August 26, 2015
WEST BANK AND GAZA
REPORT TO THE AD HOC LIAISON COMMITTEE1
Context: The Israeli-Palestinian peace process remains stalled and it is unclear whether renewed international peace efforts will gain momentum. With domestic political reconciliation deadlocked, the outlook for parliamentary elections is uncertain amid strained security conditions. Reconstruction in Gaza appears to have gathered pace since late 2015, although the humanitarian situation there remains severe.
Outlook and risks: Political and security uncertainties weigh heavily on the prospects for growth. Under these conditions and with sustained moderate policy reforms by the Palestinian Authority, real GDP growth in the West Bank and Gaza will likely reach 3.3 percent in 2016 (2.7 percent in the West Bank, and 5.5 percent in Gaza) and around 31/2 percent in the medium term—insufficient to reduce unemployment and boost per capita incomes. This outlook is subject to significant risks: (i) escalating violence; (ii) further declines in donor support; (iii) the inability to effectively contain spending; and (iv) threats to correspondent bank relations. While assertive policy actions are needed to mitigate risks, a more fundamental improvement in the outlook requires a political breakthrough.
Key policy recommendations: The priority in 2016 should be to alleviate pressures associated with the nearly $500 million projected financing gap, and mitigate the risk of an even larger gap. The Palestinian Authority should focus on resisting pressures on the wage bill, intensifying revenue enforcement efforts, and considering possible contingency plans. To ensure fiscal and economic sustainability in the medium term, the authorities need to maintain a gradual and balanced approach to fiscal consolidation, underpinned with fiscal structural reforms. Improving economic cooperation with Israel remains important. Reversing the decline in donor aid will be crucial to avoid too rapid budget compression and create space for growth-friendly investment. Efforts to maintain financial stability and develop a longer-term policy vision can help create conditions for private sector-led growth.
1 The IMF provides technical services to the West Bank and Gaza, including policy advice in the macroeconomic, fiscal, and financial areas, as well as technical assistance, with a focus on tax administration, public expenditure management, banking supervision and regulation, and statistics. See www.imf.org/wbq for recent reports.