Palestine economy to continue below potential, World Bank says

Growth projected to hover around 3% and income per capita is expected to stagnate, according to report

Shopping in the West Bank city of Hebron. Income this year is expected to stagnate as economic growth slows, according to the World Bank. EPA

The Palestinian economy is expected to continue operating well below its potential and growth is projected to hover around 3 per cent, according to a new World Bank report.

Given population growth trends, income per capita is also expected to stagnate, damaging living standards, the Washington-based lender said.

In addition, a combination of fiscal constraints and the restrictions imposed by Israel hinder access to health care, adversely affecting the population, especially in Gaza.

The Palestinian Economic Monitoring Report will be presented to the Ad Hoc Liaison Committee, a policy-level meeting for development assistance to the Palestinian people, in New York on Wednesday.

The report highlights the economic challenges facing the occupied Palestinian territories and describes the constraints affecting health services.

“Over the last five years, the Palestinian economy has basically been stagnating, and is not expected to improve unless policies on the ground change,” said Stefan Emblad, World Bank country director for the West Bank and Gaza.

“The Palestinian territories have been in a de facto customs union with Israel for 30 years, but contrary to what was expected when the agreements were signed, the divergence between both economies has continued to widen, with income per capita in Israel almost 14 to 15 times higher than in the Palestinian territories.

“Poverty rates are stubbornly high, as roughly one out of four Palestinians lives below the poverty line. Our report reminds all parties of the vital urgency to act to spur per capita growth, as well as to put the fiscal situation on a sounder footing,” Mr Emblad said.

Growth of the Palestinian economy will continue to slow this year, weighed down by a lack of reforms, a financial crisis and the worsening political and security situation, the International Monetary Fund said last month.

High unemployment and poverty are adding to macroeconomic fragilities of the occupied West Bank and Gaza that are largely dependent of foreign aid and grants, the fund said.

After the post-pandemic rebound in 2021, gross domestic product growth nearly halved to 3.9 per cent in 2022 and is expected to decelerate further to 3 per cent in 2023, according to the IMF.

Palestine's economy was driven by the recovery in private consumption as authorities eased coronavirus pandemic-related movement restrictions, the World Bank said in a report in May.

The Palestinian economy remains at high risk under a multilayered system of Israeli restrictions on movement and trade in the West Bank, a near-blockade of Gaza, an internal divide between the West Bank and Gaza, severe fiscal constraints and an unfinished reform programme of the Palestinian Authority and several years of declining foreign assistance, the World Bank said.

Public revenue has increased noticeably in 2023, however, expenditures have also continued to grow, mainly driven by a rising public wage bill.

“Taking into account the only partial implementation of recent agreements between the government and labour unions, and Israeli deductions from revenue collected on behalf of the Palestinian Authority of about $256 million, as well as donor contributions, the deficit is expected to reach $493 million in 2023 or 2.5 per cent of gross domestic product,” the World Bank said.

“Should labour agreements be fully implemented, the deficit would increase further, reaching 2.7 per cent of GDP.”

Financing options are becoming increasingly limited, and the deficit is expected to continue being financed through arrears with private suppliers, the public pension fund, and public employees (who have already been receiving only 80 per cent to 85 per cent of their wages since late 2021), the report outlined.

The relentless accumulation of additional arrears would – in the long run – affect market liquidity and could eventually choke economic activity, with devastating effects on poverty levels as well as on social stability, it added.

Reform efforts by the Palestinian Authority, more financial support from donors and co-operation by the Israel government are necessary to achieve growth and fiscal sustainability, the lender recommended.

The World Bank suggested that Israel must transfer revenue collected from Israeli businesses operating in Area C and value-added tax on Israel-Gaza trade to the PA, and fully implement the e-VAT clearance system through the adoption of legislation mandating its use.

The Israeli occupation, the fragmentation of the Palestinian territories, and the broader macro-fiscal context have also significantly impacted the Palestinian healthcare system, the report said.