1WBGEA2022002

WEST BANK AND GAZA
REPORT TO THE AD HOC LIAISON COMMITTEE1

September 13, 2022
KEY ISSUES
The Palestinian economy is facing formidable challenges. The fiscal situation, high
political, security and social tensions, rising inflation, movement and access restrictions
and an unfinished structural agenda all weigh on the medium-term outlook. Under
unchanged policies, debt is unsustainable and per capita GDP is projected to decline.
The situation is particularly dire in Gaza with persistently high unemployment and
poverty.
Overcoming these challenges will require transformational reform with efforts

required from the Palestinian Authority (PA), Israel, and the donor community. A
comprehensive and joint effort would strengthen macroeconomic stability and pave the
way for faster economic growth, job creation and poverty alleviation.
This IMF report focuses on fiscal reform policies and banking sector issues.
Following our May 2022 Report that laid out the broad contours of a reform scenario,
this report discusses fiscal reform options in more depth. It also focuses on
correspondent banking relations and the issue of excess cash in Palestinian banks.
Key recommendations
• Improve the quality of spending by implementing ambitious reforms centered on
the wage bill and net lending, and raise domestic tax revenue via base broadening.
• Seek understandings with the Government of Israel to resolve fiscal files and reduce
impediments to the movement of goods and people and on investment, including in
Area C.
• Implement additional reforms to improve the business environment and tackle
structural impediments to growth.
• Intensify oversight of banks, continue to push for alternative arrangements to
replace current shekel correspondent banking relations, and advance digital
payments to reduce excess physical shekel cash.
1 The IMF provides technical services to the West Bank and Gaza, including policy advice in the macroeconomic,
fiscal, and financial areas, as well as technical assistance, with a focus on tax administration, public financial
management, public expenditure management, banking supervision and regulation, and statistics. See
www.imf.org/wbg for previous AHLC reports and Annex III for a list of TA provided.
WEST BANK AND GAZA
Approved By In person discussions were held during August 16–28, 2022 in Ramallah
and Jerusalem. The team comprised Messrs. Tieman (head) and
Subir Lall (MCD) and
Ioannou, and Ms. Coulibaly (all MCD), Mr. Laursen, Ms. Qassis, and
Eugenio Cerutti (SPR)
Mr. Ajamieh (Resident Representative office). Ms. Ma provided
research assistance and Ms. Pineda assisted with the preparation of
the report. The mission met with Prime Minister Mohammad Shtayyeh,
Finance Minister Shukry Bishara, Palestine Monetary Authority Governor
Feras Milhem, Minister of National Economy Khalid Al-Esseily, PCBS
President Ola Awad, and other members of the Palestinian economic
team, as well as Israeli officials and representatives of the Palestinian
private sector, donors, and international organizations.
CONTENTS
RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK _______________________________________ 4

A. The Palestinian Economy Continues to Recover… ___________________________________________ 4
B. …But the Fiscal Situation Remains Difficult…_________________________________________________ 7
C. …While the Banking Sector Has Generally Been Stable… ____________________________________ 9
D. …And Significant Risks Are Ever Present ____________________________________________________ 11
A NEED FOR REFORM _________________________________________________________________________ 12

A. Fiscal Reform _______________________________________________________________________________ 12
B. Financial Sector Issues ______________________________________________________________________ 20
C. Structural Reform___________________________________________________________________________ 22
STAFF APPRAISAL _____________________________________________________________________________ 23
BOXES
1. Revenue Strategy 2022–25 _________________________________________________________________ 17
2. Excess Cash_________________________________________________________________________________ 21
FIGURES
1. Recent Economic Developments, 2011–22 __________________________________________________ 5
2. High Frequency Indicators, 2016–22 _________________________________________________________ 6
3. Fiscal Sector Indicators, 2016–21 ____________________________________________________________ 8
4. Financial Sector Developments, 2015–22 ___________________________________________________ 10
TABLES
1. Selected Economic Indicators, 2019–27 ____________________________________________________ 24
2a. Central Government Fiscal Operations, 2019–27 (In percent of GDP) _______________________ 25
2b. Central Government Fiscal Operations, 2019–27 (In millions of U.S. dollars) ________________ 26
2c. Central Government Fiscal Operations, 2019–27 (In billions of shekels) ____________________ 27
3. Financial Soundness Indicators, 2017–22 ___________________________________________________ 28
2 INTERNATIONAL MONETARY FUND

WEST BANK AND GAZA
ANNEXES
I. Risk Assessment Matrix _________________________________________________________________________ 29
II. Debt Sustainability Analysis ____________________________________________________________________ 31
III. IMF Technical Assistance to the Palestinian Authority, 2017–22 ________________________________ 38
INTERNATIONAL MONETARY FUND 3

