Economic Monitoring Report
to the Ad Hoc Liaison Committee
May 2nd, 2008
The World Bank www.worldbank.org/ps
Implementing the Palestinian
Reform and Development
At the Ad Hoc Liaison Committee (AHLC) Meeting in New York on September 23rd. 2007, the World Bank summarized the changing course of the Palestinian economy since 2000 from one driven by investment and private sector productivity to one sustained by government spending and donor aid. After a good performance in the latter 1990s, the fragile Palestinian economy entered a gradual downward cycle of crisis and dependence, as it was confounded by political and security events in the West Bank and Gaza (WB&G), the continued growth in settlements, Israeli restrictions on movement and access since the Second Intifadah, and finally the 2006 drop in donor aid. Unable to find opportunities in a shrinking private sector, a young and rapidly-expanding labor force has turned to the public sector to create jobs and increase spending to alleviate poverty, at the expense of further investment in the economy’s productive potential. This trend, underway since 2000, was most acute in the aftermath of the elections in 2006.
The analysis that was presented at the 2007 AHLC showed that reversing this downward trend required paralel actions by the Palestinian Authority (PA), Israel and the donors. In addition, these paralel actions were regarded as effective insofar as they addressed the entirety of the Palestinian pop ulation. Reform and development of the Palestinian economy – including Gaza, which represents about 40% of the population – and its institutions were to resume through the implementation of the PA’s Palestinian Reform and Development Plan (PRDP). To succeed, the PRDP was to be underwritten by donors and supported by Israeli efforts to loosen restrictions on the movement of goods and people within and out of the WB&G. It was argued that the impact of donor aid is highest when accompanied by concrete and parallel PA and Israeli actions, but that the consistent flow of aid should not be predicated on them – aid remains critical to ensure the survival of Palestinian institutions that underpin the peace process.
The expectations set at the AHLC in New York were that several developments could trigger a change in the course of the Palestinian economy: not least the Annapolis conference of November 27, 2007, where Prime Minister Olmert and President Abbas agreed to resume peace negotiations and resolve core issues by the end of 2008; the progress in bilateral discussions on key issues and the formation of seven Israeli-Palestinian working groups; and the Paris Donor Conference on December 17, 2007, where representatives of 87 states and organizations pledged US$7.7 billion in financial support to the PRDP for 2008-10. In furtherance of these efforts, several critical measures were initiated by the parties, including those by Quartet Representative Tony Blair, to rebuild confidence and momentum towards an economic recovery.
This report wil show that – despite these and other efforts since the 2007 AHLC – the virtuous cycle of economic growth arising from paralel actions by the PA, Israel and the donors has not been fuly realized. The formation of the Caretaker Government in mid-2007, and the resumption of aid have reversed the impacts of the aid boycott in 2006 and 2007, but only partially. Real GDP was negative in the first half of 2007 but began to recover in the West bank during the second half. Because of the situation in Gaza, real GDP growth in 2007 is estimated to be about 0%, which given the rapidly growing population indicates falling per capita income. The contributing effects of the closures and movement restrictions cannot be overestimated.
Moreover, economic indicators have not changed considerably, despite the resumption in aid. Unemployment in WB&G stood at nearly 23% in 2007, up from only 10% before the beginning of the Intifadah in 2000. Unemployment is highest in Gaza, at nearly 33% of the active work force. This rate is likely to become much higher as the layoffs in the industrial sector become permanent.
As a tripartite action plan, the implementation of the PRDP has begun in earnest, but progress has been only partial. The PA has implemented a sequence of steps centering on control of expenditures and medium-term reforms to bring the PA back to financial sustainability, and has achieved some important milestones in this area. The PRDP has been underwritten by donors who, at the time of this report, had already transferred half of their pledges made in Paris towards recurrent expenditures, either through direct transfers to the PA’s Central Treasury Account, through the EC’s new PEGASE instrument, or through the World Bank’s new PRD P-linked Multi-Donor Trust Fund. The efforts of the Quartet Representative have also introduced a set of concrete deliverables that, if adopted by the parties, could help trigger a much-needed private sector response. However, the private sector revival required for a virtuous cycle of growth has not been realized due to continued restrictions on movement and access. As a result, the economic scenarios presented at the Paris Conference, proposing that the implementation of Palestinian commitments alone is a necessary but insufficient condition for economic growth, have been confirmed by the zero GDP growth in the WB&G in 2007. As for 2008, the IMF analysis and AHLC Report note a projected GDP growth of 3.0% that, taking into account population growth, leaves per capita incomes static if not lower than the previous year.
Regardless of the scenario, PA reforms and adequate donor aid – covering both recurrent and development spending – remain necessary but insufficient preconditions for economic recovery in the WB&G. A scenario where PRDP reforms continue, where they are fully funded by donors, and where private sector growth and trade is revived as a result of easing movement and access restrictions, will result in accelerated growth rates at double digit levels. Embedded in this scenario is a recovery in Gaza driven by the resolution of the current stalemate, and its immediate inclusion in the benefits of reforms, donor aid, and the lifting of movement restrictions.