c. As noted in previous reports, the most significant impediment to economic viability in the Palestinian Territories is the multi-layered system of restrictions imposed by the GoI. The system of restrictions constrains investment, raises costs for doing business, and hinders economic cohesion. Restrictions on access and movement also negatively affect the PA’s capacity to deliver public services. While some actions have recently been taken by the GoI to relax certain restrictions, stronger measures to significantly ease pervasive remaining obstacles that currently prevent private sector led economic growth are warranted.
d. In addition, the PA will need to make continued efforts on the reforms which are within its control to strengthen its fiscal position and enhance its capacity to deliver essential public services. The PA has already made substantial achievements on institution building. The impressive human development outcomes in the West Bank and Gaza are good indicators of reasonably well-functioning public institutions. On the other hand, in recent years fiscal space available for the delivery of essential public services has gradually diminished mainly due to slowed economic growth and decreased donor aid. Therefore, pressing on with reforms to strengthen the PA’s fiscal position is essential to ensure the necessary fiscal space to boost growth and provide essential public services to the Palestinian people.
e. In particular, reforms to enhance domestic revenues, controls over the civil service wage bill, outpatient referrals and broader health expenditures, and deficits in the electricity sector, and rationalization of the social safety net program and the public pension system are expected to yield high returns for strengthening the PA’s fiscal position and enhancing its capacity to provide essential public services. These reforms will require strong political commitment, effective change management, and relevant technical and financial resources. The reform efforts by the PA, to be fully effective, should be combined with better cooperation by the GoI. Moreover, continued financial support by the donor community would be essential to ensure that necessary fiscal space is available for providing basic services to the Palestinian people.
B. Recent Economic Developments
1. Following robust growth in previous years, economic activity in the Palestinian Territories deteriorated in 2013, particularly in the West Bank. Growth over the last few years has mainly been driven by large inflows of donor aid that enabled the expansion of the public sector, resulting in consumption driven growth. Decomposition of recent growth trends indicates that the contribution of government funded services to the economy has been on the rise while the share of the tradable sectors has declined mainly due to the ongoing Israeli restrictions on movement, trade, and access to Area C, East Jerusalem and Gaza. However, this growth model has proven unsustainable. The significant decline in donor aid that was witnessed in 2012, in addition to insufficient easing of Israeli restrictions on economic activity, had an immediate effect on the economy as the overall growth rate in West Bank and Gaza (WB&G) declined from an average of 11 percent in 2010-2011 to 6 percent in 2012.1 The economic situation has further deteriorated in 2013 and Palestinian Central Bureau of Statistics (PCBS) reports that growth in WB&G during the first quarter of the year declined to 2.7 percent when compared to Q1 2012. Growth was driven by economic activity in Gaza which grew by 12 percent while output in the West Bank actually contracted by 0.6 percent.
3. Economic output in the West Bank contracted during Q1 2013 mainly due to insufficient easing of Israeli restrictions, the withdrawal of fiscal stimulus and high levels of uncertainty2. The public administration and defense sector shrank by 1 percent in Q1 2013 on year-on-year basis as a consequence of fiscal retrenchment implemented in the face of irregular transfer of clearance revenues3 by the GoI earlier in the year and a reduction in levels of donor aid in recent years. Furthermore, the fiscal difficulties caused a delay in civil servants’ wage payments during the months of January and February, 2013, which created high levels of uncertainty that negatively affected consumption patterns in the economy. This, in addition to the ongoing restrictions, which constrain private investment, placed a toll on various economic sectors. For instance, the services sector, which had played a significant role in growth in the West Bank in 2012 contracted by 3 percent in Q1 2013 and negatively contributed to West Bank’s growth by 0.5 percent. The wholesale and retail trade sector also contracted by 7 percent during Q1 2013, pulling down growth in the West Bank by 1 percent. Agriculture output also declined by 11 percent in Q1 2013.