West Bank econ­omy dips on slower aid, says IMF

The Pak Banker - - COMPANIES/BOSS -

An In­ter­na­tional Mon­e­tary Fund (IMF) mis­sion led by Christoph Duen­wald vis­ited East Jerusalem and Ra­mal­lah from Fe­bru­ary 3-11, 2016, 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, Min­is­ter of Na­tional Econ­omy Abeer Odeh, and other Pales­tinian of­fi­cials.

At the end of the mis­sion, Mr. Duen­wald is­sued the fol­low­ing state­ment: "2015 was an­other dif­fi­cult year for the Pales­tinian econ­omy. Growth in the West Bank slowed to an es­ti­mated 2.8 per­cent, as in­vest­ment re­mained weak, donor aid de­clined sharply, and the sus­pen­sion of clear­ance rev­enue trans­fers in the early part of the year un­der­mined con­fi­dence. While re­con­struc­tion ef­forts fol­low­ing the Is­rael-Ha­mas con­flict in 2014 pro­vided some boost to the Gazan econ­omy, the pace of re­cov­ery was ham­pered by slow aid dis­burse­ments and re­stric­tions on im­ports of con­struc­tion ma­te­ri­als, and the hu­man­i­tar­ian sit­u­a­tion re­mains dire. Un­em­ploy­ment re­mains stub­bornly high in the West Bank and higher still in Gaza, where two-thirds of young peo­ple are with­out a job.

"In the face of the chal­leng­ing cir­cum­stances, the au­thor­i­ties man­aged eco­nomic poli­cies well, re­duc­ing the over­all deficit for the third con­sec­u­tive year. We es­ti­mate that the fis­cal deficit de­clined by close to one per­cent­age point of GDP, re­flect­ing strong rev­enue per­for­mance and suc­cess­ful ef­forts to con­tain spend­ing on the wage bill and in non-pri­or­ity ar­eas. How­ever, ef­forts to al­le­vi­ate so­cial hard­ship in Gaza ne­ces­si­tated higher-than-bud­geted spend­ing on fuel. A sharp drop in donor aid con­trib­uted to higher pub­lic debt, in­clud­ing ar­rears. Nev­er­the­less, the au­thor­i­ties man­aged to clear some ar­rears to the pri­vate sec­tor and con­trib­uted small amounts to the Pen­sion Fund on a monthly ba­sis.

"Un­cer­tainty con­tin­ues to cloud the eco­nomic out­look. As­sum­ing that political un­cer- tainty and Is­raeli re­stric­tions per­sist, but that re­cent episodic vi­o­lence does not es­ca­late dra­mat­i­cally, GDP growth in the West Bank and Gaza will likely reach 3.3 per­cent in 2016, with sub-3 per­cent growth in the West Bank and 5 per­cent growth in Gaza re­flect­ing con­tin­ued re­build­ing.

Over the medium term, growth is pro­jected to hover around 3.5 per­cent, lead­ing to stag­nant per capita in­comes and ris­ing un­em­ploy­ment. Also, real GDP in Gaza will not likely re­turn to pre-con­flict lev­els be­fore 2018. While a break­through in na­tional rec­on­cil­i­a­tion ef­forts could set the stage for more fa­vor­able con­di­tions, the main risks-es­ca­lat­ing vi­o­lence that pre­cip­i­tates a se­cu­rity cri­sis; short­falls in donor aid or rev­enue; or fur­ther spend­ing pres­sures in­clud­ing in Gaza- would di­min­ish growth if re­al­ized.

"The au­thor­i­ties have pre­pared a pru­dent 2016 bud­get fo­cused on fur­ther rev­enue mo­bi­liza­tion and spend­ing con­trols, while in­creas­ing trans­fers to the Pen­sion Fund to make the pen­sion sys­tem more sus­tain­able. Still, as­sum­ing donor aid around the same level as 2015, IMF staff es­ti­mates that the bud­get im­plies a large fi­nanc­ing gap of over $500 mil­lion. To pre­vent ar­rears ac­cu­mu­la­tion, the au­thor­i­ties are ad­vised to take mea­sures to nar­row the gap, such as con­tain­ing the in­crease in the wage bill to below 2 per­cent. How­ever, as mea­sures alone will not close the gap, in­creased donor aid will be crit­i­cal in the year ahead.

"Close mon­i­tor­ing will help en­sure the con­tin­ued health of the bank­ing sec­tor. While NPLs are among the low­est in the re­gion, banks' high ex­po­sure to the PA and dou­ble digit pri­vate sec­tor credit growth in a weak eco­nomic en­vi­ron­ment war­rant close at­ten­tion. In par­tic­u­lar, with most credit chan­neled to real es­tate, con­struc­tion and con­sump­tion, the Pales­tine Mon­e­tary Au­thor­ity should stand ready to de­ploy macro­pru­den­tial tools to ad­dress po­ten­tial risks should they ma­te­ri­al­ize. The re­cently ap­proved "Anti Money Laun­der­ing and Ter­ror­ism Fi­nanc­ing" law, in line with Fi­nan­cial Ac­tion Task Force guide­lines, is a tes­ta­ment to the PA's de­ter­mi­na­tion to pre­empt risks and ad­here to in­ter­na­tional best prac­tices in this area.

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