WEST BANK AND GAZA
REPORT TO THE AD HOC LIAISON COMMITTEE1
Context: The Israeli-Palestinian peace process remains stalled, and prospects for a resumption of talks have receded, owing to continued Israeli settlement activities and Palestinian steps toward international recognition. Recent sporadic acts of violence in the West Bank highlight the fragility of the security situation. On the domestic political front, the difficult reconciliation process between the main Palestinian factions remains stalled and political uncertainty is on the rise. The reconstruction of Gaza is progressing but remains hampered by administrative delays and Israeli restrictions on the import of construction materials, as well as slow donor aid disbursement.
Outlook and risks: The economic outlook for the remainder of 2015 is highly uncertain, with numerous risks calling for a cautious policy stance. Assuming the political status quo with no change in restrictions and/or security conditions, real GDP growth for the West Bank and Gaza (WBG) economy is projected at 2.9 percent, implying stagnant per capita incomes after a drop last year. Main risks to the outlook include an escalation of political tensions and violence, fiscal slippages, and shortfalls in donor aid. Risks could be mitigated—and medium-term prospects enhanced—through progress on the peace front, an easing of Israeli restrictions, scaled-up donor aid, and improved economic collaboration at a technical level between the Palestinian Authority (PA) and the Government of Israel (GoI), including by seeking clarity on the level of the PA's outstanding electricity sector debts.
Key policy recommendations: Continued policy discipline is required to address fiscal pressures and a projected large financing gap in 2015. Measures should focus on limiting the wage bill increase, introducing new government administrative fees, implementing the envisaged withholding tax on dividends, and further reducing fuel subsidies. In addition, the PA needs to redouble efforts to mobilize donor aid, including by demonstrating a commitment to structural reforms. Over the medium term, the PA's focus should shift to a more viable financing model based on further fiscal consolidation and a re-orientation of government outlays toward productivity—enhancing investment in human capital and infrastructure.
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.