Lack of reforms and financial crisis to hamper Palestinian economic growth, IMF says

Worsening political and security situation, persistently high unemployment and poverty is adding to macroeconomic fragilities

Palestinians shop at a market in the old city of Bethlehem in the occupied West Bank. The IMF says per capita income this year is expected to decline as economic growth slows. AFP

Growth of the Palestinian economy will continue to slow this year, weighed down by a lack of reforms, a financial crisis and the worsening political and security situation, the International Monetary Fund has said.

High unemployment and poverty are adding to macroeconomic fragilities of the occupied West Bank and Gaza that are largely dependent of foreign aid and grants, the IMF said in a statement on Wednesday at the close of its staff level discussion with Palestinian officials.

“The outlook for the Palestinian economy remains bleak amid a volatile political and security situation, with downside risks persisting,” Kerstin Gerling, head of the IMF mission to the West Bank and Gaza, said.

“Together with lower regional growth, the increasingly difficult environment is weighing on both the supply and demand side of the economy.”

After the post-pandemic rebound in 2021, gross domestic product growth nearly halved to 3.9 per cent in 2022 and is expected to decelerate further to 3 per cent in 2023, the IMF said.

Palestine's economy was driven by the recovery in private consumption as authorities eased coronavirus pandemic-related movement restrictions, the World Bank said a report in May.

However, the worsening security situation and political uncertainty “point to a gradual reduction of per capita incomes over the medium term amid a continued widening of the already large gap in living standards between the West Bank and Gaza”, Ms Gerling said.

Weakening activity and relatively lower international commodity prices, however, have helped in easing inflation, which is projected at 3.2 per cent in 2023 and to slide further to 2 per cent over the medium term, she said.

The fiscal crisis in Palestine, however, continues under “broadly unchanged policies”, which has undermined the delivery of basic government services.

“An ever-binding liquidity crunch has led to a cash-based execution of the 2023 budget and constrained the full payment of public sector wages and pensions (persisting since late 2021) and cash transfers to the most vulnerable,” the IMF said.

“Arrears continue to accumulate, and without substantial adjustment policies, public debt remains unsustainable.”

The IMF said that the goal of achieving higher economic growth will require co-ordinated efforts from the Palestinian Authority, Israel and the international community.

“Boosting economic growth and improving Palestinian employment and real incomes hinges critically on the easing of Israeli-imposed restrictions on movement, access, and investment … and opening up of Gaza,” Ms Gerling said.

Deep policy reforms are also necessary to restore fiscal sustainability and free up resources for development and social spending.

“Public sector wage bill reform remains the highest priority, but progress has been erratic,” she said.

Further reforms to address net lending, including at the local government level, and health spending are also needed to stimulate the economy.

“Over the medium term, the authorities should also consider public pension reform that balances fiscal and social considerations,” she said.