Supporting Palestinian reform efforts to achieve fiscal sustainability and improve public financial management

Report
from World Bank
Published on 24 May 2013 View Original

With the World Bank’s support through the Development Policy Grant (DPG) Program III, the Ministry of Finance (MoF) was able to expand property tax collection from 22 municipalities in 2008 to 37 in 2010. The Ministry of Social Affairs (MoSA) social safety net program recertified over 60,000 households in the West Bank and 31,000 households in the Gaza Strip.

Challenge

For over a decade, the West Bank and Gaza (WB&G) has suffered episodes of violence and the destruction of property. The unstable security situation has led the Government of Israel (GoI) to impose restrictions on the movement of people and goods into, out of, between and within the West Bank and Gaza Strip. This, along with the unpredictable and frequent closure of external and internal borders, has caused major disruptions to economic activity. As a result, incomes fell and poverty rates and unemployment soared, with negative implications for the welfare of the Palestinian people during much of the last decade. The Palestinian Authority (PA) government has relied heavily on international donor support to finance its operations, develop government institutions, and ensure the delivery of public services. The 2006 election of a Hamas-led government caused most donors to withdraw direct PA support: the result was a blow to economic recovery and institution building. In mid-2007, a caretaker government was established, enabling the PA to rebuild basic operating systems that had deteriorated and create and strengthen the institutions necessary for a future Palestinian state.

Solution

Through a series of internal and external consultations with stakeholders, civil society groups and international donors, the authorities developed a 3-year Palestinian Reform and Development Plan (PRDP). The plan focuses on strengthening the PA’s fiscal position and improving governance and accountability, while targeting spending to social sectors and priority public goods that foster private sector development. The plan can only be fully implemented in the West Bank, where the new government is in full control. However, it is designed to be expanded to Gaza as soon as the situation permits.

The grant program provided support to the PA’s implementation of the Palestinian Reform and Development Plan with specific focus on strengthening the PA’s fiscal position through improved spending controls on the public sector wage bill, reductions in net lending through the transfer of electricity supply and distribution to commercial companies, better targeting of the social safety net to protect the most vulnerable populations, improved domestic revenue collection, and increasing government transparency and accountability and improving public financial management.

Results

The World Bank’s assistance has focused on mutually reinforcing goals:

Strengthen the PA’s fiscal position
•Under the DPG III, the PA had better success in meeting its targets to reduce the public sector wage, which accounted for only 19.9 percent of gross domestic product (GDP) in 2010, well below the targeted 23 percent.
•As of September 2011, 31 percent of electricity customers in Northern West Bank have been transferred to commercial services. With Bank support, the PA streamlined the programs into a cohesive and efficient social safety net program administered by the Ministry of Social Affairs (MoSA), which successfully recertified over 60,000 households (approximately 360,000 individuals) in the West Bank and 31,000 households (approximately 186,000 individuals) in the Gaza Strip, surpassing the targets identified.
•The Ministry of Finance (MoF) continued to improve local revenue collection, expanding property tax collection from 22 municipalities in 2008 to 37 in 2010, and an anticipated 50 municipalities by end-2011.

Increase government transparency and accountability through improved public financial management (PFM)
•The PA has established upgraded budget systems and successfully mapped the budget classifications to international classification standards.
•All line ministries are connected to the new computerized financial management system (a prior action for the DPG III), and the new budget module developed for the computerized accounting system was used to prepare the 2011 budget.
•The PA has continued to build on previous efforts to introduce and comply with international auditing standards. The audit of the 2009 accounts was completed in early October 2011, and the MoF submitted the draft 2010 financial statements for audit in mid-September 2011, consistent with the planned actions and medium-term objectives.

Bank Group Contribution

Total cost of the project was US$40 million, which was provided through the International Bank for Reconstruction and Development (IBRD)-administered Palestinian Reform and Development Plan Multi-Donor Trust Fund. Australia, Canada, Finland, France, Kuwait, Norway, Poland and the United Kingdom have contributed to this trust fund. Under this trust fund, the World Bank, in consultation with the International Monetary Fund (IMF), assesses reform progress on the basis of PA-provided progress reports, and these feed into trust fund disbursement decisions. These assessments are communicated to the donor community, providing a signal for harnessing additional support for the trust fund. This monitoring mechanism will continue over the life of the trust fund.

Partners

The project benefitted from effective leveraging of other projects, assisting in reinforcing reforms and institution- and capacity-building activities undertaken by the PA. For example, the European Union (EU) for capacity building in the state auditing office (SAACB), and the UK Department for International Development (DFID) assisted with the budget reforms being implemented at the MoF and line ministries. With respect to property tax reforms, the DPG III support complemented technical assistance from bilateral and multilateral donors, specifically the Japan International Cooperation Agency (JICA), the United Nations Development Programme (UNDP) and the Government of Denmark.

Moving Forward

In response to a request from the government for further support in its efforts to implement the PRDP, the Bank has prepared a follow-up operation, the DPG IV. Similar to its predecessors, the DPG IV will focus on (i) strengthening the PA’s fiscal position and consolidating recent gains, and (ii) improving public financial management. The monitoring mechanisms currently in place will be retained to facilitate the new operation’s effectiveness in supporting the PA’s reform program.

Beneficiaries

Through the updated proxy means test, over 100,000 households (approximately 600,000 individuals) in the West Bank and 50,000 households (approximately 300,000 individuals) in Gaza were verified to assess eligibility for the Palestinian National Cash Transfer Program. This effort included the identification of 19,000 newly eligible households in Gaza, implying a greatly expanded reach of MoSA assistance.

The public financial management reforms have helped the PA carry out its functions in a more transparent and accountable way, allowing for more efficient use of public and donor resources. Upgrading the budget preparation processes has strengthened capacity within the MoF as well as the institutional links between the MoF and line ministries, and, when fully implemented, will introduce a greater degree of transparency.