1. The Quartet has
stated that the Hamas movement must meet a number of basic
political conditions, and has connected Hamas’ response to levels
and forms of future donor assistance to the Palestinian Authority
(PA)1. The Government of Israel (GOI) has also indicated that it
is not prepared to conduct political relations with Hamas unless
it modifies its basic stance towards the State of Israel2.
2. In mid-March, the
Bank modeled the impacts of a possible combination of actions by
GOI and the donor community—see the Attachment. Readers are
referred to Scenario 4, which assumed for 2006 the following:
continued GOI withholding of Palestinian tax revenues collected
on the PA’s behalf;
border trade restrictions comparable to those enacted in 2005;
a 50 percent reduction in the average 2005 level of daily labor
flows into Israel from Gaza and the West Bank; and
a reduction in donor disbursements of US$200 million, or 15
percent, as compared with last year.
3. Even with these restrained assumptions, the economy would
experience a dramatic decline over the coming eight months: by
the end of 2006, average personal income would decrease by 30
percent in real terms, unemployment would increase from the
pre-election figure of c. 23 percent to about 40 percent, and
poverty levels would climb from 44 percent last year to 67
percent.
4. Based on evolving GOI and donor policies, these projections
now appear too rosy.
-
Palestinian revenues
continue to be withheld, though GOI has decided to use a portion
of them to reimburse Israeli public sector providers for
electricity, water and health referral services supplied to the
PA3;
-
Border trade
restrictions are proving more stifling than in 2005,
particularly in Gaza (where the border has been sealed to
imports and exports for over a half of the year to date)4;
-
Donor disbursements
could well prove lower than projected: the suspension of direct
transfers to the PA by OECD donors is being implemented more
rapidly than the Bank anticipated;
-
Commercial banks in
West Bank and Gaza have been reminded of their potential legal
liability under US anti-terror legislation, leading them to
withhold services to the PA; this is impeding the PA’s ability
to receive transfers of funds from abroad (in particular, from
Arab League donors), and to operate an internal payments
system5. Similar concerns have also led two major Israeli banks
to announce that they will sever their relationship with
Palestinian banks, and other Israeli banks are considering their
position6.
5. The Bank’s recent
projections will be revised in the forthcoming Economic
Monitoring Note #2 using updated macroeconomic data, and in
light of evolving developments. At the time of writing, though,
the key aggregates seem likely to decline by several additional
percentage points; this would make 2006, by a margin, the worst
year in the West Bank and Gaza’s dismal recent economic history.
6. The recession has already begun, with March and April’s
public sector salaries so far unpaid and with signs of food and
gasoline shortages manifesting in Gaza, the result of faltering
supply (due to persistent closure of the passages into Gaza)7.
In early April, the UN’s Office for the Coordination of
Humanitarian Affairs (OCHA) conveyed to Israel’s Ministry of
Foreign Affairs its concern at the early emergence of a
supply-induced humanitarian crisis8. GOI, which is calibrating
the flow of commodities into West Bank and Gaza, remains
confident said that the situation is under control, and believes
such claims to be exaggerated9.
To View the Full
Report as PDF
http://www.miftah.org/Doc/Reports/2006/PalestinianFiscalCrisisPotentialRemedies(2).pdf
Source: World
Bank