WEST BANK AND GAZA
RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK

A. The Palestinian Economy Continues to Recover…
1. The economy experienced a strong rebound from the COVID-19 pandemic in 2021,
but unemployment edged up and remains very high, in Gaza in particular. After a sharp
recession in 2020, real GDP grew by 7.1 percent in 2021 as COVID vaccinations took off and
COVID-related movement restrictions were eased (Figure 1). Private consumption contributed
5½ percentage points to growth, helped in part by higher employment of Palestinian workers in Israel
and the settlements. Growth in Gaza, however, was just 3.4 percent as reconstruction efforts following
the May 2021 conflict advanced only slowly. Even as employment grew by 8 percent during the year,
the unemployment rate increased to 26.4 percent in 2021, as the easing of lockdowns drew
discouraged workers back into the labor market. The unemployment rate in Gaza remained
stubbornly high at over 45 percent, reflecting restrictions on movement of people and goods, and is
closely associated with high prevalence of poverty.2
2. High frequency indicators point to a modest slowdown of the economic recovery in the
first half of 2022, while inflation is rising. Industrial production trended downward in late 2021 and
early 2022 before recovering in recent months, while business confidence in the West Bank has been
on an overall declining trend, even preceding the Russian invasion of Ukraine (Figure 2). After
registering modest deflation in 2020, average inflation rose to 1.2 percent in 2021 supported by
strong demand and higher prices of Palestinian imports from Israel. Inflation increased in early 2022
to reach 3.9 percent y-o-y in July due to supply chain constraints and higher fuel and food prices, in
part related to Russia’s war in Ukraine.
3. The economy’s current account deficit remains elevated mainly due to structural
factors. Imports make up almost 57 percent of GDP, more than three times the size of exports.
Both exports and imports rebounded strongly in 2021 in real terms, but the trade balance worsened
despite modest gains in the terms of trade. The real exchange rate appreciated by more than
10 percent. 3 Despite the deterioration of the trade balance, the external current account deficit
decreased to 8.2 percent of GDP in 2021 reflecting higher net income inflows, mainly from Palestinian
workers in Israel and the settlements, and increased transfers to non-governmental sectors. Still, the
external current account deficit remains very high and mainly reflects structural factors, including lack
of access to productive resources (e.g., economic activity in Area C, access to land and water for
agriculture) and restrictions on the movement of goods, which hinders production and access to
international markets.
4. Meanwhile, the political and security context continues to be fragile. Tensions around
the Al Aqsa mosque and Israeli settlements, evictions and demolitions in East Jerusalem and the
2 In 2021, poverty stood at 61 and 13 percent in Gaza and the West Bank respectively, using the national poverty line
(World Bank, 2022).

3 No external sector assessment was undertaken.

WEST BANK AND GAZA
West Bank and the stalemate in the Gaza Strip are constant sources of pressure that could erupt
with little warning, as demonstrated by the three-day hostilities between Israel and Gaza in early
August. The difficult social and economic conditions of Palestinians is made worse by rising food
prices and partial payment of public sector salaries. Elections for the Palestinian Legislative Council
(the parliament) and president remain indefinitely postponed, while local elections in most West
Bank municipalities in December 2021 and March 2022 have led to considerable gains for
independent candidates. Meanwhile, the Israeli coalition government agreed to cautious economic
confidence building measures in lieu of peace talks, but has now collapsed and new elections are
scheduled for November.
Figure 1. West Bank and Gaza: Recent Economic Developments, 2011–22

The Palestinian economy recovered strongly in 2021... ... driven by consumption and investment.
Real GDP Growth Contribution to Real GDP Growth

(In percent) (In percent)
15 20
10
5 10
0
0
-5
-10 Net exports of goods and services

-10
Gross fixed capital formation
-15 West Bank and Gaza West Bank Changes in inventories
Gaza Final consumption
-20 -20
2011 2013 2015 2017 2019 2021 2011 2013 2015 2017 2019 2021
Inflation was modest in 2021 but picked up in 2022H1. Unemployment remained stubbornly high,
particularly in Gaza.
Inflation
Unemployment rate
(Y-o-y percent change)
(In percent)
6 60
4 50
2 40
0 30
-2 20
-4 10 West Bank and Gaza West Bank

Israel West Bank
Gaza
West Bank and Gaza Gaza
-6 0
2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022
Sources: Palestine Central Bureau of Statistics (PCBS); Haver Analytics; and IMF staff estimates.

WEST BANK AND GAZA
Figure 2. West Bank and Gaza: High Frequency Indicators, 2015–22
Industrial production trended downward in 2021H2 ...while business confidence in the West Bank has bee
but has rebounded in recent months... uneven but has overall declined since mid-2021.
Industrial Production Index PMA Business Cycle Indicator

(2018 = 100) (On a 100 favorable to -100 unfavorable scale)
140 40
120 20
100 0
80 -20
60 -40
40 -60
WBG
-80 West Bank
20
Gaza
NSA SA West Bank (trendline)
0 -100
2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022
Producer, wholesale, and consumer prices all ... and the real and nominal effective exchange
increased fast... rates depreciated slightly.
Real and Nominal Effective Exchange Rates

PPI, CPI, and Wholesale Price Index (1996 = 100)
(2018 = 100)
110 145
140
105 135
130
100 125
120
95 115
110
CPI PPI Wholesale index REER NEER
90 105
2015 2016 2017 2018 2019 2020 2021 2022 2016 2017 2018 2019 2020 2021 2022
Sources: PCBS; Palestine Monetary Authority (PMA); Haver Analytics; and IMF staff estimates.

