At the end of the mission,
"Economic activity in 2013 has been weaker than expected and fiscal strains have continued. We estimate that real GDP rose by just 1 percent, reflecting the impact of uncertainty regarding the Israeli-Palestinian peace process and a sharp deterioration of economic conditions in
"The economic outlook for 2014 and beyond depends heavily on the outcome of the peace talks. Under the status quo, where peace talks are ongoing and their result is not yet known, we project growth of around 2 percent this year, and similar subpar growth performance over the medium term, with rising unemployment.
"A breakthrough in the peace talks could launch major donor initiatives, such as the Economic Initiative for Palestine, which could boost average annual real GDP growth to about 6 percent in 2014-19. On the other hand, failure of the peace negotiations could trigger a political and security crisis that would lead to accelerated arrears accumulation and economic contraction, especially if donors signal scaling back their support.
"The 2014 budget envisages modest further progress in fiscal consolidation but still leaves a sizable financing gap. Wage expenditure is budgeted to rise by nearly 5 percent. The budget envisages laudable reductions of untargeted fuel subsidies and rationalization of allowances, limits the rise in operating expenditures and transfers, and targets a reduction in net lending. Following recent practice, the wage bill is again based on zero net hiring. Domestic tax revenues are expected to increase by 6 percent, based on improvements in revenue administration.
"Given the projected financing gap and substantial fiscal risks, including with regard to the wage bill, it is imperative to contain the 2014 budget deficit beyond the level envisaged in the budget. If not, accumulation of arrears will continue, thereby hurting the private sector and undermining the credibility of the Palestinian Authority. We recommend containing the overall increase in the wage bill to 2 percent (the same as last year), accelerating the reduction of poorly targeted fuel subsidies, and means testing and rationalization of transfers for recipients outside the cash transfer program. There is also scope to increase revenue by raising tax compliance through better enforcement and scaling back tax incentives. We recommend leaving corporate income tax rates unchanged to avoid revenue losses when revenue enhancing administrative measures have yet to take hold. Tax holidays should be eliminated urgently to avoid large foregone revenues in the event of successful peace negotiations that lead to increased inflow of foreign investments.
"Structural reforms are critical to improve economic outcomes regardless of the results of the peace talks. If peace talks succeed, the Palestinian Authority would need to raise its implementation capacity through improved infrastructure and institutional reforms to optimize the economic impact of new financing and investment. The Economic Initiative for Palestine and other sources of support will present difficult economic management challenges, and cannot by themselves overcome persistent fiscal deficits and aid dependency. If peace talks do not succeed, the outlook could worsen and a new financing model--aimed at lower deficits and a change in the composition of spending in favor of development--would be urgently needed. In either case, support from the international community and broad-based and comprehensive easing of Israeli restrictions will be needed to underpin the Palestinian reform efforts."
For information on the work of the IMF in the
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