Palestine’s economy to slump in 2023 amid geopolitical uncertainty, World Bank says

Its economy grew 4 per cent last year amid easing of Covid-19 restrictions

Fiscal balance improved in Palestine last year, led by a 19 per cent increase in tax collection. Reuters

Palestine’s economic growth is expected to slump this year amid increased tension in its territories and effects from Russia's invasion of Ukraine, the World Bank has said.

Palestine's economy, largely dependent on foreign aid and grants, grew 4 per cent last year, driven by the recovery in private consumption as authorities eased coronavirus pandemic-related movement restrictions.

“Despite signs of recovery in 2022, growth remains sensitive to the escalation of tensions in the Palestinian territories and the ongoing restrictions on mobility, access and trade,” said Stefan Emblad, World Bank country director for the West Bank and Gaza.

“Raising living standards, improving the sustainability of fiscal accounts and reducing unemployment in a meaningful manner will all require significantly higher growth rates. Exogenous sources of risks, such as in the areas of food and energy prices, mean the overall economic outlook remains bleak.”

Tension rose in Palestine last month after Israeli security forces stormed Al Aqsa Mosque compound in Jerusalem, attacked worshippers and fired stun grenades at Palestinian youths.

Russia's invasion of Ukraine has also disrupted global supply chains, leading to higher commodity prices and inflation in many countries.

From January to April last year, the food component of the Consumer Price Index (CPI) rose to one of its highest points in at least six years, the World Bank said.

"The effects of such price shocks disproportionately harm the poorest households, which spend the largest share of their income on food," the report said.

"Moreover, the official CPI likely understates the effective inflation experienced by many Palestinian households, as its weights are most representative of the wealthiest 40 per cent of the population."

Fiscal balances improved in Palestine last year, led by a 19 per cent increase in local tax collection and a 20 per cent rise in clearance revenue, as well as steady public spending, the World Bank said.

Total fiscal deficit decreased by more than 60 per cent. Factoring in donor contributions and the government of Israel’s deduction from clearance revenue, the Palestinian financing gap fared better than initial forecasts, closing the year at $351 million, or the equivalent of 1.8 per cent of the gross domestic product, down from 5.7 per cent in 2021.

"While the Palestinian Authority [PA] continues to try to cover the fiscal gap, the large and growing stock of arrears to the private sector, the pension fund and public employees pose risks to long-term macroeconomic stability," the World Bank said.

"The exposure of the banking sector to the public sector remains high, which requires continued monitoring by the authorities."

The PA should also focus on reforms to increase revenue, strengthen debt management and improve fiscal sustainability, the Washington-based lender said.

Reform efforts should continue to tackle the size of the wage bill and generous public pension system, as well as increase the efficiency of public expenditure, notably by better targeting transfers to the poorest and most vulnerable, it added.

"Adequate and predictable donor budget" will support the reform process and help in macro-economic stabilisation in Palestine.