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Source: World Bank
10 May 1996

World Bank Statement On Palestinian economy


Washington -- An urgent meeting of international donors of financial assistance to the Palestinian Authority is scheduled to take place next month in Paris to tackle the "considerable" shortfall in the Palestinian budget for the remainder of the current year.

The latest estimate by the International Monetary Fund projected an expansion of the budgetary deficit to over $180 million, according to Odin Knudsen, resident representative and country manager for the World Bank's program in the West Bank and Gaza. Knudsen spoke at a press briefing here May 10 during his visit to Washington from Jerusalem where he is headquartered.

He explained that the projected shortfall due to the Israeli "closures and the consequential shutting down of economic activity" has more than doubled the earlier projected deficit for 1996 which was estimated at $75 million.

He also added that despite an intensive job creation program sponsored by the donors and the issue of 10,000 Israeli work permits for Palestinian workers, "the unemployment situation remains acute."

Israel sealed its borders with the West Bank and the Gaza Strip following several suicide bombings that left more than 60 persons dead.

Following is the text of the statement issued by Kndusen describing the economic situation in the Palestinian areas:

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A - ECONOMIC SITUATION

Employment

Due to border closures and tight controls on permits, Palestinian employment in Israel declined from an average of 116,000 in 1992 to 53,000 in 1994 and an estimated 29,500 in 1995. Although 1996 began well with employment of Palestinians in Israel reaching over 50,000 (with unofficial employment in Israel probably reaching close to 70,000 Palestinians workers in Israel), a series of bombings in late February resulted in a tight closure of the West Bank and Gaza resulting in the loss of jobs both in Israel and in the Palestinian territories. At the height to the closure during March and April, practically no building materials enter the Gaza Strip resulting in the loss of almost all construction jobs and a blockage of the coast shut down most off shore fishing. With agricultural exports also almost stopped, the Gaza economy plunged into a severe depression with unemployment estimated to have reached over 60 percent of the work force. In recent weeks, imports and exports have increased resulting in some recovery of employment although permits for working in Israel were reported to be at only 10,000. An intensive job creation program sponsored by donors and operating through the World Bank and the U.N. provided about 21,000 short-term, low paying jobs. Despite the freer flow of commodities and the donor efforts, the unemployment situation remains acute both in the West Bank and Gaza.

Quarterly Budget for April-December 1995 and medium-term prospects

Fiscal developments in 1995 were more favorable than initially anticipated, as a result of strong revenue performance and expenditure restraint. Total current revenue is currently estimated at U.S. $425 million for 1995 as a whole (12.6 percent of GDP). This favorable outcome is attributable to strengthened domestic tax and non-tax revenue collection and sharply increased VAT revenue clearances from Israel. At the same time, total recurrent expenditures were contained to U.S. $526 million for 1995 (15.6 percent of GDP). As a result, the recurrent deficit for 1995 at U.S. $101 million (3 percent of GDP) was less than half of the deficit projected in the PA's budget for 1995. For 1996, the IMF projected further reductions in the deficit to about $75 million. However, due to the closures and the consequential shutting down of economic activity, the IMF's latest estimates for the 1996 budget project an expansion of the budgetary deficit to over U.S. $180 million. Donor funding for the deficit stands now at less than $75 million, so a considerable shortfall in financing is anticipated for the remaining part of 1996 if the closure continues.

BANK DEVELOPMENT ACTIVITIES

The Holst Fund

The Holst Fund is the primary instrument for funding the budget deficit and start-up activities. It has been used also to fund job creation. The Fund is administered by the World Bank through the Palestinian Ministry of Finance and PECDAR, a Palestinian implementation agency.

Twenty-five donor countries have so far pledged a total of U.S. $217 million to the Holst Fund. Of this, U.S. $183 million has been paid in to the Bank, leaving some U.S. $34 million currently owed by the donors, of which about U.S. $49 million was pledged during the January 9, 1996, Ministerial Conference on Economic Assistance to the Palestinians. Intensive efforts are underway to convert pledges to payments into the Holst Fund. To date, U.S. $181 million has been disbursed.

The Bank, through the Holst Fund, has agreed to finance 21,000 jobs created under PECDAR's program of "first round" direct-hire job creation. A direct hire program of this size costs approximately $6 million per month.

