REPORT ON MACROECONOMIC DEVELOPMENTS AND OUTLOOK1
Context: The political situation is marked by heightened uncertainty. Israel suspended the peace talks that started in July 2013 following the announcement on April 23, 2014 of a reconciliation agreement between Fatah and Hamas, the rival Palestinian factions. A consensus government was sworn in on June 2, 2014, with the intention to hold national elections within six months. Prospects for a resumption of peace talks are uncertain, especially in light of the recent rise in political tensions.
Outlook and risks: With the suspension of peace talks, economic prospects for the West Bank and Gaza have dampened and risks have increased. Much will depend on Israeli and donor actions in the period ahead. A reduction in clearance revenue transfers2 or donor aid, for example, would increase fiscal pressures and hit the already struggling economy hard. On the other hand, if the peace process was to resume and over time completed successfully, this could lead to reduced Israeli restrictions and would facilitate the launch of donor initiatives and the Initiative for the Palestinian Economy led by the Office of the Quartet Representative (OQR).
Key policy recommendations: Cautious macro-fiscal management and continued structural reforms are critical. For 2014, fiscal measures are needed to fill the projected financing gap to avoid further arrears accumulation. Moreover, the authorities are advised to prepare a contingency plan to respond to rising fiscal risks. The donor community could help by maintaining aid flows to the West Bank and Gaza in present fragile circumstances. Over the medium term, there is a need to move to a more viable financing model, one that combines lower deficits with a growth-friendly reorientation of expenditure and with sustained and predictable donor assistance. A broad-based easing of Israeli restrictions remains a precondition for higher growth and employment.
1The 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 macroeconomic statistics (Annex 11). See www.imf.org/wbg for recent staff reports.
2Clearance revenues are revenues collected by Israel in the form of indirect taxes on imported goods. These revenues are later transferred to the Palestinian Authority.