Steady economic decline since 2011. Negative per y g p capita income growth in the WB since 2013 External budget support reduced from 18% of GDP in 2009 to 8% of GDP in 2013-15 Fiscal deficit reduced from 22% of GDP in 2009 to 12% of GDP in 2013 15 It is still 12% of GDP in 2013-15. It is still unsustainable, ns stainable with $ 500 million unfinanced gap in 2015 No Israeli facilitation of restrictions The No Israeli facilitation of restrictions. The occupation is more entrenched. 2
2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 Real Real growth gro 6.3 2.2 -0.4 -0.7 2.9 2.9 2.9 Palestine 6.0 1.0 5.1 -2.0 2.0 2.0 2.0 WB 7.0 5.6 -15.2 7.0 5.0 5.0 5.0 Gaza Per Capi Per Capita Income Income Income Income gro growth 3.1 -0.1 -3.3 -3.6 0.0 0.0 0.0 Palestine 2.9 2 9 -1 6 1.6 2.4 2 4 -4 7 4.7 -0 7 0.7 -0 7 0.7 -0 7 0.7 WB Gaza 3.4 2.0 -18.2 3.3 1.7 1.7 1.7 3
Most sources of growth have been either stable or declining The largest decline has been in the fiscal deficit 1997 99 1997 ‐ 99 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 Capital 37.6 18.1 22.1 24.6 22.1 21.7 21.6 22.0 18.6 formation Machinery and d 12.8 5.4 5.9 6.3 6.0 6.3 5.3 5.4 4.7 Equipment 18.0 19.3 17.4 15.6 15.3 17.2 16.6 16.6 18.0 Exports Workers 15.5 10.9 11.2 11.4 12.1 12.0 10.0 10.2 11.2 Remittances Rec. Budget 0.0 24.5 20.1 22.3 13.9 12.2 12.9 12.5 11.9 deficit 4
Private sector investment in machinery and equipment has only averaged 5.1% of GDP annually i h l d 5 1% f GDP ll over 2012-14. After depreciation, net private investment is only 1% y Public development expenditures declined from 6% of GDP in 2007 to 2% of GDP in 2012-14 5
External budget support declined from 18% of GDP External budget support declined from 18% of GDP in 2009 to 8% of GDP annually in 2012-15. The recurrent fiscal deficit has been reduced from 22% of GDP in 2009 to12% of GDP in 2013-14, a major achievement in “fiscal consolidation” We have a 10 percentage points decline in both external budget support and in the recurrent budget deficit. A huge withdrawal of fiscal stimulus which g has reduced economic growth 6
30 25 20 percent 15 perce Budget deficit Budget Support udget Suppo t 10 5 0 7
Fiscal Fiscal Fiscal Deficit Fiscal Deficit Deficit and Deficit and and West and West West Bank est Bank Bank Real ank Real Real Growth eal Growth Growth in Growth in in percen in percen percent percent 25 20 20 15 cent ent Budget deficit Budget deficit Perc Per WB real 10 5 0 2008 2009 2010 2011 2012 2013 2014 8
In the context of Israeli economic restrictions, I h f I li i i i which undermined private sector investment in p productive capacity, the recurrent fiscal deficit was p y, good for Palestinian economic growth. But because budget deficit financing had to rely on private sector payment arrears, it damaged the d d h economy 9
Debt to commercial banks $ 1.2 billion. This may y be an upper limit, given that PNA debt and debt of its employees constitute 41% of banks portfolio. Borrowing from abroad is not advisable Domestic bonds would be too expensive Private sector payment arrears, $ 600 million Public debt: $ 4.8 billion or 38% of GDP (external $ 1 1 d $ 1.1; domestic $ 3.7) i $ 3 7) 10
During 2014 $ 280 million of private sector During 2014, $ 280 million of private sector arrears were repaid but new arrears of $ 740 million were accumulated Three major problems in using arrears to finance the budget It is forced credit on the private sector, taking away f d d h k funds which could be used for investment It is opaque inequitable and invites corruption It is opaque, inequitable and invites corruption It is used as residual financing which undermines the Budget and expenditure control 11
Palestinian private savings are high, $ 7 billion in deposits (60% of GDP) and banks are very liquid deposits (60% of GDP), and banks are very liquid. Yet, for lack of private sector demand for investment financing, due to Israeli restrictions on investment financing, due to Israeli restrictions on economic activity, 35% of Palestinian bank deposits are invested abroad. This is a withdrawal of liquidity from the income stream which also liquidity from the income stream which also reduces economic growth. At a time when we are in need of basic At a time when we are in need of basic infrastructure and an upgrading in private sector productive capacity, over one third of our savings i is invested abroad i t d b d 12