The Technical Assistance Trust Fund (TATF)

The TATF is administered by the Bank and funded by donors. The Trust Fund supports economic and sector studies, advisory services and feasibility work. The TA program currently consists of 54 activities for which TATF support has been requested. The estimated cost of these activities is about U.S. $25 million. This means that the TATF is in principle fully allocated, since funds pledged to the Fund only total U.S. $23 million. Activities completed or under contract amount to about $17 million with a further $6-7 million under preparation. A total of $6.5 million has been disbursed.

Work started on two critical TA activities in March 1996, a $3.4 million contract with Harvard Institute for International Development to help the Ministry of Health harmonize and integrate the health sector and design national health insurance system, and a $1.3 million contract with Arthur Andersen (Australia) to help the Ministry of Finance design and establish a Financial Management Information System (GFMIS) for the central Palestinian government. Also during the month, American consultants completed the design of Traffic Management Systems for Ramallah/El-Bireh and Bethlehem in the West Bank and German consultants completed design for a similar system for Gaza City. Finally, Arthur Andersen (US), working with the Ministry of Local Government and PECDAR completed the design of a set of standardized, computerized municipal accounts for Nablus in the West Bank.

Emergency Rehabilitation Project (ERP)

The ERP was the first project approved by the Bank. It is designed to rehabilitate infrastructure both on the West Bank and Gaza and to rebuild schools. With a $30 million contribution by the World Bank, the project is strengthened by cofinancing from the Saudis, the Swiss and the Danes.

So far the ERP has financed over 120 sub-projects, most of which are now completed or nearing completion. Total committed financing for the project amounts to U.S. $94 million. ERP disbursements to date stand at about U.S. $56.4 million.

Education and Health Rehabilitation Project (EHRP)

The EHRP is designed to provide infrastructure rehabilitation to schools and hospitals in the West Bank and Gaza. Some new construction, such as additional classrooms, is also included in the project.

Some U.S. $107 million cofinancing is being sought from donors, and current indications are that donor cofinancing of U.S. $70 million should be feasible. Currently, 10 Health Centers and 7 schools have been contracted to local consultants for design, and construction is expected to begin in June 1996.

New Projects

The Bank's assistance strategy for the 1996-98 period focuses on the provision of basic/social infrastructure, and supporting the private sector through investment and policy interventions, as well as helping sustain the financial viability of the Palestinian administration and assisting in the development of key economic policies and institutions. The following projects, primarily under preparation, reflect consultations with and priorities set by the Palestinian Authority.

(i) The Municipal infrastructure Development Project aims to rehabilitate municipal infrastructure in selected municipalities (two in Gaza and three in the West Bank) and to develop the local government sector. The Bank will contribute $40 million to this project from the Trust Fund for West Bank and Gaza including money for a job program through municipalities. About $30 million is expected in cofinancing. Negotiations have been completed and Board presentation is scheduled for late May 1996;

(ii) The Water and Sanitation Services Project in Gaza aims to improve the Gaza Strip's water and wastewater services, and to provide a framework for the efficient implementation of donor-funded projects. The project features a management contract with a private water company. This innovative project will establish the principle of utility management by the private sector. The Bank would provide $25 million for a four-year private management contract, for rehabilitation and operating investment, and for institutional capacity development. Present indications are that at least $66 million in cofinancing will be made available. Appraisal and negotiations were concluded in January 1996, and Board presentation is currently scheduled for June 1996.

(iii) The Emergency Rehabilitation Project II. The World Bank's Board of Directors last week approved a $20 million replenishment for this project, intended to create additional construction employment, under the Bank's emergency employment generation effort, during the current crisis.

(iv) The NGO Project, aims to provide funding to deserving NGO projects targeted to the poor and disadvantaged. $5 million of the replenishment of the Trust Fund for WBG would go to this project. The project has been under preparation since October 1995, and agreement on its structure by the PA, the Israeli Government and local NGOs is expected this month. The PA would not be involved in the governance of the Fund; it would be administered by an NGO under the Bank's guidance. Present indications are that at least $10 million in cofinancing will be made available.

In addition to these four projects, the following are under preparation by the Bank Group for FY96 or early FY97. It should be noted that no funds will be available for these projects now, as all have been earmarked for the four projects described above.

