The World Bank urged on Monday donors to boost support for the Palestinian Authority (PA), which it said was facing a destabilizing budget crisis linked partly to “record low” foreign aid contributions.
In a report, published ahead of a donor conference in Brussels, the World Bank paints a contrasting view of the Palestinian economy, which is seeing a post-lockdown recovery even as food insecurity worsens in places.
The report, “The Palestinian Economic Monitoring Report to the Ad Hoc Liaison Committee (AHLC),” highlights the critical challenges facing the Palestinian economy and the required fiscal reforms. It also outlines the key areas in which Palestinian lives have been impacted by the pandemic and its restrictions.
It will be presented in Brussels on Tuesday during a policy-level meeting for development assistance to the Palestinian people.
“The fiscal situation remains highly challenging,” the World Bank said, adding that the PA was now paying only “partial salaries since November.”
The PA’s 2021 budget deficit hit $1.26 billion, while a “record low” $317 million was received in foreign aid, the World Bank said.
The PA relies on the funds to overcome the months-long financial crisis caused by the coronavirus pandemic, Israel’s deduction of Palestinian tax funds and the drop in external financial aid.
“Despite impressive fiscal consolidation efforts over the years, the size of the fiscal deficit has remained large,” said Kanthan Shankar, World Bank Country Director for West Bank and Gaza.
Given a sharp decline in aid from 27% of GDP in 2008 to 1.8% in 2021, the PA has accumulated a large stock of arrears to the private sector, the pension fund, and domestic borrowing, he added.
“As domestic financing options are no longer possible, pressing on with priority reforms to increase revenues and improve fiscal sustainability is very important.”
After one of the biggest recessions on record when the economy shrank by 11.3% in 2020, the growth rate reached 7.1% in 2021.
This increase was mainly due to higher consumption in the West Bank following the easing of COVID-related measures and the increase in the number of Palestinians working in Israel and the settlements.
Gaza’s recovery was slower given the May 2021 conflict.
The report pointed out that at the peak of the lockdown and economic restrictions, around 110,000 additional Palestinians entered poverty.
It said that the new poor were concentrated in rural areas of the West Bank and were more likely to be living in female-headed households.
“With 20% of previously employed main income earners losing their jobs, income fell in more than 60% of Palestinian households during the height of the pandemic.”
To help achieve fiscal sustainability, the report called on the international community to provide budget support and urged greater efforts by the PA to pursue reforms in revenue and expenditure.
However, reforms need be carried out gradually to avoid negative social implications, especially in the post-pandemic context.
For example, it said revenue reforms should initially focus on high earners who are not fully paying their dues.
The report also recommended that the PA revisits expenditure on the wage bill, improves value for money in the health system, better manages the public pension fund, and reduces net lending.
While PA reforms are necessary to reduce the size of the fiscal deficit, the report stressed they are not sufficient to secure sustainable development.
The report also stressed that cooperation by the Israeli government is essential to increase revenues.