WEST BANK AND GAZA
5. The outlook for 2022 points to a slowdown of the economy amid rising inflation
concerns. Growth was 5.7 percent (y-o-y) in 2022Q1 and is projected to decline to 4 percent, driven
by lower consumption and investment due to lower real incomes as prices rise, 4 continued fiscal
weaknesses, and increased uncertainty related to the war in Ukraine—while direct spillovers from
Russia and Ukraine (merchandise trade, tourism) are limited, indirect exposures, particularly on food
and fuel imports via Israel, are substantial. 5 Inflation is projected to rise to 4.9 percent in 2022, the
highest since 2010, driven by higher food, fuel, and construction material prices, while moderated by
substantial shekel appreciation. Over the medium term, growth is expected to slow to its estimated
potential rate of 2 percent, which remains constrained by Israeli restrictions on the movement of
goods and people and gaps in the business environment.
B. …But the Fiscal Situation Remains Difficult…
6. Despite a difficult environment, the authorities contained the 2021 fiscal deficit to
pre-pandemic levels. The fiscal deficit declined to 5.2 percent of GDP in 2021. The deficit excluding
grants—a better indicator of fiscal effort—came in
Composition of Expenditures
at 7.0 percent of GDP. Contributing to this
(In percent of total expenditure and net lending)
outcome was a 15.9 percent increase in revenues, 6 100
well above nominal GDP growth, restraint in 90
recurrent spending, and a cut in development 80

70
spending to 1.3 percent of GDP, its lowest level on 60
record. With budget grants down 40 percent from 50
2020, government debt (including arrears) 40

30
increased from 34.5 percent of GDP in 2019 to
20
50.4 percent of GDP at end-2021 (20.6 percent of 10
GDP excluding arrears and promissory notes, see 0
2019 2020 2021
Figure 3). 7
Wage bill Goods and services
Transfers Others
7. The deficit led to the net accumulation Net lending Capital expenditure
of new domestic arrears of 4.7 percent of GDP. Sources: MoF; and IMF staff estimates.
Prudential limits on bank lending and the lack of

access to international capital markets constrained budget financing options. Arrears consist of
outstanding obligations to suppliers, private contractors, and the pension fund. In addition, the
policy of partial payment of public sector salaries (while exempting the lowest earners from the
4
See the World Bank September 2022 AHLC Report (forthcoming) for a detailed analysis of the impact of rising food
prices on poverty.
5 Direct imports from Ukraine and Russia together are limited to 1.2 percent of imports. Imports of wheat and flour
(direct plus through Israel) from Ukraine and Russia comprise 59 percent of wheat and flour imports. Fuel imports
are almost wholly from Israel, which itself imports about 38 percent of its oil imports from Russia (UN COMTRADE
2018–19).
6 See IMF staff’s May 2022 AHLC Report for further details.
7 The 50.4 percent of GDP end-2021 debt stock number includes promissory notes, which the authorities do not
record as part of their debt (Annex II).

WEST BANK AND GAZA
haircut), in place since November 2021, has led to wage arrears. Staff estimates the end-2021 arrears
stock at 27.8 percent of GDP. 8 However, there is considerable uncertainty over the size of these
arrears, and the published end-2021 stock of arrears stood at 16.7 percent of GDP.
Figure 3. West Bank and Gaza: Fiscal Sector Indicators, 2016–21
Expenditure has grown considerably relative to pre- … outpacing revenue gains even as grants continued
COVID-19 levels... to decline.
Expenditure Revenue and Donor Aid

(In percent of GDP) (In percent of GDP)
40 40
Current spending Capital spending Grants Clearance revenue
Net lending Revenue and grants Domestic tax revenue Non-tax revenues
35 35
Total expenditure
30 30
25 25
20 20
15 15
10 10
5
5
0
0
2016 2017 2018 2019 2020 2021
2016 2017 2018 2019 2020 2021
High deficits are largely financed with domestic arrears... … pushing public debt to record highs.
Budget Financing Public Debt

(In percent of GDP) (In percent of GDP)
12 60
Net external financing Foreign debt
Repayment of old arrears Domestic debt
10 Accumulation of new arrears 50 Arrears
Net domestic bank financing
8 Overall deficit (-)
40
6
4 30
2
20
10
-2
-4 0
2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021
Sources: Ministry of Finance (MoF); and IMF staff estimates.
8 These estimates exclude penalties and interest on pension fund arrears, which remain under negotiation.

