- Strong revenue mobilisation efforts contributed to a marked reduction in the 2016 fiscal deficit
- 2017 is likely to be a very challenging year for the Palestinian economy
- Budget pressures require continued strong domestic policies, more donor support, and more predictable revenue transfers from Israel.
An International Monetary Fund (IMF) mission led by Karen Ongley visited East Jerusalem and Ramallah from January 31 to February 9, 2017 to assess recent economic developments in the West Bank and Gaza and the financial situation of the Palestinian Authority (PA).
The mission met with Prime Minister Rami Hamdallah, Finance Minister Shukry Bishara, Governor Azzam Shawwa, and other Palestinian officials. At the end of the mission, Ongley issued the following statement that outlined "increasingly difficult conditions" for the Palestinian economy.
“While we estimate that GDP growth increased from 3.5% in 2015 to 4% in 2016, this was not sufficient to generate new jobs and unemployment rose to more than 28% in September. Consumption is still the primary driver of growth, as political uncertainties and access restrictions continue to inhibit private sector investment across the West Bank. While donor-funded reconstruction in Gaza continued, aid disbursements were delayed and humanitarian conditions remain dire, particularly as the provision of public services worsens," Ongley noted in the statement.
“The Ministry of Finance and Planning managed these testing circumstances skillfully. Strong revenue mobilisation efforts contributed to a marked reduction in the 2016 fiscal deficit. In particular, discussions between the PA and government of Israel contributed to the payment of past obligations to the PA and these one-off factors helped to increase tax and non-tax receipts by about two percentage points of GDP. The sharp increase in total revenue saw the recurrent deficit decline to 5.6% of GDP in 2016 from 9.6% of GDP in 2015. However, a further decline in donor budget support contributed to a financing shortfall and the accumulation of arrears.
“Notwithstanding recent progress on the budget, 2017 is likely to be a very challenging year. We therefore welcome the prudent approach in the 2017 budget of assuming lower donor support and no additional one-off transfers from Israel. Despite efforts to bolster domestic receipts, the assumed decline in clearance revenue and other payments from Israel points to a reduction in overall revenues, while spending pressures remain. The recurrent deficit is projected to widen by about 2% of GDP and, with another 15% decline in donor budget support, this would result in a financing gap of almost 6% of GDP."
The IMG encourages the authorities "to build on recent efforts and explore mitigating options. In the near term, this could include considering contingency measures such as limiting the increase in the wage bill to inflation, as this is the largest expenditure item."
Ongley's mission statement also noted that the upcoming Public Financial Management (PFM) strategy could help to enhance the efficiency of spending and promote lasting fiscal improvements. "An action plan of well-prioritised PFM measures could also provide a strong basis for increased donor engagement and support for the government’s priorities in the context of the 2017-2022 National Policy Agenda. Other priority areas include civil service and pension reform, as adopting a strategic approach to the wage bill would free up resources for priority public investments," she stated, identifying the reversal of the decline in donor support and continued discussions with the Israel government on enhancing and improving the predictability of revenue transfers as key success factors.
Ongley disclosed that the Palestine Monetary Authority (PMA) remains committed to strengthening the anti-money laundering and combating the financing of terrorism (AML/CFT) framework, in line with international standards. "In this context, we welcome the constructive working relationship between the Palestine Monetary Authority (PMA) and Bank of Israel. Another important step is the PMA’s recently accepted request for a comprehensive AML/CFT evaluation by Middle East & North Africa Task Force (MENAFATF)*, along with plans to continue with AML/CFT-related reforms, with technical support from the IMF and other development partners," she stated in her mission report.
*MENAFATF combats laundering and terrorist financing.