Following a mission to East Jerusalem and Ramallah, the IMF warned the Palestinian economy, which went into recession last year as a result of war in Gaza, faced a slow recovery. It has been estimated the Palestinian economy shrank by nearly 1% of real gross domestic product last year, its first contraction since 2006.
A high degree of uncertainty would prevent strong growth in 2015, IMF mission leader Christoph Duenwald said.
‘Most notable is the non-transfer to the PA of clearance revenues collected by Israel on goods imported into the West Bank and Gaza. These represent about two-thirds of net revenues and are essential to the PA’s budget and to the Palestinian economy,’ he said. ‘Reduced wage payments and other public spending cuts necessitated by the suspension of clearance revenues in the presence of financing constraints will likely cause a sharp reduction in private consumption and investment.’
Following the conclusion of the mission on January 29, Duenwald warned there would be a ‘fiscal crisis’ if the clearance revenue continued to be withheld over the next few months.
‘The absence of clearance revenue will need to be compensated by curtailment of wages and allowances, cuts in non-wage spending, further borrowing from the banking system, or additional arrears accumulation.’
This month Israel withheld the December 2014 clearance transfer of $127m in protest of PA’s move to join the International Criminal Court.
The PA’s fiscal position could become ‘untenable’ if the payments were delayed for more than a few months, with a growing risk of social unrest and strikes that could lead to political instability, the report warned.
However, these serious risks could be mitigated if Israel quickly resumed transfer of clearance revenue and international aid was front-loaded to deal with the crisis.
‘For 2015 as a whole, even assuming a resumption of clearance revenue transfers in a few months, we project a large financing gap that calls for a prudent fiscal stance, with strict restraint on public sector wages,’ Duenwald said.
‘We recommend safeguarding transfers to poor and vulnerable households, and social assistance in Gaza, where the humanitarian situation is particularly dire.’
The IMF also called on the PA to undertake reforms to place the territories on a more sustainable fiscal position. This should include a renewed emphasis on public financial management and improved revenue administration, and the development of a simplified tax regime for small businesses.
This article originally appeared in Public Finance International.