The World Bank is releasing a report entitled “Fifteen Months – Intifada, Closures and Palestinian Economic Crisis” (the Assessment), which surveys the economic impact of the current crisis and proposes a strategy for managing the Palestinian economy in 2002.

Mainly as a result of the heavy restrictions on the movement of labor and goods in the West Bank and Gaza (the ‘closures’), the Palestinian economy is in severe recession. Unemployment has tripled, to almost one -third of the workforce. Real incomes have fallen by almost 30 percent, and are now lower than they were in the late 1980s. The proportion of the poor (those consuming less than US$2 per day) has doubled, to almost a half of the population of the West Bank and Gaza. Tremendous damage has also been done to the international donor effort to help bring peace to the Palestinian and Israeli peoples.

As the report shows, however, this tragedy has not extinguished the donor community’s belief in the possibility of peace, and donor financial support has virtually doubled during the intifada. Over US$900 million was disbursed by donors in 2001.

“The economic crisis is not irreversible. If the closures are lifted, the Palestinian economy will recover” said Nigel Roberts, Director of the World Bank in the West Bank and Gaza. “If closures persist or intensify, the economy will eventually unravel. Public services will break down. Unemployment and poverty rates will continue to climb. Helplessness, deprivation and hatred will increase, and this unique chance for reconciliation will pass.”

The report also promotes the need for a well-designed Palestinian reform agenda that ensures public accountability and transparency, and offers a solid legal environment for private investment. The donor community is encouraged to seek a balance in 2002 between short-term crisis support and a continued focus on the policies, institutions and infrastructure essential to sustained economic growth and to the creation of a viable Palestinian state.

Since the beginning of the intifada, donors were heavily involved in providing emergency assistance to the Palestinian Authority (PA) and the Palestinian people. By mid-2001, however, many donors felt they needed a better sense of the economic impact of the crisis, and a sense of the priorities they should address in 2002.

Working on behalf of the donor community, the World Bank prepared this report with technical support from UNSCO and finance from the Government of Norway.

The report is divided into 4 main sections:

The first section describes the nature and extent of Israel’s policy of closure (internal closure within WBG, closure of the borders between Israel and WBG, and closure of international crossings between WBG and neighboring Jordan and Egypt) — and its impact on economic activity. It is clear that the main proximate cause of the Palestinian economic crisis is closure, the impact of which far exceeds that of armed confrontation and associated physical destruction.

The second section quantifies the impact of closure and confrontation on employment, trade, investment and productive capacity in the public and private sectors, and on the living standards of the Palestinian population. This section depicts an economy in severe recession. The share of the Palestinian population living below the poverty line is estimated at almost 50 percent, double what it was in late 2000, while the unemployment rate has tripled to nearly 30 percent of the labor force. Physical damage from the conflict by the end of December 2001 is estimated at US$305 million, while Gross National Income losses amounted to at least US$2.4 billion in real terms.

The PA is effectively bankrupt, since tax revenues have dwindled to one fifth of previous levels. Monthly budget needs under the “austerity budget” promulgated in March 2001 total US$90 million, but revenue collected by the PA now amounts to less than US$20 million per month. The report describes three types of pressure on PA finances arising from the crisis: the sharp drop in PA revenue collections associated with the decline in economic activity and disruption of tax administration; the suspension since December 2000 by Israel of the transfer of the revenues collected on the PA’s behalf (over US$500 million at that time); and an increase in the need for emergency expenditures, particularly in health.

