Fiscal Challenges and Long Term Economic Costs
Palestinian Economy is Losing Long-Term Competitiveness
JERUSALEM, March 12, 2013 – The World Bank’s latest Economic Monitoring Report stresses that while the donor community’s efforts are directed towards short-term relief for Palestinian fiscal stress, it is important to recognize that the prolonged system of closures and restrictions is causing lasting damage to the competitiveness of the Palestinian economy.
The report entitled Fiscal Challenges and Long Term Economic Costs was released today ahead of the Ad Hoc Liaison Committee (AHLC) meeting, a forum of donors to the Palestinian Authority (PA), which will meet in Brussels on March 19. The report analyzes the state of the Palestinian economy and the PA’s fiscal position.
The Bank’s analysis of the prospects for an economically viable Palestinian State in the near future remains largely unchanged: Palestinian institutions have the required capacity to exercise state functions, but Israeli-imposed economic restrictions continue to constrain sustainable economic growth. This situation is unlikely to change as long as political progress remains absent.
This latest report, however, offers new analysis by exploring the long-term damage to the competitiveness of the Palestinian economy wrought by the worsening fiscal situation and the absence of political progress.
The economy is in danger of losing its capacity to compete in the global market, according to the report. It shows that the structure of the economy has deteriorated since the late 90’s as the value-added of the tradable sectors has declined, illustrated by the productivity of the agriculture sector having roughly halved and the manufacturing sector having largely stagnated.
The share of exports in the Palestinian economy has also been in steady decline since 1994, dropping to 7 percent in 2011, one of the lowest in the world. Moreover, Palestinian exports are concentrated in low value-added goods and services, the majority of which is exported to Israel.
Of equal importance to the long-term viability of the economy, the quality of infrastructure in key sectors like water and transport is deteriorating and damaging economic productivity. This negative impact is most severe in Gaza where significant resources are required to bring the level of infrastructure performance to a desirable level.
The labor force, too, could lose long-term employability, say the report’s authors. With low labor force participation and high rates and duration of unemployment, many Palestinians of working age do not have the opportunity to develop on-the-job skills. Increased employment in the public sector has provided some short-term relief, but this is unsustainable and does little to prepare employees for future private sector jobs.
“Continued financial support by the donor community, and increased reform efforts by the Palestinian Authority to manage the current fiscal challenges must remain a high priority,” said Mariam Sherman, World Bank Country Director for the West Bank and Gaza. “However, much bolder efforts to create the basis for a viable economy need to be made to prevent the continued deterioration that will have lasting and costly implications for economic competiveness and social cohesion.”
To download the full report, please visit: www.worldbank.org/we
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