April 10, 2017
REPORT TO THE AD HOC LIAISON COMMITTEE1
The peace process looks increasingly vulnerable. In January, the international community reaffirmed its support to the two-state solution at the Paris Conference, although the position of the new U.S. administration is perceived as less clear. While a United Nations Security Council resolution condemned settlement activity, Israel stepped up settlement approvals in early 2017. The domestic situation remains unsettled, with municipal elections planned for May in the West Bank.
Underlying trends point to a sobering outlook. While growth edged up to an estimated 4 percent in 2016, ongoing constraints and political uncertainty have eroded the economy's productive capacity. Absent a breakthrough on the peace process, growth is projected at around 3.3 percent in the medium run—insufficient to reduce unemployment and boost per capita incomes. The outlook is subject to significant and interconnected risks: (i) reduced donor support; (ii) escalating unrest; (iii) geographic fragmentation and erosion of economic control; and (iv) strained Israeli-Palestinian correspondent bank relations.
Persistent financing gaps require further fiscal adjustment balanced against the need to invest in the economy. The priority in 2017 is to reduce the nearly $800 million financing gap, by restraining non-priority current spending and looking for scope to raise revenue. Lackluster growth and persistent financing gaps over the medium term require further adjustment based on efforts to rebalance spending toward investment to help support growth, ensure fiscal sustainability and preserve financial stability. Strengthening public financial management is a priority reform that could generate significant payoffs by supporting fiscal adjustment, but requires support across government. Increasing the predictability of revenue transfers from Israel and reversing the decline in aid will reinforce domestic efforts to secure fiscal sustainability.
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.