WEST BANK AND GAZA
8. Fiscal performance in the first half of 2022 points to a continuation of 2021 trends.
Domestic revenues continue to perform well, as do clearance revenues (CR, taxes collected by Israel
on behalf of the PA), mainly due to tax administration gains, higher fuel prices, and increased
economic activity. The authorities continue to manage tight fiscal constraints by paying partial salaries
to public sector employees, sharply reducing social transfers, and containing development spending.
The fiscal deficit (on a commitment basis) in the first half of 2022 came out at 0.4 percent of GDP,
compared to 2.4 percent of GDP over the same period in 2021, while the full year deficit is projected
at 3.5 percent of GDP.
9. Under unchanged policies public finances remain unsustainable. Government debt

(including arrears) would reach 58 percent of GDP by 2027. Although liabilities to the pension fund
will only come due over the long term, debt
Deficits and Public Debt Under Baseline
sustainability analysis (Annex II) highlights risks
(In percent of GDP)
associated with high gross financing needs and 0 100
shocks. A significant part of the problem is

structural. The PA raises virtually no revenue 80
-2
from Gaza and East Jerusalem, while it spent
about a third of its budget in these areas in 60
2021, and neither does it raise any significant -4

revenue from Area C in the West Bank. 40
Moreover, the PA and Israel disagree on the
-6
amounts that the Government of Israel (GoI) 20
Overall balance
should transfer to the PA under the Paris
Public Debt (rhs)
Protocol (fiscal leakages) and unilateral Israeli -8 0
deductions for so-called “prisoner payments”. 9 2021 2022 2023 2024 2025 2026 2027
Lastly, donor grants are not projected to Source: IMF staff estimates.
increase over the medium term. 10
C. …While the Banking Sector Has Generally Been Stable…
10. The banking sector has remained generally stable (Table 3 and Figure 4). 11 At end-June 2022,
banking sector capital (16.7 percent of risk-weighted assets) remained adequate and profitability
(10.4 percent return on equity) had recovered to above its pre-pandemic level, while non-performing
loans (NPLs) remained steady at 4.2 percent of total loans. Liquid assets increased, and comprised
47 percent of short-term liabilities at end-June 2022, but liquidity management continued to be
hampered by the limit imposed on the transfer of physical shekel cash from the West Bank to Israel.
As a result, banks held excess shekel cash of NIS 5 billion (equivalent to 7.2 percent of assets) at
9 The Israeli Palestinian Prisoners Law from 2018 mandates withholding CR of an amount equivalent to the GoI’s
estimate of PA payments to families of Palestinians imprisoned or killed for alleged terrorist offences under Israeli
law.
10
The temporary uptick in 2023 is due to the assumption that the EU donor grants or 2022 and 2023 will both be
paid out in that year.
11 The Palestinian banking sector consists of 13 private banks. The two largest banks together have a market share of
46 percent. Banking sector assets comprise 116 percent of GDP.

WEST BANK AND GAZA
end-June 2022. The GoI renewed letters of immunity and indemnity to the two Israeli banks that offer
correspondent services to Palestinian banks until March 2023, ensuring correspondent banking relations
(CBRs) continue uninterrupted.
Figure 4. West Bank and Gaza: Financial Sector Developments, 2015–22

Capital remains adequate and profitability is above pre- Deposit growth outpaced private credit growth until
pandemic level. 2022Q1...
Capital Adequacy Ratio and Profitability Deposit and Credit Growth
(In percent) (Y-o-y percent change)
24 25
Total deposit growth
20 Private credit growth
20
16
15
Structural
12 break in
RoE 1/ 10
8
5 0
4
Return on equity
Regulatory capital to risk-weighted assets
0
0
2016 2017 2018 2019 2020 2021 2022
2015 2016 2017 2018 2019 2020 2021 2022
... raising bank liquid assets to total assets. Non-performing loans rose only modestly, while
provisioning increased.
Liquid Assets
Non-Performing Loans and Provisions
(In percent of total gross assets)
40 16 140
NPL ratio (in percent of gross loans)
14 120
NPLs+Watch list+Subs & doubtful (in percent of
gross loans)
35 12 Provision (in percent of NPLs, rhs) 100
10
80
30 8
60
6
40
25 4
2 20
0 0
20
2015 2016 2017 2018 2019 2020 2021 2022
2015 2016 2017 2018 2019 2020 2021 2022
Sources: PMA; and IMF staff estimates.
1/ Return on equity (ROE) follows the 2019 IMF Financial Soundness Indicators Compilation Guide for 2019Q4 onwards. Figures
for earlier years follow the 2006 Guide and are thus not comparable.

WEST BANK AND GAZA
D. …And Significant Risks Are Ever Present.
11. Political and socioeconomic conditions present clear downside risks. Frustration with
the lack of progress on the peace process, unemployment, poverty, and dissatisfaction with
domestic politics may lead to civil unrest or another confrontation with Israel. Renewed
COVID-19-related movement restrictions and Russia’s war in Ukraine present further risks. If these
risks were to materialize, food and fuel price hikes could accelerate and confidence, investment and
growth could be negatively affected (Annex I). Without fiscal buffers and with little scope for
monetary easing, the authorities would not be able to significantly ease the burden. Still, they might
attempt to cushion fuel and electricity retail prices, which would lead to higher fuel and electricity
subsidy outlays.
12. The fiscal situation brings about risks

