INTERNATIONAL MONETARY FUND
MIDDLE EAST AND CENTRAL ASIA DEPARTMENT
WEST BANK AND GAZA: FISCAL PERFORMANCE IN 2006
The Palestinian government was confronted with a severe fiscal crisis in 2006. Resources to fund the government’s recurrent expenditures fell by more than one third compared to the previous year, despite a strong increase in external support, forcing a major compression of expenditures. Government employees received on average only about 50-55 percent of their regular incomes. As new financing mechanisms were set up to bypass the government and banks were reluctant to transact with the government, the public financial management system became increasingly fragmented, with no proper budget framework, no central control, and less transparency and accountability. At the same time, the PA’s already unsustainable underlying fiscal position deteriorated further in 2006. The government’s wage bill continued to expand and now exceeds revenues (adding the indirect tax revenues still withheld by Israel). Strong adjustment will be needed to put government finances on a sustainable path, but sizable external support will remain needed in the adjustment period. A strong economic recovery would greatly assist the adjustment process.