We have lost economic viability. Declining per capita income, higher unemployment and poverty i i hi h l d which may lead to political instability. We have lost fiscal sustainability Large financing We have lost fiscal sustainability. Large financing gaps, ($ 500 million estimated in 2015) but the private sector cannot continue to serve as a bank f for the government to finance this gap. h fi hi We need to reduce the recurrent deficit but at the same time we need to revive the economy same time we need to revive the economy How do we deal with this contradiction ? 13
We need to do four things: We need to do four things: Reduce the recurrent fiscal deficit to available legitimate financing legitimate financing Compensate this reduction by increasing public investment in infrastructure Reintegrate Gaza into the Palestinian economy Improve financial management and governance p g g 14
60 50 40 40 age of GDP centage o 30 Revenue rcen Expenditures p Per Pe 20 10 0 199619971998199920002001200220032004200520062007200820092010201120122013 Year Year Year Year 15
Recurrent public expenditures increased from 22% Rec rrent p blic e pendit res increased from 22% of GDP in 1997-99 to 45% of GDP in 2007. They were reduced to 34% of GDP by 2014, a major achievement. Revenues have declined from 23% of GDP in 97-99 t to 21% in 2014 21% i 2014 We have a structural deficit of 12% of GDP, and foreign budget support is only 8% of GDP In foreign budget support is only 8% of GDP. In addition, we have a small deficit in the development budget We have to take fiscal measures equivalent to 4 percentage points of GDP over two years to cover the unfinanced gap ($500 million) the unfinanced gap ($500 million) 16
Revenue: Reduce fuel tax refund (NIS 500 million in 2015) d f l f d ( ll ) Broaden the domestic income and VAT tax base Land registration g Expenditure: Limit yearly wage increase to 2% Reduce electricity subsidy (NIS 1 billion in 2014) Reduce PNA expenditures in Gaza ( NIS 5 billion or 34% of total public expenditures) p p ) Security costs of 8.7% of GDP are relatively high 17
Palestinian infrastructure and resource based Palestinian infrastructure and resource based projects should be given priority to jump start the economy and stimulate private investment. Gaza Marine Gaza desalination plant Electricity generation (Jenin) using natural gas Electricity generation (Jenin) using natural gas Water projects in the West Bank ($ 60 million) Bus transportation system between West Bank cities Upgrading agricultural production to compete with U di i l l d i i h imports (imports from Israel $ 450 million annually) 18
A look at the record : While there is a view that the PNA has passed the “threshold” for statehood, we are faced with 3 issues: The two state solutio wo state solution. This prospect is regressing, the occupation is more deeply entrenched A sustain A sustainable growth path ble growth path. Here, we have also regressed into negative per capita income Fiscal sust scal sustainabilit ainability. While progress has been made in y p g reducing the deficit, we still have unfinanced gaps and reliance on financing from private sector In the absence of significant progress in these areas, t e abse ce o s g ca t p og ess t ese a eas, the role of the PNA and the international community has been reduced to sustaining the occupation. 19
Clearly define a reform agenda and a set of y g priorities in public investment projects Agree with the international community on a financeable budget deficit target and adopt necessary measures Establish a stock of arrears and a repayment Establish a stock of arrears and a repa ment schedule Muster political will to achieve reconciliation with Muster political will to achieve reconciliation with Gaza 20
Agree with PNA on a budget deficit target and Agree with PNA on a budget deficit target and provide necessary budget financing Agree with PNA on a reform agenda and hold PNA g g accountable Press GoI to lift the siege from Gaza and facilitate implementation of public investment f Press GoI to implement public investment projects in the West Bank in the West Bank 21
Thank you 22
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