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OPT: Macroeconomic and fiscal framework for the West Bank and Gaza - Fifth review of progress

Attachments

STAFF REPORT FOR THE MEETING OF THE AD HOC LIAISON COMMITTEE
Madrid, April 13, 2010

EXECUTIVE SUMMARY

Economic growth in 2009 picked up significantly in the West Bank, but conditions in Gaza remain difficult. The Palestinian Authority (PA) has continued to build a solid track record in institution-building and economic and security reforms, supported by generous aid. The Government of Israel (GoI) has relaxed some restrictions on movement and access in the West Bank during 2009. However, there has been no additional significant easing of the West Bank's restrictions so far in 2010, and economic activity in Gaza remains severely constrained by the persisting blockade. Real GDP growth in the West Bank and Gaza (WBG) is estimated at 6.8 percent for 2009, consisting of 8.5 percent growth in the West Bank and 1 percent in Gaza.

The PA's 2010 Budget builds on the progress made last year in institution-building and public finance reforms. In 2009, the war in Gaza has imposed a burden on the budget as it required substantial non-wage emergency spending. The 2009 recurrent deficit on a cash basis was in line with the budget target. However, non-wage expenditure commitments were above budgeted amounts, and there was a shortfall in donor aid relative to the budget's external financing requirements including Gaza's emergency spending, which led to the accumulation of non-wage arrears. The 2010 Budget envisages a tightening of the fiscal stance to reduce the recurrent deficit to $1.24 billion from $1.59 billion on a commitment basis in 2009. Toward that end, it is important to step up structural reforms, including implementation of a social safety net and electricity sector reform, and to enhance commitment controls and cash management to minimize further arrears accumulation and recourse to bank borrowing.

There is an urgent need to secure adequate donor assistance to finance the 2010 recurrent financing requirements. A front-loading of that assistance is especially important given the aid shortfalls during the first quarter of the year. External recurrent financing requirements for April to December 2010 are projected at about $1.1 billion, given the $174 million already disbursed in the first quarter of 2010. The $1.1 billion is in addition to about $0.7 billion needed for public investment in the Palestinian territories in 2010.

Concerted actions by the three parties (the PA, the GoI, and the donor community) are critical to sustain the economic recovery and reduce significant risks to the economic outlook. Perseverance by the PA in institution-building, reforms and good governance, supported by adequate and timely donor aid, is needed to achieve increased self-reliance and sustain private sector confidence. A breakthrough in the peace process and removal of restrictions on a wider scale are essential for a durable and regionally balanced growth in the Palestinian territories. This requires action on three fronts. First, lifting Gaza's blockade is essential to stem the continuing decline in Gazans' living standards. Second, removing impediments to private and public investment in the West Bank's Area C, which represents about 60 percent of its territory, is needed to tap the West Bank's full growth potential. Finally, lifting restrictions on the Palestinian territories' external trade, especially on exports to Israel, is key to a sustained rise in real GDP per capita and a balanced growth pattern.