Fiscal crisis jeopardizes Palestinian statehood potential

World Bank: Low economic growth, low donor assistance resulted in financial crisis; fraction of desired $1.4 billion donor support raised.

PA President Abbas at PLO Executive meeting 311 (R) (photo credit: REUTERS/Mohamad Torokman)
PA President Abbas at PLO Executive meeting 311 (R)
(photo credit: REUTERS/Mohamad Torokman)
A fiscal crisis has jeopardized Palestinian statehood unless the donor community provides more funds, or Israel lifts its restriction on movement and access, according to a new report released Monday by the World Bank.
It issued its report on the fiscal crisis in the Palestinian Authority in advance of both a September 18 donor conference in New York and an anticipated Palestinian bid for unilateral statehood at the UN a few days later.
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In past reports the World Bank has warned economic growth in the Palestinian economy was deceptive in that it was heavily reliant on donor funding because Israeli restrictions had made it difficult for the private sector to develop a self-sustaining economy.
In Monday’s report it reiterated that conclusion, and it said the Palestinian economy was as developed as it could be given Israeli restrictions in the West Bank and the Gaza Strip.
“Though the PA has sought to reduce its need for external assistance, lower economic growth and lower than expected donor assistance have resulted in an acute fiscal crisis,” the World Bank warned.
According to its projected budget, the PA had hoped to receive $1.4 billion in donor support this year, of which it has raised only a fraction of that amount, primarily from Europe.
The report noted in particular the drop in aid from Arab countries, which in 2008 had given $446m., in 2009, $462m., in 2010, $231m., and in the first half of 2011 had provided less than $80m.
Financing fell below expenditures in the first half of 2011, said the report, and as a result, the PA resorted to increased domestic bank borrowing.
Even so, according to the report, in early July 2011 the PA could not make its wage payments, and in early August 2011 it paid wages but was not able to cover its transfers.
According to the report, GDP growth for 2011 was now projected to be 7 percent instead of an anticipated 9%.
“To date, the PA has continued to implement its reform agenda, but a protracted fiscal crisis risks jeopardizing the gains in institution-building made painstakingly over the past years,” the report said.
“Ultimately, in order for the Palestinian Authority to sustain the reform momentum and its achievements in institution-building, remaining Israeli restrictions must be lifted,” the report stated.
That is particularly true when it comes to growth in the private sector.
It added that real growth in the West Bank and Gaza for the first half of 2011 was 10%, but this was due to the 28% growth rate in Gaza that resulted from the loosening of restrictions on the flow of goods.
At the same time, however, the report said, the economy in the West Bank has slowed down. In the first half of 2011 there was only 4% growth compared to 8% in 2010.
Israel is the West Bank and Gaza’s largest trading partner, said the report, but according to Israel’s Central Bureau of Statistics, the import of goods and services by the PA from Israel grew by only 2% between the fourth quarter of 2010 and the first quarter of 2011.
Exports from the West Bank to Israel were flat, said the report.
Unemployment in the West Bank and Gaza remains high, according to the report, even though it fell from 22.9% in the second quarter of 2010, to 18.7% in the second quarter of 2011.
Again, it noted the drop was due to improvements in Gaza, where unemployment fell from 39.3% in the second quarter of 2010 to 25.6% in the second quarter of 2011.
In the West Bank, however, unemployment was stagnant at 15% in the first half of 2011, according to the report.
Still, it noted that, “The 2011 Doing Business report ranked the West Bank and Gaza ahead of its neighbors Jordan, Egypt, Lebanon and Syria in four out of its nine core indicators.”
The report continued to state that “in areas where government effectiveness matters most – security and justice; revenue and expenditure management; economic development; and service delivery – Palestinian public institutions compare favorably to other countries in the region and beyond.”
Among its laudatory comments regarding PA reform it noted that the High Judicial Council Magistrate and First Instance Court handled 67% more cases in 2009 than in 2008. The number of judges on the bench has tripled in the last 10 years, said the report.
Trials occur more quickly and court decisions are more regularly enforced and honored, said the report.
Mortality rates are lower, and literacy rates are higher than most countries in the region, it said.