WEST BANK AND GAZA
REPORT TO THE AD HOC LIAISON COMMITTEE1
Context: The political situation is increasingly precarious, with the flare up in tensions since September 2015 posing another test for the Israeli-Palestinian peace process. With chances of direct negotiations receding, recent diplomatic initiatives are shifting focus to a multilateral approach. Limited progress on domestic political reconciliation does not augur well for a breakthrough in the near term. Despite some recovery, humanitarian conditions in Gaza remain severe, compounded by slow inflows of donor aid and restrictions on imports of 'dual usage' construction materials.
Outlook and risks: Uncertainty continues to cloud the already difficult economic outlook. Assuming that recent violence does not escalate dramatically, real GDP growth in the West Bank and Gaza (WBG) will likely reach 3.2 percent in 2016 and around 31/2 percent over the medium term—insufficient to boost per capita incomes and reduce unemployment. A resumption of hostilities or increased violence pose the main risks that would further weaken economic activity, and shortfalls in budget support would jeopardize the already fragile fiscal position. Strained correspondent banking relations are potential source of concern. However, improved economic cooperation between the Palestinian Authority and Government of Israel could strengthen significantly the fiscal position, and restarting the peace process would brighten prospects for eventual economic and fiscal sustainability.
Key policy recommendations: Despite determined fiscal consolidation efforts, the downcast outlook for donor aid implies a large financing gap in 2016. The authorities can help fill the gap by limiting the wage bill increase, reining in fuel subsidies, promptly raising government fees, and broadening the tax base while improving collection. However, economic cooperation with Israel and increased donor aid will be vital to avoid further arrears accumulation. Sustained reforms to ensure a robust regulatory framework and strengthen institutions, along with a more strategic approach to aid management, better aligned with budget priorities, will be essential to create the conditions for private-sector led growth and catalyze increased donor support.
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.