World Bank Says Palestinian Economy In Severe Recession, 50% Of Population In Poverty

VOL. XLV

No 14

8 April 2002

PALESTINE

World Bank Says Palestinian Economy In Severe Recession, 50% Of Population In Poverty

The Palestinian economy is in severe recession, mainly as result of the heavy restrictions on the movement of labor and goods in the West Bank and Gaza, according to the World Bank in a 23 March report (prior to the latest escalation of violence) entitled Fifteen Months – Intifada, Closures and Palestinian Economic Crisis. While the economic crisis is not irreversible and the Palestinian economy will recover if the closures are lifted, if they continue or intensify the economy will “eventually unravel,” said Nigel Roberts, World Bank director in the West Bank and Gaza. He warned that in that even public services will break down, unemployment and poverty rates will continue to climb. The report stresses that the present situation is unsustainable, with households in many cases exhausting their savings and capacity to borrow and emergency employment schemes not having any impact on unemployment. The fiscal situation continues to deteriorate and donor contributions have not closed the budget deficit. Up to now, the Palestinian Authority (PA) has managed this deficit by borrowing from commercial banks, cutting salaries, squeezing operating costs and delaying the payment of bills – but all of these strategies are reaching their limit. By the end of 2001 the PA’s arrears amounted to $430mn, most of which were owed to Palestinian commercial suppliers, in turn placing significant pressure on Palestinian commercial banks (MEES, 25 February). On the social side, the World Bank warns, poverty is deepening, particularly in isolated communities, and serious health and environment problems are emerging.

The report notes that the share of the Palestinian population living below the poverty line is estimated at almost 50%, double the figure in late 2000, while unemployment has tripled to nearly 30% of the labor force. Physical damage from the conflict by the end of December 2001 is estimated at $305mn, while the loss in Gross National Income amounts to at least $2.4bn in real terms. The PA is effectively bankrupt, given that tax revenues have fallen to one-fifth of previous levels. Monthly budget needs under the “austerity budget” passed in March 2001 total $90mn, but revenue collected by the PA now amounts to less than $20mn per month. The report notes that the PA’s finances are facing three types of pressure as a result of the crisis: a sharp drop in revenue collections associated with the decline in economic activity and the disruption of tax administration; the suspension since December 2000 by Israel of the transfer of the revenues collected on the PA’s behalf (over $500mn at the time); and an increase in the need for emergency expenditures, particularly in health.

However, the beleaguered Palestinian economy has remained relatively resilient because the PA has managed the crisis well, particularly the budget, the delivery of basic services and rehabilitation efforts. Also, although employment for Palestinian workers in Israel virtually disappeared in the first weeks of the intifada, an average of 50,000 workers from the West Bank have managed to find work again in Israel and the settlements. Households have reduced their expenditures and drawn down their savings, and informal self-help and sharing systems have redistributed the economic pain, while donors (often working through NGOs) have injected timely and generous emergency assistance. Despite the difficulties, donor disbursements rose by 93% in 2001 to almost $930mn. Over 80% of this was devoted to budget support and emergency relief, helping to sustain a minimum level of market demand and preventing the disintegration of government structures. Donor contributions to the UN Relief and Works Agency (UNRWA) have also been crucial, and numerous small scale job creation programs for the newly unemployed have been put in place. The World Bank notes that without the intervention of the donors, and in particular the Arab League and EU countries, all semblance of a modern economy would have disappeared by now. Nevertheless, the surge in assistance came with a price – disbursements on growth-oriented infrastructure and capacity building projects dropped from over $400mn in 1999 to $175mn in 2001, and many large projects have been seriously delayed or damaged. “In effect, long-term investment has been sacrificed to short-term survival,” the report notes.

The report concludes that for any significant recovery to take place, the Government of Israel must dismantle the present system of internal checkpoints and border restrictions on goods and workers. And, in addition, it must release withheld tax revenues to the PA and resume regular revenue clearances. The World Bank notes that donors of aid will provide major emergency support in 2002 and recommends that the programs should focus on budget support to the PA and the municipalities, targeted assistance to social service delivery institutions, emergency support for the private sector, enhanced efforts to support the unemployed and poor (through cash payment and job creation schemes), the reconstruction of damaged infrastructure and rehabilitation of degraded agricultural land; loans to university students who have lost the means to pay for their education and support to UNRWA’s emergency programs for refugees.

The World Bank says that total donor financing needed this year will depend on political developments. Should the peace process resume and closure be lifted, total needs would amount to about $1.1bn, while a continuation of the current status quo would require around $1.5bn from donors and a significant tightening of closure would increase total emergency needs to around $1.7bn. The report said that donors should also dedicate themselves to the medium-term development agenda, despite the difficulties of working under present conditions. It recommends that the PA should maintain strong budget discipline this year and develop a unified emergency plan for 2002 which will help focus energies on immediate economic survival and subsequent recovery.

The report notes that the PA intends to implement its medium-term agenda, which has been suspended since September 2000. The aim is to promote transparency and accountability in the public sector and create a supportive environment for private sector development. The PA now wants to manage all sources of public revenue in a transparent fashion, maintain a public sector hiring freeze, apply clear public procurement standards and guidelines, develop a unified pension system covering all public employees and create a legal environment which is conducive to investment and open competition.