The West Bank-Gaza’s Bleary Blockades
Despite a blip in Palestine Stock Exchange interest mainly from Gulf investors exiting Egypt, the World Bank’s annual West Bank and Gaza donor report underscored the severity of “fiscal crisis” with a recurring $1 billion deficit only half plugged by aid and commercial bank borrowing. The double-digit growth pace from a low base will not repeat as Israel’s access and trade restrictions remain intact, and business and regulatory reforms languish especially around land registration. The Palestinian Authority’s wage bill rose 5 percent in 2011 on greater security force employment. Tax and customs revenue collection were below target, as cumulative domestic debt reached over $1 billion, “at the limit” of available supply. Capacity may be further constrained by proposals to impose capital gains and savings account levies alongside ongoing efforts to overhaul payer exemption and reporting practices. The public pension system is currently insolvent, and steps to eliminate arrears and introduce “parametric changes” were missing in recent years. The civil service takes half of regular spending, with salaries absorbing twice the MENA average as a fraction of national income. Reconciliation between the respective governing parties in the twin territories as outlined by their leaders could reduce overlap, but administrative structures are unwieldy despite data and information processing strides, the document comments. The combined West-Bank Gaza economy will increase 7 percent in 2012, with per-capita incomes around the end-1990s level. Gaza construction spurted after blockade easing with first assistance-related and then private-sector equipment let in, while the West Bank’s pillars are defense and government. Unemployment continues at 25 percent, and after the initial wave, few Israeli investment restrictions have been loosened. Border closures and limits on dual-use items with potential military application extending to telecommunications are external obstacles, but dated and inconsistent internal company and transactions laws are also market-unfriendly.
The monetary authority which is assuming central bank functions is moving to impose Basel II standards, and non-performing loans are under 5 percent of the total. The formal payments network is unable to transfer Israeli shekels into Hamas-controlled Gaza which “strengthens unregulated money changers,” in the paper’s view. Electricity, water and sanitation are critical unmet infrastructure needs demanding $500 million in funding. Energy disruption has begun to affect Israel as well with the damage to Egypt’s gas pipeline contributing to $4 billion in economic losses, according to the Finance Ministry. Bond yields have risen on tensions with Iran as foreigners have dumped short-term Makam holdings now subject to tax. With 2 percent inflation, benchmark rates have stayed the course with the shekel flat against the dollar. Projected GDP growth is 3 percent, but the OECD recently criticized high public debt and poverty ratios which restrict industrial and labor maneuver.
