PALESTINIAN ECONOMY FACES CRISIS, SAYS IMF
▶ Public debt set to hit 65% of GDP by end of 2027 if fiscal deficits continue
The Palestinian economy, which is largely reliant on foreign aid and grants, is going through a “fiscal crisis” and the outlook is “dire”, the International Monetary Fund has said.
Public debt, including arrears, rose to 49.3 per cent of gross domestic product last year, from 34.5 per cent in 2019, the Washington-based lender said in a report after discussions held in February and March this year with Palestinian officials, Israeli representatives and international organisations.
The fiscal challenges are largely structural and if policies remain unchanged, per capita GDP is expected to decline.
Public debt, including arrears, could hit 65 per cent of GDP by the end of 2027 if fiscal deficits continue, IMF estimates show.
The fiscal deficit is estimated to have hit 5.3 per cent of GDP last year, up from 4.5 per cent in 2019, before the onset of the Covid-19 pandemic.
These challenges are exacerbated by already persistent high unemployment and poverty, particularly in Gaza.
“Against the background of repeated political and security shocks … the combination of the Covid-19 pandemic, declining donor support and spending priorities have resulted in high deficits. With limited financing options, the authorities have accumulated large domestic arrears,” the fund said.
“Without a change in policies, the economic outlook is dire, with debt on an unsustainable path and per capita GDP projected to decline over the medium term.”
The economy was “hit hard by repeated shocks” as a result of several waves of Covid-19, and the associated lockdowns “severely depressed economic activity”, the fund said.
It partially rebounded from an 11.3 per cent contraction in 2020, thanks to a vaccination drive and a recovery in consumption, and grew by about 6 per cent last year, overall, and by 7 per cent in the West Bank.
The economy in Gaza is estimated to have grown by 2 per cent, partly due to the May 2021 conflict between Israel and Hamas, the fund said.
Despite the rebound, Palestinian GDP is projected to return to pre-pandemic levels only towards the end of next year.
Challenges include inflation, as a result of the appreciation of the Israeli shekel, and the higher cost of imports from Israel.
Unemployment remained high at 24 per cent at the end of last year. Despite improving to 13 per cent in the West Bank, it stood at 45 per cent in Gaza, reflecting the impact of last year’s conflict and existing restrictions on the movement of people and goods, the fund said.
“Extremely high unemployment in Gaza is closely associated with high and increasing poverty, with the World Bank estimating that almost 60 per cent of the Gazan population lives below the poverty line,” the fund said. “This represents a large increase of more than 17 percentage points from the last household survey in 2016-2017.”
The fiscal crisis, growing debt, deteriorating political and socioeconomic conditions, a resurgence of the pandemic and the Ukraine war present additional risks to the economy that could result in chronically weak growth, the IMF said.
While the economy rebounded in 2021 and is projected to expand by 4 per cent this year, this is “mainly a cyclical rebound from the unprecedented depth of the 2020 recession”, the fund said.
Over the medium term, the Palestinian economy is projected to gradually decline to a longterm potential growth rate of 2 per cent, “reflecting restrictions on the movement of goods and people, weak labour market outcomes and low public and private investment”, the fund said.
“This is below projected population growth, implying decreasing real per capita GDP. Inflation is projected to increase, due to increased commodity prices and inflationary pressures in Israel.”
The IMF said Palestine’s goal should be to first stop the increase in public debt and work to reduce it.