Though Israeli restrictions are responsible for many of the Palestinian Authority’s economic woes, improving the situation will also require the PA to demonstrate fiscal responsibility, two new reports published by the World Bank and the International Monetary Fund this week said.
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The pessimistic reports will serve as the basis for Tuesday’s meeting of the Ad Hoc Liaison Committee in New York. The committee, comprised of senior Foreign Ministry officials from the PA, its donor states and Israel, meets twice a year to discuss economic aid to the PA.
“Palestinians are getting poorer on average for the third year in a row,” the World Bank report warned in a grim opening sentence. The IMF report, for its part, predicted economic stagnation in the absence of any change in the existing political and security situation or in the movement restrictions imposed by Israel.
The World Bank predicted gross domestic product growth of only 1.8 percent in the West Bank this year. Given that population growth is an estimated 3 percent, this translates into a decline in GDP per capita. The report said that GDP per capita has been declining since 2013 in both the West Bank and Gaza Strip.
In Gaza, the bank predicted much higher growth, of 6.5 percent, but from a much lower starting point, owing to the damage caused by last summer’s war and the years of recession that preceded it.
Last year, 25 percent of all Palestinians lived below the poverty line – 39 percent in Gaza and 14 percent in the West Bank. About 80 percent of Gaza residents depend on financial aid, and 60 percent of Gaza’s young people are unemployed.
The PA’s budget deficit, after receipt of all pledged aid, is expected to be between $400 million and $500 million this year, out a total budget of $4.1 billion.
The World Bank repeatedly drew a connection between the PA’s economic slowdown and Israeli restrictions on movement, as well as Israel’s control of the approximately 60 percent of the West Bank known as Area C. It said that ever since the Oslo Accords were signed in 1993, there has been a steady decline in Palestinian industry, agriculture and export capabilities, and it termed the economic situation “unsustainable.”
The IMF also linked the PA’s economic problems to Israel’s conduct, albeit less strongly.
Yet both organizations made do with issuing general recommendations to Israel (remove restrictions, transfer all taxes it collects on the PA’s behalf). In contrast, they made concrete and aggressive recommendations to the PA, focusing on reforms they consider vital.
The IMF in particular urged the PA to exercise fiscal discipline. Both organizations said it should cut spending on public-sector salaries and freeze the number of public-sector employees, further improve its tax collection and cancel fuel subsidies.
Both also criticized the PA’s regressive tax system, characterized by high indirect taxes and low direct taxes on wealthy individuals and corporations. The system has become even more regressive lately because of the PA’s decision to lower direct taxes, reversing the steps taken by Salam Fayyad at the end of his tenure as prime minister and finance minister.
Some of the organizations’ recommendations are at odds with the Palestinian public’s expectation that the PA will serve as a safety net against the damage caused by Israel’s ongoing rule. For instance, both recommended cutting spending by the Health Ministry, mainly by reducing the number of patients referred for treatment in Israel and reducing the number of Gazans sent for treatment in the West Bank and East Jerusalem.