The Palestinian Economy and the PA’s
Fiscal Situation
(Updated February 2006)
The
Palestinian Economy
The
Bank estimates that real GDP growth in
the West Bank and Gaza reached 8-9 percent
in 2005, continuing the modest
recovery that began two years ago. Reflecting
on the past five years, two distinct
periods are discernable: (i) October
2000 through 2002, the period of severe
crisis, in which real GDP per capita
declined by about 36 percent, and (ii)
2003 through 2005, a period of stabilization
and gradual recovery, in which real GDP
growth has averaged about 7 percent per
annum.
Nevertheless,
today’s Palestinian economy still
operates at well below its potential,
with real GDP per capita almost 30 percent
lower than in 1999. The inability of
the Palestinian economy to fully use
its productive potential is first and
foremost the result of restrictions on
the movement of people and goods. At
the pace of economic growth witnessed
since 2003, pre-intifada per capita income
levels may not be restored before 2012.
The
socio-economic situation is precarious.
Unemployment levels remain high. The
third quarter (Q3) data for 2005 show
unemployment at 23 percent (20 percent
in the West Bank and 29 percent in Gaza),
i.e. more than double pre-intifada levels.
Youth unemployment is more acute, with
Q3 unemployment among 20-24 year-olds
some 35 percent overall. Around 43 percent
of the Palestinian population still fall
below the poverty line, with perhaps
15 percent living in deep poverty, i.e.,
not able to meet subsistence needs.
The
PA’s fiscal situation
The
PA’s fiscal situation has become
increasingly unsustainable mainly
as a result of uncontained government
consumption, in particular a rapidly
increasing public sector wage bill,
expanding social transfer schemes and
rising “net
lending” [1].
In addition, the depressed economy
led to lower tax revenues.
In
2005, the PA’s budget deficit reached
about US$800 million, of which
c. US$340 million was financed by donors
in the form of direct budget support.
The remaining deficit was financed through
a combination of commercial bank borrowing
and liquidation of PA assets in the Palestine
Investment Fund. Unless addressed promptly,
deficits of this magnitude will compromise
the prospects of rapid recovery by destabilizing
the PA’s operations and by reducing
the public and private resources otherwise
available for productive investments.
The
Reform Fund
The
Public Financial Management Reform Trust
Fund (the “Reform Fund”) was
approved by the World Bank’s Board
of Executive Directors in April 2004. The
PA and the World Bank agree every six months
on a set of specific reform benchmarks
that, upon fulfillment, trigger disbursements.
To date, a total of US$310 million has
been committed to the Reform Fund from
12 donors, of which US$250 million has
been disbursed in four tranches (see table
below).
The
fifth tranche has no yet been disbursed
as the PA has not fulfilled the relevant
benchmarks. In particular, the significant
increase in public sector salaries and
public hiring is a setback with respect
to the efforts of placing the PA on an
orderly fiscal footing. The PA has not
yet committed to any mitigating measures
to bring the fiscal situation under control.
Sources: The World Bank
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