Macroeconomic and Fiscal Framework for the West Bank and Gaza – First Review of Progress

International Monetary Fund PRDP Review - May 2, 2008 - Back to Resources Page [1]

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The Palestinian Authority (PA) is implementing prudent fiscal policies and reforms, in the
context of an ambitious budget for 2008. A strict government employment policy has been
followed and utility subsidies are being reduced. The Public Financial Management System
(PFMS) has also been strengthened, which will help control nonwage spending. The 2008
budget builds on this progress, and targets a reduction of the recurrent deficit from 27 percent
of GDP in 2007 to 22 percent of GDP in 2008, in particular through: (i) a freeze on wage rates
and on new employment (except for health and education); (ii) enforcement of measures to
increase utility payments by households and municipalities; and (iii) improvement in cash
management and spending commitment controls to help prioritize and raise the quality of
spending, and minimize arrears accumulation. The staff considers that the reforms undertaken
so far, and the 2008 budget, represent a significant stride toward fiscal sustainability.

Donor assistance pledged for the recurrent budget falls short of the Palestinian Reform
and Development Plan (PRDP)’s needs. The total amount pledged at the December 2007
Paris donors’ conference for 2008–10, at $7.7 billion, is significantly above the PRDP’s
requirements. However, pledges allocated for the recurrent budget are below those needed to
finance the projected deficits. For 2008, the amounts disbursed or confirmed are adequate to
cover recurrent financing needs for the first half of the year. However, without additional
assistance, a shortfall of NIS 1.4 billion ($0.4 billion) is projected in the second half of 2008.
Adequate and timely disbursements from donors, and close coordination with the PA, are
essential to prevent liquidity problems and expenditure arrears.

Israel has tightened restrictions on movement and access based on security concerns,
and settlements in the West Bank have expanded, with attendant risks to economic
growth and reforms. Social and political pressures against austerity measures have recently
increased, conveyed through protests and strikes by trade unions. These pressures could grow
if household incomes and employment opportunities remain constrained, posing significant
risks to fiscal adjustment.

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International Monetary Fund PRDP Review - May 2, 2008 - Back to Resources Page [1]