Palestinian economy in 'fiscal crisis' with pre-pandemic rebound at end of 2023, IMF says

Public debt, including arrears, is projected to reach 65% of GDP by the end 2027 if fiscal deficits continue

A Palestinian juice seller calls out to customers at a market in Bethlehem in the West Bank. AFP

The Palestinian economy, which is largely reliant on foreign aid and grants, is enduring a "fiscal crisis" and the economic outlook is "dire", according to the International Monetary Fund.

Public debt, including arrears, increased to 49.3 per cent of gross domestic product in 2021 from 34.5 per cent of GDP in 2019, the Washington-based lender said in a report following discussions that were held during February and March this year with Palestinian officials as well as Israeli representatives and international organisations.

The fiscal challenges are largely structural and if policies remain unchanged, per capita GDP is projected to decline. Public debt, including arrears, is projected to reach 65 per cent of GDP by the end 2027 if fiscal deficits continue, according to IMF estimates.

The fiscal deficit is estimated to have reached 5.3 per cent of GDP in 2021, up from 4.5 per cent in 2019, before 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," the fund said.

“With limited financing options, the authorities have accumulated large domestic arrears … 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 has been "hit hard by repeated shocks” as a result of multiple waves of the Covid pandemic, which along with associated lockdowns "severely depressed economic activity", the fund said.

The economy partially rebounded from a 11.3 per cent contraction in 2020 thanks to a vaccination drive and a recovery in consumption, growing about 6 per cent in 2021 overall and 7 per cent in the West Bank.

The economy in Gaza is estimated to have grown by 2 per cent, in part due to the May 2021 conflict between Israel and Hamas, the IMF said. Despite the rebound, Palestinian GDP is projected to reach its pre-pandemic level only towards the end of 2023.

Challenges include inflation as a result of the appreciation in the Israeli shekel and the higher cost of imports from Israel. Unemployment remains high at 24 per cent at end of 2021. It improved to 13 per cent in the West Bank, but was 45 per cent in Gaza, reflecting the 2021 conflict and existing restrictions on movement of people and goods, the IMF 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. This represents a large increase of more than 17 percentage points from the last household survey in 2016-17," the fund said.

The fiscal crisis, growing debt, political and socioeconomic conditions, a resurgence of the pandemic, in addition to the war in Ukraine, present additional risks to the economy and result in chronically weak growth, the IMF said.

While the economy rebounded in 2021 and is projected to expand 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 decrease to its long-term potential 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 IMF 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 suggested that Palestine's goal should be to first arrest the increase in public debt and reduce it, while improving the quality of expenditure by shifting more resources to development spending and improving the social safety net. Increasing development spending will help boost the Palestinian economy’s long-term growth potential.

"The way out of the current fiscal crisis will require wide-ranging Palestinian policy actions," the IMF said.

“Given the size of the fiscal deficit and the multitude of difficult reforms that will need to be pursued, this requires a multiyear horizon. The way out of the current fiscal crisis will require wide-ranging Palestinian policy actions.”

Systematic reform to the key drivers of non-discretionary spending, such as civil service salaries and benefits, transfer payments, the public pension scheme, the healthcare system, and fuel subsidies are key, the fund said.