Palestinian economy in ‘fiscal crisis’ with pre-pandemic rebound in late 2023, IMF says

The Palestinian economy, which largely depends on foreign aid and subsidies, is going through a “fiscal crisis” and the economic outlook is “catastrophic”, according to the International Monetary Fund.

Public debt, including arrears, fell from 34.5% of GDP in 2019 to 49.3% of gross domestic product in 2021, the Washington-based lender said in a statement. report following discussions that took place in February and March of this year with Palestinian officials as well as with Israeli representatives and international organizations.

Fiscal challenges are largely structural and if policies remain unchanged, GDP per capita is expected to decline. According to IMF estimates, public debt, including arrears, is expected to reach 65% of GDP by the end of 2027 if fiscal deficits persist.

The budget deficit is estimated to have reached 5.3% of GDP in 2021, compared to 4.5% in 2019, before the Covid-19 pandemic. These challenges are exacerbated by already high and persistent unemployment and poverty, particularly in Gaza.

“In the context of repeated political and security shocks … the combination of the Covid-19 pandemic, declining donor support and spending priorities have resulted in high deficits,” the fund said.

“With limited financing options, the authorities have accumulated large domestic arrears…without policy change, the economic outlook is dire with debt on an unsustainable path and GDP per capita expected to decline over the medium term.”

The economy has been “hit hard by repeated shocks” following multiple waves of the Covid pandemic, which, along with the associated lockdowns, “have severely depressed economic activity”, the fund said.

The economy has partially rebounded from an 11.3% contraction in 2020 on the back of a vaccination campaign and a recovery in consumption, growing by around 6% in 2021 overall and 7% in the West Bank.

Gaza’s economy is estimated to have grown by 2%, in part due to the May 2021 conflict between Israel and Hamas, the IMF said. Despite the rebound, Palestinian GDP is only expected to reach its pre-pandemic level towards the end of 2023.

Challenges include inflation resulting from the appreciation of the Israeli shekel and the higher cost of imports from Israel. Unemployment remains high at 24% at the end of 2021. It rose to 13% in the West Bank, but to 45% in Gaza, reflecting the 2021 conflict and existing restrictions on the movement of people and goods, the report said. IMF.

“Extremely high unemployment in Gaza is closely associated with high and rising poverty, with the World Bank estimating that nearly 60% of Gaza’s population lives below the poverty line. This represents a sharp increase of more than 17 percentage points. percentage from the last household survey in 2016-2017,” the fund said.

The fiscal crisis, growing debt, political and socio-economic conditions, a resurgence of the pandemic, in addition to the war in Ukraine, pose additional risks to the economy and lead to chronically weak growth, the IMF said.

While the economy rebounded in 2021 and is expected to grow 4% this year, this is “mostly a cyclical rebound from the unprecedented depth of the 2020 recession,” the fund said.

In the medium term, the Palestinian economy is expected to gradually shrink to its long-term potential rate of 2%, “due to restrictions on the movement of goods and people, weak labor market performance and the weak public and private investment,” says the IMF.

“This is lower than projected population growth, implying a decline in real GDP per capita. Inflation is expected to rise, due to rising commodity prices and inflationary pressures in Israel.”

The IMF has suggested that Palestine’s goal should be to first stop the increase in public debt and reduce it, while improving the quality of spending by allocating more resources to development spending and improving the social safety net. Increased development spending will help boost the long-term growth potential of the Palestinian economy.

“Exiting from the current fiscal crisis will require far-reaching Palestinian political actions,” the IMF said.

“Given the scale of the budget deficit and the multitude of difficult reforms that will have to be pursued, this requires a multi-year horizon. Exiting the current fiscal crisis will require far-reaching Palestinian political actions. »

Systematic reform of key drivers of non-discretionary spending, such as civil service wages and benefits, transfer payments, the public pension system, the health care system and fuel subsidies, is essential, said the bottom.

Updated: May 03, 2022, 07:26

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