHLC highlighting its state-building achievements over the past two years. The report precedes the AHLC’s next meeting in New York 18 September.

Statehood Bid Could Hit Revenue

Palestinian president Mahmoud Abbas is due to lodge a proposal with the UN seeking recognition of an independent Palestinian state in the West Bank, Gaza Strip and East Jerusalem very soon, probably when the UN General Assembly convenes next week.

Abbas has also travelled to Cairo, where the Arab League is meeting this week, to ask Arab countries to cover the PA’s financial deficit and potentially compensate for US assistance that may be halted or decreased due to the Palestinian bid for statehood, and the tax revenue that Israel is expected to seize.

According to the International Monetary Fund, last year the US provided US$225 million in budget support to the PA. US aid to the PA, including contributions for projects and other assistance is estimated at about US$450 million a year, according to the Israeli daily Haaretz.

Gaza and the West Bank are treated as part of the same customs envelope by Israel, which collects the customs taxes and is supposed to remit them monthly to the PA in Ramallah, according to the Paris Protocol signed in conjunction with the Oslo Accords in 1994.

This month’s salary payments (paid one month in arrears) for PA government employees are scheduled to be paid on 15 September, spokesperson for Palestinian Prime Minster Salam Fayyad, Ghassan al-Khatib, told IRIN, although it is unclear if next month’s payment will be made on time.

“The cabinet is working on next year’s budget, and expects less financial deficit in 2012 by increasing domestic revenues and reducing some expenditures, without affecting services,” said Khatib, “which will reduce foreign aid dependency”.

The Bank's report underscores that economic growth is unsustainable without political progress towards ending the occupation, he added.

[This report does not necessarily reflect the views of the United Nations]