Economic Monitoring Report to the Ad Hoc Liaison Committee
After a steady improvement in the fiscal position over the past decade, the standoff over clearance revenues has severely constrained the PA budget, leading to a significant expansion in expenditure arrears. Going forward, however, uncertainty abou...
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| Language: | English |
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World Bank, Washington, DC
2019
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| Online Access: | http://documents.worldbank.org/curated/en/410061568815090051/Economic-Monitoring-Report-to-the-Ad-Hoc-Liaison-Committee http://hdl.handle.net/10986/32428 |
| Summary: | After a steady improvement in the fiscal
position over the past decade, the standoff over clearance
revenues has severely constrained the PA budget, leading to
a significant expansion in expenditure arrears. Going
forward, however, uncertainty about a resolution for the
clearance revenue standoff will weigh on the economy. Over
the last two decades, the Palestinian economy has been
driven by large inflows of transfers as other sources of
growth have been long-hindered by the ongoing Israeli
restrictions on movement and access. Under a baseline
scenario which assumes a continuation of the Israeli
restrictions, persistence of the internal divide between the
West Bank and Gaza and a decline in aid levels, the
Palestinian economy is expected to slip into a recession in
2020 and 2021, even if additional, one-off transfers from
clearance revenues are made. As financial buffers are
depleted, the reduced revenues will require sizable cuts in
public spending, which in turn would translate in reduced
consumption and investment. The decline in growth implies a
sizable decline in real per capita income and a rise in
poverty. The Palestinian financial sector continues to face
substantial risks against the backdrop of the fiscal crisis.
The negative impact of the deepening fiscal crisis on the
quality of loan portfolios across the banking sector has
started to materialize as both non-performing loans and
classified loans have been on an upward trajectory. With the
severe liquidity shortage facing the PA, it has resorted to
domestic banks to finance its needs raising the sector’s
exposure to the PA for the first time in a number of years.
Banks are also rescheduling outstanding loans held by PA
employees who are receiving a reduced salary, compounding
the destabilizing effect on the sector. However, the fact
that the PA is simultaneously building up an asset in the
form of tax revenues not received from the GoI ameliorates
the situation as the increased exposure may be seen as a
temporary trend. Another cause of concern is a possible
disruption in Correspondent Banking Relationships (CBRs)
between Palestinian banks and their Israeli counterparts due
to de-risking by Israeli banks. The immunity and indemnity
package given by the GoI to banks with CBRs are set to
expire in May 2020 and February 2021, respectively, when a
longer term and more sustainable intervention is expected to
be in place. While resolving the fiscal crisis is an
immediate priority there remains a broader reform agenda to
improve the economy and Palestinian living standards. |
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