Credit to the PA and PA Employees
to the banking sector and real economy. (In percent of equity or gross loans)
Banks are highly exposed to the PA.12 An 250 50
unchanged fiscal trajectory or downside shocks 45
impacting PA debt (Annex II) would increase 200 40
credit risk on this exposure, lowering the quality 35
of bank assets, and could ultimately endanger
150 30
financial stability. If banks came under pressure,
25
the authorities’ ability to provide liquidity
100 20
support would be limited. Meanwhile the large
15
and increasing stock of PA arrears to suppliers
and public sector employees presents risks to the 50 10
real economy. 5
0 0
13. The threat of disruption of shekel 2015 2016 2017 2018 2019 2020 2021
Credit to PA employees (% equity)
correspondent banking relations and asset Credit to the PA (% of equity)
Informal prudential limit for credit to the PA
quality deterioration comprise other banking Credit to the PA & PA employee (% gross loans, rhs)
sector risks. Pending the development of Sources: PMA; and IMF staff calculations.
alternatives to current CBR arrangements (¶32)
any disruption to existing shekel CBRs would have serious economic impact due to the Palestinian
and Israeli economies’ interconnectedness and the widespread use of the shekel in the Palestinian
territories. Furthermore, the cessation of COVID-19-related forbearance measures in 2022 could
expose bank asset quality weakness—particularly in SMEs and consumer loans. The Gaza loan
portfolios may also deteriorate because of difficult conditions on the ground and the destruction of
physical infrastructure during the May 2021 conflict. Still, the high NPL coverage ratio of 96 percent
provides a significant buffer.
12Banks direct exposure stood at 21 percent of total loans (some 11 percent of assets or 111 percent of equity—
above the informal 100 percent prudential limit) at end-2021, while loans to PA employees added an additional
16 percent of loans (8 percent of assets) in indirect exposure and there is further indirect exposure through loans to
PA suppliers. Direct exposure fell to 104 percent of equity at end-February 2022.

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14. The authorities broadly agree with staff’s views on the outlook and risks. They note the
increased burden inflation puts on the population. They concur that the current fiscal outlook poses
risks and requires reform and noted that most of the fiscal leakages would be resolved if Israel
abided by the provisions of the Paris Protocol. Against this background, they stress the 2021 deficit
was contained despite the fragile political and socioeconomic situation, on the back of good
revenue performance that has continued into 2022.
A NEED FOR REFORM

Boosting growth and putting public finances on a sustainable path will require ambitious reforms
spanning several years and close cooperation between the PA, the GoI and donors. IMF staff’s
May 2022 AHLC Report laid out the broad parameters of a macro-fiscal reform scenario and how each
stakeholder could contribute. This report does not revisit the reform scenario but rather builds on it by
providing more details on reforms needed to achieve these objectives. Taken together, the sustained
and deliberate implementation of the reforms outlined below would help restore debt sustainability,
boost long-term economic growth, and reduce unemployment and poverty.
A. Fiscal Reform
15. The 2022 budget envisages

West Bank and Gaza: Central Government
considerable spending cuts, but the
Fiscal Operations
underlying policies to achieve these results
(Percent of GDP, accrual basis) 1/
remain under discussion. The budget 2020 2021 2022
foresees a fiscal deficit of 3.8 percent of GDP. Total revenues and grants, net 25.3
Act.
25.3
Budget
26.2
Proj.
25.8
The lower deficit is driven almost exclusively Total revenues 22.1 23.5 23.4 24.1
by lower recurrent spending, notably on

Domestic tax revenues 4.7 5.5 5.7 5.9
Clearance revenues 15.1 16.0 15.6 16.5
transfers, goods and services, net lending, and Tax refunds 0.7 1.0 0.9 1.3
Nontax revenues 2.4 2.2 2.2 2.3
wages. These spending cuts, together with Earmarked collections 0.6 0.8 0.8 0.8
projected increases in donor support for Grants 3.1 1.8 2.8 1.6
projects, are used to triple development Total expenditure 32.6 30.5 30.0 29.2
spending to 3.9 percent of GDP in the budget. Wages and salaries

Goods and services
12.9
4.2
13.4
4.5
13.0
3.8
13.3
4.3
However, the policies to yield these expected Interest 0.4 0.7 0.8 0.7
Transfers 10.4 7.6 5.9 6.7
savings have not yet been formulated and Minor capital 0.2 0.2 0.3 0.2
implemented. Accordingly, staff has not Net lending 2.2 2.1 1.5 2.0
Earmarked spending 0.6 0.8 0.8 0.8
included the budgeted savings and additional Development expenditure 1.8 1.3 3.9 1.3
development expenditure in its baseline

Overall balance (including grants) -7.4 -5.2 -3.8 -3.5
scenario. Sources: Palestinian authorities; and IMF estimates and projections.
1/Based on staff’s projected GDP.
16. Any reforms will have to be

carefully sequenced and communicated to increase the chance of success. The approach should
be to first focus on “stop gap” measures that can be implemented in the short term, followed by a
gradual and carefully sequenced implementation of ambitious medium term reforms. The reforms
will require strong political commitment over the medium term and should be accompanied by
effective communications on their need.

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Wage Bill
17. The public wage bill contributes Public Sector Wage Bill in 2021
considerably to fiscal pressures and will 60
require deep reform. The wage bill accounted WBG Avearge of peer countries 1/
for 44 percent of total spending and 57 percent 50
of total revenues (excluding grants) in 2021.

