The International Monetary Fund’s latest report to the Ad Hoc Liaison Committee of foreign aid donors on the state of the economy in the West Bank and Gaza, released on May 18, is revealing on many levels.
While the report duly notes that the PA’s economy is complicated to some degree by the Israeli occupation of the West Bank, it determines that there is nothing preventing the PA government from building viable national governing institutions based on strong tax revenue levels – in fact, that of “an average upper middle income country”, no less – provided it follows IMF fiscal recommendations it has thus far failed to heed.
As was widely reported, the report notes a massive shortfall in aid received by the PA and Gaza, apparently from Arab countries and particularly stark in comparison to what had been pledged for Gaza reconstruction – of the $3.5 billion promised for the reconstruction of Gaza only about 27% has been disbursed. It is a problem it vaguely attributes to the lack of Palestinian unity, “donor fatigue”, reprioritising of foreign aid in the face of other crises and the recent fall in oil prices, without weighing potential political reasons.
It does not blame the Israeli “blockade” – which many media reports seem to imply must be ultimately responsible.
It further shows that – over two decades since its creation – the PA has unwisely shunted a high percentage of its aid towards paying growing salaries and hiring in the public sector while at the same time failing to invest in development to move the economy towards self-sufficiency.
High recurrent government expenditure supported by donor aid has become the main driver for economic growth in the WBG [West Bank and Gaza], creating a situation of aid dependency. The PA has long been a large recipient of official donor aid. While official support grew over time, it became increasingly volatile and channeled to recurrent expenditure. Official donor aid peaked at 32 percent of GDP in 2006, when half of it went to development support. Since then, aid has declined to about 10 percent of GDP and development support has become severely squeezed. Over the same period, public recurrent expenditure increased in real terms by 9 percent, reflecting primarily increases in wage spending that have persistently outpaced inflation and growth in net lending. With private sector investments constrained by a short political horizon and Israeli restrictions, the economy of the WBG is increasingly reliant on the public sector, which in turn has become dependent on external support to finance its day-to-day operations.
It finds the PA’s tax collection system to be weak and inefficient, which is contributing to its budget deficits.
Until recently, little progress was achieved in revenue mobilization,
which contributed to an entrenching of aid dependency. Revenue declined in terms of GDP from 2005 to 2013 by 9 percent… A cross country comparison shows that government revenue in the WBG is lower compared to most of the countries in the MENA [Middle East and North Africa] region, and it is significantly lower than the average for the WBG’s peer countries in the lower-middle-income group.
Buried in the report, the IMF also identifies the PA’s biggest financial liability – the fact that it pays the salaries of thousands of Gazans while receiving none of the taxes there.
Domestic revenue from Gaza-tax and nontax-has not been received since 2006, when Hamas seized power in Gaza. At the same time, the PA spends a significant share of its budget on Gaza, including 40 percent of its wage bill (or 6 percent of GDP).
Alarmingly, the report sees up to a one-in-three chance that the turmoil around the Middle East will spill over into the Palestinian territories by 2018, or even if it doesn’t, that the problems in the region could rearrange aid priorities from donor countries, to the detriment of the PA.
Nature/Sources of Main Threats:
Heightened risk of fragmentation/state failure/security dislocation in the Middle East
Likelihood of Realization in the Next Three Years:
Medium/Short Term (10-30 percent)
Expected Impact on Economy If Risk is Realized:
Social and political unrest in the nearby region could spill over to the WBG and potentially divert donor money away from the WBG.
Economic policies can do little to mitigate these particular risks. At best, maintaining strong domestic policies could instill some element of confidence.
The IMF offered a variety of recommendations for the PA to improve the condition of its economy, which could be summarised in one sentence.
Over time, there is a need for a more sustainable financing model based on lower deficits, a pro-growth re-orientation of government spending, and sustained predictable donor aid.
To underscore its point, the IMF includes case studies of other troubled countries that had reduced their aid dependency and emerged with a robust economy by following these principles.
Elliott Abrams, the former top Bush Administration official in charge of Israeli-Palestinian issues, republished some of these recommendations and case studies on his blog about the IMF report that appeared at the website for the Council on Foreign Relations on May 20.
For Abrams, who was part of the Bush team that saw a peace agreement come tantalisingly close after Israeli Prime Minister Ehud Olmert presented a peace offer to Palestinian President Mahmoud Abbas in 2008 (an offer that Abbas unfortunately never responded to), the IMF report was a reminder that Palestinian statehood is not something that can be actualised through speeches or UN resolutions. Rather, it requires the Palestinians to build the foundations of statehood – focus on fiscal responsibility, take charge of their own affairs and build an economy and viable state institutions ahead of time.
The IMF report shows that much could be done, even within current constraints, to improve the Palestinian economy. It’s undramatic, the details are boring, and some of the analyses are technical. No prizes, no time on the evening news. But that is how Palestinian institutions will be built, and how the institutions of a state must come into existence-not at the State Department and not at the United Nations.
The IMF report is a reminder that speeches, great conferences, and dramatic donor pledges (that are never met) do not benefit the Palestinians. And of course efforts to hurt the Israeli economy through boycotts will not help but will actually harm the Palestinians as well. It is long past time to take a more serious approach, and the IMF’s report shows some ways this could be done if the genuine goal is progress rather than taking credit and casting blame.
Abrams’ point about boycotts is well taken – as Palestinian journalist Khaled Abu Toameh noted in an article from 2013 about Palestinian intimidation of West Bank businessmen who do business with Israel:
The campaign of intimidation against Palestinian businessmen will not only foil Kerry’s plan to boost the Palestinian economy, but also scare away potential investors from launching badly needed projects in the West Bank.
The campaign has already resulted in the cancellation of scheduled meetings between Palestinian and Israeli businessmen. Once again, the biggest losers are the Palestinians.
Those who are threatening businessmen do not want to see economic prosperity in the Palestinian territories. Instead, they want Palestinians to continue living in misery and frustration in order to keep alive the fight against Israel.
Meanwhile, as I reported in March 2014 in reference to the Palestinian and pro-Palestinian NGO consortium EWASH’s resistance to building a desalination plant for Gaza:
The top two reasons EWASH offers for opposing desalination is that it would make the “occupation” appear too benevolent and at the same time make Gaza self-sufficient!
The larger point being that there appears to be an internal struggle within Palestinian society between those who believe in building a stronger, more prosperous Palestinian Authority and those who believe the opposite – that any effort to improve the Palestinian economy would make “the occupation” look too pleasant and undermine unilateral international pressure on Israel to withdraw unconditionally and without requiring the Palestinians to make concessions.
This internal struggle, it seems, is almost entirely taking place in the West Bank. Gaza’s Hamas, which took control in a coup and is not recognised as legitimate, has always taken a very cynical view towards the Gaza economy. During the years that Egypt turned a blind eye to smuggling, Hamas made a windfall from running such tunnels and taxing the cheap Egyptian-sourced goods and commodities that came through them.
Since Egypt changed its policy and closed those tunnels, however, Hamas seems to have abandoned the idea of building Gaza’s economy in any meaningful way, and seems prepared to perpetuate the misery and blame it all on Israel as a means of getting what it really wants, which is international pressure on Israel to end its limited blockade of the territory and thus get unfettered access to weapon imports.
Unfortunately, this very real undercurrent in Palestinian political strategy has been entirely ignored by the IMF – an omission that undermines some of the report’s assumptions and conclusions.