The Palestinian Authority (PA) has achieved much through a comprehensive plan of institution building and fiscal strengthening since 2007, when a solid track record of reforms was first established. However, despite these efforts, the situation remains precarious compounded by almost no momentum on the peace process. As a result, despite higher than projected economic growth in 2010 (the third consecutive year of real economic growth for the PA), a severe fiscal crisis threatens to become protracted given declines in donor assistance and limited movement by the Government of Israel (GoI) to further ease access and movement restrictions.
Previously, such as in 2010, an easing of movement restrictions in the West Bank contributed to economic growth, but there have been few significant additional measures recently. Furthermore, the GoI maintains a ban on almost all exports from Gaza, and significant restrictions on the passage of people and imports. PA reforms, which have helped inspire investor confidence, have slowed substantially in the face of political uncertainty. Differences within Palestinian polity are not yet resolved. Unless there is significant progress in the Israeli-Palestinian political dialogue, real growth in West Bank and Gaza will continue to be slow.
The PA is expected to remain heavily dependent upon external budget support for the next five to ten years. External support was estimated at US$983 million in 2011, whereas only around US$610 million in future donor financing has so far been identified for the foreseeable future. With no access to external capital markets, debt to the local banking sector is around US$1.1 billion and the banks cannot support much more borrowing, while arrears are putting a severe strain on local businesses and institutions.
Despite the fact that the PA is making a concerted effort to strengthen its fiscal position, including steps to raise domestic revenues and control expenditures, reducing spending, in the immediate term, to the level at which the projected recurrent deficit would match the declining levels of expected donor support would have significant social and economic consequences. A continuation of the current trend of reduction in donor aid is likely to further aggravate the Palestinian fiscal crisis, potentially jeopardizing gains made in recent years in institution-building.
The West Bank economy grew at a rate of 5.8 percent in 2011, down from 7.5 percent in 2010. The slowdown can be attributed to falling donor support combined with the uncertainty caused by the PA’s fiscal crisis, as well as a lack of significant new easing of Israeli restrictions.
GDP in Gaza is estimated to have expanded in 2011, but from a very low base, due to a combination of large aid inflows, easing of restrictions on entry of goods from Israel and increased imports through tunnels from Egypt. Infrastructure in Gaza continues to deteriorate, and is in need of massive investments in key sectors such as water and waste water, electricity and solid waste. Unemployment remains high (21 and 30 percent in West Bank and Gaza, respectively, in Q4 of 2011) and labor force participation is low.
The World Bank has special arrangements for the West Bank and Gaza as it is not a member country of the institution. In 1993, the World Bank established the Trust Fund for Gaza and the West Bank as a mechanism for funding assistance. The Bank Group leverages its comparative advantages by focusing on laying the foundation for a future Palestinian state, as it has since 1993: a grasp of longer term development issues, convening influence with development partners, and technical expertise.
A new joint WB-IFC Interim Strategy for FY12-14 is scheduled to be presented to the Board on April 10, 2012, and is based on the following two pillars, supporting the 2011-2013 Palestinian National Development Plan:
To strengthen the institutions of a future state to efficiently manage public finances and ensure services to citizens; To support the creation of an enabling environment for private sector led growth.
The Bank’s program of knowledge products and grants is focused on education, social protection, municipal, energy, water and solid waste management sectors. Along with offering a range of advisory services, the IFC continues to support both existing and new clients in the West Bank and Gaza private sector.
With support from the World Bank, the PA was able to achieve the following results in four key areas since 2008:
- Governance: 1) Public Financial Management - The PA has been successful in developing a new accounting system, introducing a programmatic presentation in the budget, reforming payroll and human resources systems; and 2) Fiscal Reform - the PA has mobilized domestic tax revenues, reduced the growth of the wage bill and assisted municipalities in improving their financial and fiscal performance;
- Economic and Private Sector Development: The World Bank has maintained a robust analytical program to monitor the impact of restrictions on economic activity. A study on trade corridors in the West Bank that revealed possible alternative routes to world market access was carried out. A project supporting Palestinian enterprises’ entry into new markets was financed, helping more than 230 companies, 42 of which have entered 34 new export markets, by introducing hundreds of locally produced products into the West Bank and Gaza;
- Social Development: The World Bank has been instrumental in creating momentum for the social safety net reform through the on-going West Bank and Gaza Cash Transfer Project and the Social Safety Net Reform Project (SSNRP). The reform effort supported by the SSNRP and led by the Ministry of Social Affairs has established an effective poverty-targeting database as well as the systematic use of the banking system to provide and monitor cash transfers. Important results have also emerged in the education, pension and NGO sectors;
- Public Infrastructure: The World Bank supported the PA in improving the institutional frameworks for - and access to - water and sanitation, solid waste management, electricity and municipal service delivery through substantive analytical pieces and financing investments. Key building blocks for a transparent municipal finance system have been implemented by municipalities.
The Bank has administered the Palestinian Reform and Development Plan Multi-Donor Trust Fund since April 2008. This continues to be one of the most important budget support mechanism for the Palestinian Authority. Australia, Canada, Finland, France, Kuwait, Norway, Poland and the United Kingdom have contributed to this Trust fund, and it has received US$ 812 million since inception.
Coordination with a number of donors on investment projects has allowed the World Bank to leverage funding and maximize impact on the ground. For example, the water and urban sectors have received multiple donor contributions on top of WB resources: the Northern Gaza Emergency Sewage Treatment Project (US$26.8 million from the WB) has received funding from AFD, SIDA, Belgium, and EIB, totaling about US$75 million; and the Municipal Development Project ($2 million from the WB) has received funding from AfD, KfW, SIDA, Denmark, Belgium, GiZ) totaling about US$83 million.
The Bank also functions as the secretariat for the Ad Hoc Liaison Committee (AHLC) of donors to the Palestinian authority. The AHLC is a semi-annual meeting chaired by the Government of Norway that brings together the donors, the PA and the GoI, with participation from the UN, USA, the EU and the IMF. The Bank submits a report prior to each meeting updating partners on recent economic and fiscal trends and provides economic and institutional analysis. The report helps to set the agenda and to frame the discussion.
The World Bank supports the Office of the Quartet Representative through the secondment of a full time staff member.
All dollar figures are in US dollar equivalents. Updated April 2012
For more information, please contact:
In Washington: Lara Saade; firstname.lastname@example.org
In West Bank: Mary Koussa; email@example.com