The main cause lies in relatively high public 40
sector wages (incl. allowances), caused by high

30
past salary increases, often out of sync with
inflation and private-sector wage trends. 13 In 20
addition, automatic promotions based on
seniority rather than performance have led to a 10
top-heavy grading structure with more staff at

senior levels than in other countries. Although 0
In % of GDP In % of Expenditure In % of Revenue
pockets of overstaffing exist, the overall size of Sources: IMF World Economic Outlook database; and IMF staff estimates.
the public sector is not unduly large by 1/ Peer countries comprise oil importing countries in the Middle East and
Central Asia.
international standards, even when employees
in Gaza are included. 14
18. The authorities are working with the World Bank to identify reform proposals.
Agreeing on and implementing wage bill reform policies will take time, and hence potential savings
will mostly materialize gradually over time. Policy options could include:
Short Term
• Continue the current temporary policy of paying partial salaries to public sector employees
while exempting the lowest earners, until policy reforms generate substantial savings on the
wage bill.
• Temporarily suspend all recruitment in the public sector and subsequently limit it by hiring
at most 1 staff for each staff that leaves the service. Meet employment needs in specific
sectors by shifting staff across departments.
• Suspend the next salary and allowance increases for employees above a certain grade.
• Suspend all promotions for civilian and security personnel for the remainder of 2022.
13See the World Bank 2016 public expenditure review. The PA implements an annual mandatory step increase of
1.25 percent, in addition to about 3–4 percent in other increases. At end-2022Q1, the average public sector salary was
32 percent above the average private sector salary.
14 The security sector accounts for almost 10 personnel per 1,000 inhabitants, compared with a global average of
some 4.5/1,000 (World Bank May 2022 AHLC Report). The health and education sectors also have larger numbers of
staff than other countries in the region (e.g., higher doctor-patient ratio).

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Medium Term
• Reform the system of allowances and integrate them into base pay.
• Cease the practice of automatic salary increases and reform salary grades for new recruits.
• Consider early retirement incentives, provided these are well targeted (e.g., security
personnel, staff with long employment records) and cost effective, and do not undermine
the viability of the pension system.
• Undertake a functional review of the civil service, including in Gaza, and implement
broad-based civil service reform aligned with a new vision of about the role of government.
The key objectives would be to align staffing to the functions and needs of the public.
Reforms would include modernizing human resource management (e.g., merit-based
promotions, performance-based annual assessment), restructuring or merge public
institutions and moving positions as needed, and adopting digital technologies.
19. The authorities consider the wage bill as the biggest challenge for public finances. They
plan to shrink public sector employment and hence significantly lower the wage bill through a new
early retirement scheme for both civil servants and security personnel. They also underscored the
importance of containing subsequent hiring and instead plan to rely on rotation of existing staff to
open positions. The authorities are planning to include some allowances into base pay and remain
committed to restoring payment of full salaries as the situation allows. They have set up high-level
committees to further develop these reform proposals.
Net Lending
20. Net lending constitutes a considerable fiscal drag. Net lending comprised 2.1 percent of
GDP in 2021. It refers to the system by which Israel deducts payments (including for delay fines and
addressing outstanding debt) for electricity, water and sewage services provided to Palestinian
consumers through local government units (LGUs) and Palestinian distribution companies (DisCos)
from the clearance revenue it collects on behalf of the PA. 15 As LGUs and DisCos are formally
responsible for the collection and payment of these bills, in effect net lending represents debt of the
LGUs and DisCos to the PA (hence the terminology) and the associated deductions constitute
transfers from the central government to LGUs/DisCos. By far the biggest component of net lending
consists of electricity provision to Gaza, followed by electricity to West Bank, water provision and
finally sewage services.
21. Net lending distorts incentives and reflects weaknesses in intergovernmental relations.
The current setup does not provide accountability to the LGUs and DisCos and thus encourages a
culture of nonpayment. For example, LGUs use some of their collections to pay for other expenses
(education, health, local projects) and distribution companies have been known to pay shareholder
15 The Palestinian Electricity Law No 13 from 2009 provides that municipal electricity distribution services be
integrated into five licensed electricity DisCos (which are owned by the municipalities). However, many municipalities
never joined the DisCos, resulting in a web of highly inefficient overlapping distribution infrastructures.

