World Bank urges Israel to ease restrictions as Palestinian economy stalls

Palestinian economy faces "severe fiscal shock" amid dispute on martyr payments and dual-use goods

A Palestinian man carries the national flag during a demonstration near the fence along the border with Israel, east of Gaza City, on February 22, 2019. / AFP / MAHMUD HAMS

The World Bank urged Israel to curb restrictions on imports to Palestine that can have both civilian and military use, concluding that limitations have pushed the Palestinian economy into "severe fiscal shock".

Palestine's economy saw "no real growth" last year because of a standoff with Israel over tax collection and the implementation of the dual-use goods system, the World Bank said in a new report. The report will be presented to a committee that coordinates development assistance to Palestinians on April 30 in Brussels.

"The dual-use goods system in its current application limits economic diversification and sustainable growth in the Palestinian territories," Anna Bjerde, World Bank acting country director for West Bank and Gaza and director of strategy and operations for the Middle East and North Africa, said. "A revamp of the application of the restrictions on dual-use goods is critically needed.”

Stalled growth is mainly due to "steep deterioration" in Gaza, whose economy contracted 7 per cent last year while the West Bank also under-performed, according to the international lender. The Palestinian economy is projected to grow 0.5 per cent this year and just 1 per cent in 2020 if Israeli restrictions persist, according to World Bank estimates.

"Urgent resolution is needed to prevent a further deterioration of economic activity and living standards," Ms Bjerde said.

Easing dual-use goods restrictions could bring an additional 6 per cent growth in the West Bank economy and 11 per cent in Gaza by 2025, according to the report.  Israel restricts the transfer of 62 items for Gaza on top of an already long list of 56 items for the West Bank, going "well beyond" standard international practise.

The World Bank also highlighted the economic impact from the ongoing dispute over tax revenues that Israel collects on behalf of the Palestinian Authority. That income amounts to 65 per cent of the PA's total revenues.

Israel has recently deducted $138 million from the PA’s clearance revenues in 2019 to offset estimated payouts to Palestinian martyrs and prisoners’ families.  In response, the PA rejected the rest of the tax money and instead cut the wage bill by 30 per cent, reduced expenditures in social assistance and borrowed more from local banks.

If left unresolved, the standoff will increase the financing gap from $400 million in 2018 to more than $1 billion in 2019, according to the report.

"In the short-term, it is key to streamline and simplify the administrative procedures of the dual use system," the report said.

In the medium term, the report recommends a risk-based approach to provide access to dual-use goods for legitimate businesses that have a strong track record to safely and securely handle hazardous materials, it said.

"In the long term, the Government of Israel should align its dual use list with international practice," the World Bank report said. "The PA should build a credible regime of control and verification and be able to assume responsibility for the control of dual use goods within its jurisdictions."

The PA has also been squeezed by deep US aid cuts ordered by the Trump administration, exacerbating the Palestinian economy's crisis.

The World Bank outlines a grim outlook for the Palestinian economy, that's forecast to grow between 0.5 per cent and 1.6 per cent between 2019 and 2021.

Israel's decision to reduce the tax transfers to the PA will negatively impact the authority's fiscal position in the coming years. The expected continued decline in foreign aid means the fiscal deficit (after grants) is projected to reach 6.5 per cent of GDP in 2019 through to 2021.

Palestine will continue to rely heavily on imports to meet even some basic needs, and the imports share is expected to rise to 62 per cent in 2021, the report showed.

"Further reductions in tax transfers and an increased possibility of conflict pose significant downside risks," the World Bank said.