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West Bank and Gaza update - Apr 2006

Attachments

In This Issue
1. West Bank and Gaza Economic Update and Potential Outlook

2. Land Administration in the West Bank and Gaza

3. The Role and Performance of Palestinian NGOs In Health, Education and Agriculture

4. An Interim Assessment of Passages and Trade

5. Recent Economic Developments

6. Economic and Financial Developments By the IMF

7. World Bank Activities - Speech by the Country Director

8. Consultations with Palestinian Civil Society on Improving Women's Rights

9. Transparency and Good Governance in Tertiary Education

West Bank and Gaza Economic Update and Potential Outlook

This note previews the findings of the Bank's Economic Monitoring Report #2, requested by the Ad Hoc Liaison Committee in December 2005 and due next month. It reports on developments in 2005 on the basis of recent data, and reviews the potential economic impact of various policy measures currently under consideration.

Developments in 2005

In 2005, real Gross Domestic Product (GDP) grew by an estimated 6.3 percent. As explained in the Bank's December 2005 Economic Monitoring Report #1 (1), a confluence of factors explains this level of growth, including an expansionary (but unsustainable) fiscal policy by the Palestinian Authority (PA), increased banking credit to the private sector, a relaxation of closures (permitting a higher number of Palestinian workers to find jobs in Israel), and increased Israeli demand for Palestinian exports (2). Despite positive growth rates during 2003-5, Palestinian incomes remain considerably lower than their pre-intifada levels, with real GDP per capita in 2005 about 31 percent lower than in 1999.

Current Context

In recent weeks, both the Government of Israel (GOI) and donors have been considering a variety of economic responses to the outcome of the Palestinian Legislative Council (PLC) election of January 25, 2006, some of which are already under implementation. GOI has suspended the regular transfer of revenues which it collects on behalf of the PA; other forms of economic interaction at issue are Palestinian labor access to Israel, and the flow of imports and exports across Palestinian borders with Israel. Donors are planning to reduce various categories of foreign assistance.

By way of introduction, two points are worth noting. First, the Palestinian economy is highly sensitive to external stimuli, due to its degree of dependence on Israel and on foreign assistance; consistent with this, the Ad Hoc Liaison Committee (AHLC) in December 2005 agreed that achieving desirable rates of Palestinian GDP growth would depend on Israel continuing to transfer revenues, rolling back the system of movement restrictions in force and maintaining or increasing labor access to Israel-and on sustained high rates of donor and private investment as well as Palestinian governance reform. It follows that suspending revenue transfers, constraining Palestinian movement and access and reducing aid flows would cause severe economic damage if the available tools were employed with sufficient vigor. Second, the impact of the suspension of clearance revenue transfers and restrictions on movement and access would be much greater than the impact of reduced aid flows.

The relative impact of GOI and donor actions is borne out by the economics of the second intifada-a period in which the various restrictions placed on the movement of people, labor and goods, and on the transfer of revenues collected by GOI on the PA's behalf, led to a contraction in real personal incomes of almost 40 percent between the third quarter of 2000 (Q3/2000) and Q3/2002-despite a doubling of annual donor disbursements in the same period.

(1) The Palestinian Economy and the Prospects for its Recovery-Economic Monitoring Report to the Ad Hoc Liaison Committee Number 1, December 2005.

(2) In Economic Monitoring Report #1 (op. cit.), we estimated that real GDP growth might reach 8.7 percent in 2005. The economic data released since then, notably labor market data for the third and fourth quarters of 2005, show that economic developments in the second half of 2005 were less positive than anticipated.

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