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before paying their Israeli suppliers. It also results in extensive and untransparent cross claims, when
the PA withholds earmarked revenues it collects on behalf of LGUs as a partial offset for the Israeli
deductions. 16
22. Net lending is made worse by widespread problems with the electricity network.
Inadequate investment in maintenance and upgrading of the grid have led to considerable technical
losses. Non-technical losses are also significant mainly due to theft, metering errors, lack of access to
meters in Area C, and unbilled accounts. High prices by the Israeli supplier further contribute to
weaknesses. 17 These problems are particularly prominent in Palestinian refugee camps, where
metering is lacking and non-collection is rife, and Gaza, from which the PA receives no utility
revenue. The water and sewage networks suffer from similar issues.
23. Reducing net lending will require reforms along several fronts over many years. Policy
options include:
Short Term
• Strengthen transparency. Deductions by the GoI should be clearly broken down by service
and recipient, and reported online well-ahead of reconciliation meetings with the PA to
allow for audit and reconciliation before deductions are made. So should deductions by the
PA from LGU’s earmarked revenues.
MediumTerm
• Gradually replace offsets with fixed transfers. This would incentivize LGU collection and
would improve transparency in intergovernmental relations.
• Professionalize utility distribution services. In line with World Bank recommendations, complete the
move towards integrated DisCos by merging remaining municipal distribution services into the existing
DisCos, and ensure cost recovery. Promote similar arms-length arrangements for water and
sewage service. These measures would reduce inefficiencies and improve governance.
• Improve LGU administrative capacity and increase LGU own revenue sources. Strengthened
administrative capacity (including liquidity and cash management) would allow LGUs to handle
larger own-revenue streams and be more accountable to local residents. These efforts should
be accompanied by reforms to increase LGU resources and at the same time limit the
potential drain of LGUs on PA resources (through, e.g., review or approval of LGU budgets
by the PA and a prohibition of borrowing by LGUs). The authorities may need to consider
broader reform of LGUs by merging smaller units.
16Earmarked revenues include municipal property taxes, and license and road fees and comprised some 3 percent of
total revenue in 2021.
The Israeli Electricity Company charges its bulk tariff for medium or low voltage customers instead of an export
17
wholesale price that would remove non-applicable components of the tariff.

WEST BANK AND GAZA
24. The authorities see net lending a major challenge and are making efforts to reduce the
fiscal drain. They note that a large part of the problem relates to the Gaza Strip—which is entirely
beyond their control—, Area C—where they have no enforcement powers—, and refugee camps,
with collection rates elsewhere generally high. Still, specific action can help. The authorities have, for
instance, established a specialized unit to develop a database with crossclaims and a procedures
manual for handling them. To be comprehensive, such database will require more timely information
from Israel on bills and deductions. Israeli cooperation will also be required for enforcement (e.g., of
disconnection on nonpayment) in Area C and allowing the construction of large-scale solar
generation facilities, both of which would mitigate the problem. More ambitious reform of LGUs or
forcing holdout LGUs to join electricity DisCos is politically sensitive and could proceed only in
tandem with increased LGU resources. Still, the authorities are starting a pilot enabling five
municipalities to collect property tax themselves, expecting this will boost ownership and collection.
Tax Revenue
25. The authorities have formulated an ambitious strategy to boost domestic revenue.
Even as tax revenue collection is already well-above peers, the strategy appropriately focuses on
broadening the tax base through combating tax and customs evasion. A key priority is combating
underreporting among liberal professions
Revenue Ratios
(e.g., doctors, lawyers) (Box 1). To achieve (In percent of GDP, 2021)
this goal, the authorities are seeking to 35
Clearance revenues Domestic revenues 1/
strengthen banks’ information exchange 30
with tax authorities. While it is best practice
25
for the tax authority to collect certain
tax-related information from financial 20
institutions, the specific modalities and 15

procedures need to be carefully drafted to
ensure appropriate safeguards, provide 10
checks and balances to prevent overreach, 5

and minimize the burden on banks. The tax
0
strategy envisages a new VAT law that was West Bank and Gaza West Bank only 2/ Average of peer
recently approved by cabinet, as well as a countries 3/
new customs law and amendments to the Sources: Palestinian Authorities; and IMF staff estimates.
1/ Including all other tax and non-tax revenues.
2011 income tax law. The strategy may also 2/ IMF Staff estimates.
3/ Peer countries comprise oil importing countries in the Middle East and
involve additional tax expenditures Central Asia.
(“sectoral transformation” —see Box 1),
contrary to past advice to review and trim exemptions. It will be important to prioritize and sequence
the envisaged revenue reform in order to not overburden implementation capacity and increase the
chances of success.

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Box 1. Revenue Strategy 2022–25

The goal of the authorities’ revenue strategy is to boost domestic tax revenues. The main elements of the
strategy include:
• Identifying and registering unregistered taxpayers (horizontal expansion).