-- The Palestinian Housing and Housing Finance Project (FY97) is intended to help generate affordable housing for the poor, through an explicit program of subsidies, as well as to develop a demand-based housing market for middle income families, through the creation of a mortgage system. The project is institutionally complex, however, since it seeks to create a financial system for the housing market (none currently exists). About $25 million in grant or cofinancing appears to be available for the project. Project appraisal has been delayed due to the unsettled political situation and is now planned for June.

-- The Border and Local Industrial Estate Development Project (FY97) would establish one or more industrial zones to help jump-start the industrial development of the WBG. The Bank plans to put $5 million into the program; at least another $21 million can be expected from other donors if a commercially viable package is developed.

-- Electricity Distribution and Management in the West Bank (FY97) would finance the rehabilitation of electricity distribution facilities in the West Bank, and would help establish a rational institutional structure for the sector. The technical component of the project has been prepared and is relatively straightforward; the institutional actions proposed are more complex, and involve the functional establishment consolidation of distribution utilities under private management. Donor interest in the project appears strong, with some $48 million in cofinancing indicated so far.

-- The International Finance Corporation (IFC) of the World Bank Group is likely to finance an Independent Power Generation Project in Gaza (an equity investment of about U.S. $5 million and an IFC loan of about U.S. $20 million; the Bank has been asked to provide a subordinated loan of $10 million). The Palestinian Energy Authority is about to select the sponsor group following a bidding process launched in September 1995.

-- The Multilateral Investment Guarantee Agency (MIGA) has prepared a Political Risk Insurance Trust Fund, and has been asked by the PA to raise funds from donors to underwrite the scheme. Following a meeting held in Madrid on January 31 to February 2, 1996, with prospective donors, a number of countries have shown interest in putting money in the fund.

-- The World Bank is planning to establish an Expatriate Trust Fund to pay "relocation allowances" to Palestinian recruits to key positions in the PA (many of whom have been discouraged from returning by the costs of relocation). The design of this fund is due for completion this fiscal year, and operations should begin early in FY97. $7 million in private and public resources have been committed.

DONOR SUPPORT

Pledges and Commitments. Since the signing of the Declaration of Principles, donors have pledged some U.S. $2.8 billion in assistance to the WBG for 1994-98. Of this, some U.S. $1.45 billion was pledged in 1994 and 1995, and U.S. $1.4 billion has been firmly committed (59 percent for investment projects, 10 percent for technical assistance and 32 percent for start-up and recurrent expenditures).

Disbursements. As of January 1996, disbursements stood at U.S. $887 million (where "disbursement" is defined from the donor perspective, i.e. released by the donor to the implementing agency.)

Recent meetings and visits

(a) On January 9, 1996, the Government of France hosted the Conference on Economic Assistance to the Palestinian in Paris. Donors demonstrated their support for the U.S. $550 Core Investment Program and other projects as well as for the projected 1996 recurrent cost deficit of U.S. $75 million, by (i) committing U.S. $809 million to the Core Investment Program and other investment projects and (ii) U.S. $72 million against the 1996 budget, U.S. $45 m of this through the Holst Fund. The Bank will monitor the delivery of these pledges during 1996. The Bank will focus on trying to ensure commitment of cofinancing pledged against Bank-led core projects (preparation/implementation of 10 of the core's activities would be initiated by the Bank); in addition to the Bank's U.S. $90 million, up to U.S. $300 million in cofinancing has been committed to these projects in the form of joint or parallel financing.

(b) Mr. Wolfensohn's visit to the West Bank and Gaza in March 1996. During his meeting with Shimon Peres, Mr. Wolfensohn and the Prime Minister discussed the impact of closures: the increase in unemployment in the West Bank and Gaza, the difficulties in exchanging goods and the likely increase in the budget of the PA. As an alternative to the status quo, Prime Minister Peres asked his team to examine the possibility of opening a route between Gaza and Egypt. The importance of establishing an industrial zone was also highlighted, with the Bank indicating the pressing need is resolving differences between the PA and the Israelis on the issue of land allocation for industrial zones. Mr. Wolfensohn also met with President Arafat in Gaza, during which time he reassured the President that the Bank would continue to support the Palestinians during these difficult periods. Mr. Wolfensohn offered that he would go to the Board and request an additional $20 million immediately to supplement the employment creation activities of the ERP, which has now been approved. This is in addition to the emergency employment generation by direct hire taking place through the Holst Fund.

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