September 2007, The World Bank released today its report to the Ad-Hoc Liaison Committee (AHLC), the first major conference of donors to the Palestinian Authority (PA) since 2005, to be held in New York on September 24. The report, a product of two months of intensive consultations with a wide spectrum of Palestinian, Israeli and international officials and agencies, warns against partial and unilateral solutions to the Palestinian economic crisis, calling instead for comprehensive and parallel policies, which address the fundamental preconditions for economic recovery. Main findings • The decline of the Palestinian economy since the Second Intifada has left per capita GDP at $1,129 in 2006, about a third less than its level of $1,612 in 1999. In addition, GDP is being increasingly driven by government and private consumption from remittances and donor aid, while investment has fallen to exceedingly low levels, leaving an inadequate productive base for a self-sustaining economy. Furthermore, the West Bank and Gaza (WB&G) faces an expanding labor force and, as result of the unpredictability of the border crossings and checkpoints, a shrinking private sector. Thus, the public sector has become the only alternative for jobs. As a result, public sector employment has grown by 60% since 1999 and by 2006 stood at about 157,800. Thus, while the public sector has expanded, the economy’s productive capability has begun to hollow out, making it increasingly donor dependent. • The PA has sought to deliver services to an increasingly dependent population, and to compensate for a dwindling private sector. The PA’s long-standing fiscal crisis deepened in 2006 as a result of GoI’s withholding of Palestinian clearance revenues and the aid boycott, resulting in a deficit of over $1 billion. Yet, wages and non-wage operating costs, transfers, and spending on utilities and energy continued to grow despite the drop in funding. The PA’s financial position continues to deteriorate at an increasing rate in 2007. In the first half of 2007, the deficit was $100 million a month. Even after Israel’s decision in June 2007 to start releasing clearance revenues, the wage bill still exceeds government revenues. This is further impacted by the PA’s limited ability to increase domestic revenues given the loss in value-added tax (VAT) and customs duties from the suspension of Gaza trade. As such, nearing the end of 2007, the PA finds itself with a large deficit, a significant stock of arrears and falling revenues. External assistance has been unusually high in 2007; nearly $450 million has been received in the first half of the year. Looking forward, the PA forecasts a need for at least $1.67 billion in donor assistance per year to close the fiscal gap, of which 95% will go to meet recurrent expenditure needs as opposed to development aid. • Aid flows into the WB&G have been considerable, but remain fragmented and focused on bilateral arrangements with donors based on short-term political positions rather than a collective, longer-term view on broader economic and governance fundamentals. Thus, aid has not been governed by a longer-term Palestinian development agenda, nor has it been matched by parallel actions by the PA and the GoI to create an environment where funds translate into sustainable growth. Aid has been reactive and lacking levers to encourage or enable institution-building or to create powerful incentives to reform. In addition, the hollowing out of the Palestinian economy has risked reversing the benefits of over $10 billion in past aid, and has diverted funds to recurrent expenditures and basic lifeline humanitarian support rather than to an investment in building effective Palestinian institutions and infrastructure. Donors have long been aware of this issue, hence the establishment of multilateral financing mechanisms and new aid coordination bodies at the last AHLC in London. However, the effectiveness of these structures was undermined by the aid boycott. Going forward, these aid coordination bodies must be revitalized. The presence of the new Quartet Representative, and his leveraging of these structures, could strengthen them considerably. Also, donor commitment to the Palestinian Development and Reform Plan 2008-10 will be a key test of their support of Palestinian-driven institution-building, recovery and growth. Main recommendations • Moving forward, the restoration of growth and peace will require all sides not only to return to the preconditions for economic recovery, but to take actions collectively and in parallel, in view of their longer-term benefits rather than their short-term costs. Experience over the past 15 years has shown that only parallel actions on the issues outlined in this report will lead to tangible results. • The viability of the PA is a precondition for a lasting recovery and peace. For the PA to be viable, it must restore law and order and become fiscally self-sufficient. Continued donor investment in and through PA institutions must be based on economic considerations and bolster a commitment by the Government to the reforms noted in this report, not be conditioned on it. Similarly, the PA’s reform agenda must clearly and realistically reflect a finite horizon of aid dependency. • GoI actions on Palestinian movement and access must also reflect a clear policy on settlement activity, and a view of the removal of these restrictions as a major catalyst for stability, and not a consequence of it. In addition to the private sector, Israeli restrictions also impede the functions of the Palestinian public sector. The PA is obliged to administer a series of isolated territories despite complex obstacles in coordinating government policy, administrative procedures, service delivery and law enforcement. • Any discussion on economic recovery and peace is incomplete without the Gaza Strip. Gaza represents about 40% of the population and is a core part of the Palestinian territory, economy and identity. Thus, any serious options for a private-sector led and export-oriented Palestinian economy must include Gaza. Without it, the collective investments and commitments advocated in this report are unlikely to materialize due to continued uncertainties about the sustainability and inclusiveness of Palestinian institutions. |
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