Palestinian economy could contract by 11%

The Palestinian economy could contract by as much as 11% this year as a result of the COVID-19 pandemic, after already struggling to survive due to a financial spat with Israel and falling donor funds, the World Bank reported on Monday.

“The economy may shrink by at least 7.6%, based on a gradual return to normality from the containment, and by up to 11% in the case of a slower recovery or further restrictions,” the bank said in a statement to the media.

It issued its report in advance of Tuesday’s virtual meeting of the Ad Hoc Liaison Committee, which oversees donor-supported projects for the Palestinians.

The meeting was initially scheduled for April, but was canceled due to the pandemic. At the time, the World Bank predicted a possible 7% contraction as the worst case scenario.

Now it made an even more dire prediction of 11% and warned of increasing poverty.

Last year, 14% of Palestinians in the West Bank and 54% in the Gaza Strip lived below the poverty line, the report stated. Those numbers could rise to 30% in the West Bank and 64% in Gaza, the World Bank said.

It noted that as a result of the virus, some 100,000 Palestinians were no longer crossing into Israel to work.

“The outlook for the Palestinian economy looks grim,” the bank said.

It lauded the PA for its health measures, noting that the authority acted “early and decisively to save lives,” but explained that the pandemic struck in midst of an economic crisis, with government spending on medical, social and economic needs having increased due to COVID-19 precisely when revenues had been declining.

The bank also predicted a potential $1.5 billion deficit for the Palestinian Authority in 2020, noting in particular the drop in donor funding, which it said comprised only 4% of the PA’s GDP for the second year in a row, down from 27% in 2008.

In 2019, the Palestinian economy grew by only 1% due in part to low levels of investment, movement restriction, poor tax collection and a stand-off between the PA and Israel over the transfer of tax revenue collected on behalf of the Palestinians.

“The slowdown was driven by a decline in investment and in public consumption given the PA’s fiscal crises which resulted from the clearance revenue standoff,” the bank said.

Israel had deducted from that sum the money the PA spent on payments to terrorists and their families. Initially, the authority had refused to accept any tax fees from Israel. It has since rescinded that position and accepted the transfers of revenues. Israel had in turn loaned the PA money to help it deal with the COVID19 crisis.

But according to the bank, that was only part of the issue. It said that PA tax collections from Palestinians were down by 8.8% and that there was poor technical communication between the Israeli and Palestinian governments with regard to tax collection. The World Bank suggested electronically linking both systems, akin to a system recently put in place between the PA and Jordan with regard to custom duties.

In addition, the World Bank noted, “tax avoidance is still widespread, particularly among high-earning professionals, and the PA needs to focus efforts on this group of taxpayers.”

“The International community needs to do what it can to help the Palestinian economy survive the challenges of the COVID-19 crisis,” it said.