The Palestinian economy, which is largely reliant on foreign aid and grants, is forecast to grow by 3.5 per cent in 2022.
This is driven by the continued recovery in private consumption amid the complete easing of Covid-19-related restrictions, and a rise in the number of Palestinians working in Israel, a new report from the World Bank has found.
The forecast, however, is lower than the 7.1 per cent economic growth recorded by Palestine in 2021 and the 5.7 per cent real gross domestic product growth in the first quarter of this year.
“In 2022, growth in the Palestinian territories is projected to slow down, as the low base effect weakens, public consumption declines and inflationary pressure persists," the World Bank said.
Inflation is expected to hover around 3.6 per cent for the full year amid higher food and fuel prices, while public consumption will decline as the Palestinian Authority pays partial salaries to its employees, the Washington-based lender said.
“If prices continue to rise at the rates tracked so far in 2022, households could face average total increases of up to 80 per cent in the cost of bread, flour and vegetable oil between January 2022 and January 2023,” the World Bank said.
“Consumption patterns indicate that these price shocks will harm poorer households relatively more than wealthier deciles of the population.”
Food and commodity prices have soared globally due to the continuing conflict in Ukraine.
Palestine faces the risk of higher inflation and greater food insecurity this year because most of its wheat supplies are imported from Russia and Ukraine, either directly or through Israel, the UN Conference on Trade and Development said in a report last week.
The West Bank and Gaza is the second-highest importer (by share) of food in the region, with a substantial proportion of wheat flour and sunflower oil imports coming from Ukraine and Russia, the World Bank said.
Between January and April 2022, the food component of the Palestinian Consumer Price Index (CPI) rose steeply to its highest point in the past six years, the report found.
The report also found that demand increased as employment figures rose this year.
The number of West Bank Palestinians working in Israel and the settlements rose to 203,000 in the first quarter of this year from 153,000 in the fourth quarter of 2021.
"The average daily wage of these workers is more than twice the average daily wage in the West Bank, implying a larger impact on demand," the report said.
Overall, the unemployment rate in the Palestinian territories was at 24.2 per cent in the second quarter of this year, down from 26.4 per cent in 2021.
However, the overall rate masks a wide regional divergence whereby unemployment in the West Bank reached 13.8 per cent in the April-June period while it was 44.1 per cent in Gaza, “reflecting the difficult social and economic conditions” in the area, the World Bank said.
The report also said that the Palestinian Authority’s (PA) fiscal deficit declined by 70 per cent in the first half of 2022 compared with the same period in 2021 on the back of strong revenue growth.
It “maintained spending as increases in certain expenditure items were offset by a strong decline in spending on the National Cash Transfer programme, at a large social cost”.
“Even though direct borrowing by the PA from the domestic banking sector is gradually declining, PA and public sector employees combined still account for close to 40 per cent of total banking sector credit, posing destabilisation risks,” the World Bank said.
“Non-performing loans and classified loans have also risen since 2018.”
Reforms are needed on both the revenue and expenditure sides for a more sustainable fiscal position including reforms related to the wage bill, the public pension system and “untargeted transfers”, the report said.
Total revenue is expected to rise by more than 10 per cent to $4.67 billion in 2022 from $44.23bn last year.
Meanwhile, the PA’s deficit is expected to reach $770 million in 2022, on a commitment basis, the World Bank said.
“A stable and predictable continuation of donor assistance to the PA through budget support operations will be critical as it carries on with its reform agenda,” the World Bank said.
It added the PA has strengthened its anti-money laundering and combating financing of terrorism framework to boost partnerships with the donor community.
“The PA’s reforms are necessary but not sufficient to put the Palestinian territories on a sustainable development path,” it said.
“Co-operation by the government of Israel remains essential to reduce economic restrictions and sources of fiscal leakage, and to help create greater fiscal space for social assistance.”