The World Bank said in a report today that despite some signs of recovery, the Palestinian economy has not yet rebounded to its pre-pandemic level.

The ongoing restrictions on movement and access, the long-term effects of fiscal distress, combined with a rapid increase in prices, it said, are contributing to a slower economic recovery, with growth projected to reach 3.5% in 2022, down from 7.1% in 2021.  

“The war in Ukraine has exacerbated already elevated price pressures in the Palestinian territories. Combined with the negative effects induced by COVID-19, price shocks have directly affected the supply of basic food commodities, undermining the welfare of Palestinian households, particularly the poorest and most vulnerable,” said Ferid Belhaj, World Bank Vice President for the Middle East and North Africa.

“We are encouraged by the PA’s progress in its reform agenda, and concerted positive efforts… are still needed to create fiscal space for vital social assistance and economic development.”

The report pointed out that rapid inflation has driven further up food and fuel prices, which account for a higher proportion of expenses in poor households. The West Bank and Gaza is the second highest importer of food in the region, with a substantial proportion of wheat flour and sunflower oil imports coming from Ukraine and Russia.  

“The Palestinian economy continues to face enormous challenges that may affect its long-term macroeconomic stability. The compounded effects of the COVID-19 pandemic and the Ukraine war, clashes in the West Bank and recurring conflicts in Gaza, on top of the fiscal stress amplify the destabilization risks. Adding to that, donor aid remains insufficient to close the financing gap which may reach 3.3% of GDP in 2022, reducing the PA’s ability to meet its recurrent commitments,” said Stefan Emblad, World Bank Country Director for West Bank and Gaza.

According to the report, “the Palestinian Authority’s (PA) fiscal deficit declined by 70 percent in the first half of 2022 compared to the same period in 2021. This was due to strong revenue growth and maintained spending as increases in certain expenditure items were offset by a strong decline in spending on the National Cash Transfer program, at a large social cost.”

“Close cooperation between the Palestinian Authority, the Israeli government, and the international community will be vital to reorient the economy toward long-term sustainability, significantly boost the PA’s revenues and support Palestinian households to cope with the rising prices,” said Emblad

The World Bank said Palestinian reforms are needed on both the revenue and expenditure sides for a more sustainable fiscal position, adding, “Spending reforms should target the wage bill, the public pension system, and the untargeted transfers. Better management of health referrals and unplanned subsidies to Local Government Units are also key priorities.”

The report suggest that a stable and predictable continuation of donor assistance to the PA through budget support operations will be critical as it carries on with its reform agenda.

“The PA continues to make progress in improving the public financial management (PFM) and it has also recently strengthened the Palestinian Anti-Money Laundering and Combating Financing of Terrorism (AML/CTF) framework. Building on these efforts will be an important aspect of the partnership with the donor community. The PA and the international community should work together to review the most effective form of direct assistance to the poorest and most vulnerable, including reviving the National Cash Transfer Program,” said the report.

The report pointed out that the PA’s reforms are necessary but not sufficient to put the Palestinian territories on a sustainable development path, and that granting Palestinian businesses access to Area C could boost the Palestinian economy by a third and increase revenues by 6% of GDP.