Last updated: 17 March, 2012

IMF: More aid needed to avoid Palestinian cuts

The International Monetary Fund urged donor countries Saturday to honor their promises to the Palestinian Authority, whose economy is entering a “difficult phase” and could further deteriorate.

The Palestinian economy is experiencing a serious drop in liquid assets that has worsened since last year due to a reduction in aid from Western and Gulf countries, as well as trade and movement restrictions imposed by Israel, an IMF report said.

The report, prepared for a meeting of donor countries in Brussels next week, estimated a financing gap of about $500 million.

It said only $800 million of donor aid was disbursed to finance the 2011 recurrent budget, compared to $1 billion anticipated. And development budgetary aid stood at just $169 million, compared to a budgeted $500 million.

“These shortfalls, in addition to lower-than-expected tax revenue in the context of a slowdown in economic growth, led to the accumulation of $0.5 billion in domestic payment arrears to the private sector and to the public pension fund,” the report said.

It pointed to an increase in domestic bank borrowing by some $140 million, which raised government debt to the banking system to $1.1 billion, or 11 percent of GDP.

And while the 2012 draft budget plans to reduce the recurrent deficit by three percentage points of GDP, “there remains a substantial financing gap, projected at $0.5 billion,” the IMF warned.

“There is little scope to cover that gap through further arrears accumulation to the private sector or borrowing from commercial banks, given the existing large stock of debt to businesses and banks.”

It said there was a “high risk” that the gap would trigger cuts in wages, social transfers and other essential spending. The IMF called for “concerted efforts” from the Palestinian Authority, the Israeli government and donor countries to bridge the financing gap.

“It will be very difficult for the PA to cover the 2012 financing gap through austerity alone, without the prompt pledging and disbursement of additional aid,” the report added.