The third section highlights the way in which households and institutions have been coping with the crisis. The report finds four main reasons to explain the resilience of the beleaguered Palestinian economy: first, the PA has managed the crisis well, particularly the budget, the delivery of basic services and physical rehabilitation efforts. Second, after a virtual cessation of work in Israel in the first weeks of the intifada, an average of 50,000 workers from the West Bank have managed to find work again in Israel and the settlements. Third, households have reduced their expenditures and drawn down their savings, and informal self-help and sharing systems have redistributed the economic pain. And fourth, the donors (often working through NGOs) have injected timely and generous emergency assistance. Despite the difficulties of working in conflict, donor disbursements rose by 93 percent in 2001 when compared with 1999 (to almost $930 million). Over 80 percent of this was devoted to budget support and emergency relief. This unprecedented quantity of budget support has helped sustain a minimum level of market demand and has prevented the disintegration of government structures. Donor contributions to UNRWA have also been key, and numerous small-scale job creation programs for the newly unemployed have been put in place. Without the intervention of the donors, and in particular the Arab League and European Union states, all semblance of a modern economy would have disappeared by now. Even so, the surge in assistance came with a price – disbursements on growth-oriented infrastructure and capacity building projects dropped from over US$400 million in 1999 to US$175 million in 2001, and many large projects have been seriously delayed or damaged. In effect, long-term investment has been sacrificed to short-term survival.

The report, however, stresses that the present situation is unsustainable. Households have in many cases exhausted their savings and capacity to borrow. Emergency employment schemes, for all their merits, have not made a significant dent on unemployment. The fiscal situation continues to deteriorate, and donor contributions have not closed the budget deficit. Up to now the PA has managed this deficit by borrowing from commercial banks, cutting salaries, squeezing operating costs and delaying the payment of bills – but all of these strategies are reaching their limit. By the end of 2001, the PA’s arrears amounted to US$430 million, most of these to Palestinian commercial suppliers (in turn placing significant pressure on Palestinian commercial banks). Poverty is deepening, particularly in isolated communities. Serious health and environment problems are emerging.

The final section identifies the actions that need to be played by Israel, the PA and the donors to reverse this economic decline.

It is axiomatic from the Bank’s analysis that any significant recovery of the Palestinian economy requires that the Government of Israel dismantle the present system of internal checkpoints and border restrictions on goods and workers. In addition, withheld tax revenues need to be released to the PA, and regular revenue clearances resumed.

It is recommended that the Donors’ program of emergency support, scheduled for 2002, have seven basic priorities:
1. Budget support to the PA and the municipalities;
2. Targeted assistance to social service delivery institutions;
3. Emergency support for the private sector;
4. Enhanced efforts to support the unemployed and the poor, through cash payment and job
creation schemes;
5. The reconstruction of damaged infrastructure and rehabilitation of degraded agricultural land;
6. Loans to university students who have lost the means to pay for their education;
7. Support to UNRWA’s emergency programs for refugees.

Total donor financing needed in 2002 would vary according to the political scenario projected. Should the peace process resume and closure be lifted, total needs would amount to about US$1.1 billion. A continuation of the current status quo would require around US$1.5 billion from donors, and a significant further tightening of closure would increase total emergency needs to around US$1.7 billion.

Donors should also re-dedicate themselves to the medium-term development agenda, despite the difficulties of working under present conditions. In this connection, the report lists the main characteristics of projects which have proven particularly effective during the intifada.

The report recommends that the Palestinian Authority should maintain strong budget discipline in 2002 and make adequate provision for essential operating costs, and should develop a unified Emergency Plan for 2002 with the full participation of civil society. This will help focus Palestinian energies on immediate economic survival and subsequent recovery. The PA has described in this report its intention to implement the medium-term agenda in suspense since September 2000. This agenda has two main planks – the promotion of transparency and accountability in the public sector, and the creation of a supportive environment for private sector development. The report lists the different actions the PA now proposes to undertake. These include the transparent management of all sources of public revenue, the maintenance of a public sector hiring freeze, the application of clear public procurement standards and guidelines, the development of a unified pension system covering all public employees and the creation of a legal environment conducive to investment and open competition.

For more information on the World Bank’s work in West Bank and Gaza and to access the full report, please visit http://www.worldbank.org/we

Contact Person:

In West Bank: Ma’moon Sbeih +972 (2) 236-6500, e-mail: msbeih@worldbank.org
In Washington: Sereen Juma +1 (202) 473-7199, e-mail: sjuma@worldbank.org

To download report: Fifteen Months – Intifada, Closures and Palestinian Economic Crisis