• Strengthening coordination with the customs police to curb tax evasion.
• Establishing a revenue risk management department.
• Developing a risk-based tax audit strategy.
• Requiring business taxpayers to use cash registers.
• Strengthening coordination with relevant government agencies to exchange information.
• Electronically linking the public sector and the private sector, particularly the banking sector, to facilitate
exchange of information on taxpayers.
• Developing and promoting the use of the electronic portal for taxpayers.
• Developing legislation and regulations governing e-commerce.
• Fully integrating the tax and customs administrations by completing the networking of the various
computerized systems (including a comprehensive taxpayer database) and creating a customs and tax
inspection department.
• Automating all customs and tax procedures and offering electronic services to taxpayers, including e-
invoicing.
• Strengthening integrity and fighting of corruption
The strategy also emphasizes “sectoral transformation” of the tax system. Specifically, the authorities plan to
offer attractive tax rates on specific sectors (e.g., education, e-commerce, real estate, health, liberal
professions, agriculture, tourism) to encourage their development.
26. Cooperation between the PA and the GoI will be required to boost revenue and
improve transparency. Systematic changes going beyond one-off payments to resolve or at least
reduce fiscal leakages—estimated at about 1.8 percent of 2022 GDP—will be paramount. The launch
of the e-VAT pilot in March is a good first step to tackle the VAT leakage. Under the pilot, traders on
both sides can issue transaction receipts digitally. While the system is compulsory for Palestinian
traders, participation for Israeli traders remains
Main Fiscal Leakages, 2022
voluntary for now, resulting in modest take up.
Annual flows, percent of
Going forward, there is a need to move more 2022 GDP
decisively toward bringing all Israeli traders and Total 1.8
hence all purchases into the system. Revisiting VAT 1
0.8
the handling fee in light of significantly Allenby crossing fees 0.1
increased trade volumes over the past two and a Handling fee 0.5
of which : Fuel 0.2
half decades would be opportune. Exempting
18
Other 0.4
fuel imports from excise and VAT rather than the
Source: IMF staff estimates.
current practice of charging and subsequently 1
Losses largely due to missing invoices.
refunding the tax to the PA subject to the 3
18 The 3 percent handling fee currently finances a disproportionately high share of the Israeli customs and VAT
department’s total budget when compared to the share of Palestinian imports out of total imports handled by the
department.

WEST BANK AND GAZA
percent handling fee would comprise an important first step in this regard. Regarding the Allenby
(King Hussein) bridge exit fees, the GoI has unilaterally increased the exit fees three times but has
not shared the increased revenues with the PA. In addition, there is a need for increased
transparency through publishing detailed reports on the amounts deducted by Israel, for instance on
the GoI’s website. Easing access for Palestinian business to Area C in the West Bank and transferring
the tax revenue on economic activity in Area C (outside the settlements and military locations) in line
with the Paris Protocol would have a further strong impact on revenues. Lastly, revenues withheld
unilaterally by Israel because of prisoner payments present a considerable fiscal drag. 19 Other
solutions should be found to support needy families, which should be accompanied by the cessation
of these deductions and the release of the stock of withheld funds.
27. The authorities view their revenue strategy as underpinning the recent good revenue
performance and expect its gradual further implementation to continue to boost revenue.
They are discussing various options to organize the exchange of bank account information with the
tax authorities, building on the advice of a recent IMF revenue administration TA mission. The
authorities strongly support faster progress on resolving the outstanding fiscal files, noting that they
find the nature of some of the CR deductions intransparent and hence arbitrary. They would like to
see the e-VAT coverage expand quickly to include all trade and the handling fee reduced, with fuel
purchases exempt from it, and the transfer of customs authority to proceed. They believe that
intensified discussion between the Israeli and Palestinian Ministries of Finance could help advance
these fiscal issues, The authorities also explained that, due to political circumstances, obtaining
better fiscal data from Gaza remains elusive.
Other Fiscal Issues
28. Reform of the healthcare, public pension and fuel subsidy systems present other
potential areas for reform. Any such reforms should be gradual and go hand-in-hand with
increased social support for the most vulnerable households and increased development spending,
and should be communicated clearly in order to minimize the potential for social unrest.
• Public health spending is driven by high wages (60 percent of the Ministry of Health’s budget),
outside medical referrals (90 percent of non-wage spending), and high pharmaceutical costs. 20
Inefficiencies, duplication of service, doubtful or fraudulent claims, and emphasis on tertiary
rather than primary care have all played a role. Moreover, the Government Health Insurance
(GHI) system is underfunded, posing considerable financial risks to the PA. 21
19 Since 2019 Israel has withheld an estimated US$580 million (2.9 percent of 2022 GDP) in clearance revenues related
to prisoner payments.
20 See World Bank PER (2016) and AHLC Report (May 2022).
21 The GHI scheme was established in 1994. It offers health insurance, including on non-contributory basis for those
facing hardship. Over the years, the share of non-contributory participants increased resulting in lower revenues and
higher spending for the GHI, increasing pressures on the PA budget.

WEST BANK AND GAZA
• The public pension system for civil servants and security personnel is fragmented and complex,
comprising four different schemes. 22 All schemes provide generous benefits, with some featuring
replacement rates up to 100 percent of final salary, broad eligibility criteria, and early retirement
options from age 45. Legally, the unified (Scheme II) pension system is a fully funded system, but
the government has been unable to make the full required contributions and hence the current
pension fund assets are insufficient to meet future obligations, rendering the system
unsustainable. In practice the system operates as a PAYG system, with the PA paying current
pension outlays, through the pension fund or, for security personnel, directly to beneficiaries.
• The PA sets the retail sale price for each fuel type in the Palestinian territories. Fuel subsidies
cover losses the General Petroleum Authority incurs from selling in Palestinian territories at
below its purchase price. The PA covers these losses through a fuel tax refund, which in 2021
totaled 0.4 percent of GDP. Amidst rising fuel prices, the fiscal burden has increased to
0.6 percent of projected 2022 GDP in the first half of the year, as the PA sought to contain the
passthrough of import prices to consumers.
29. Improved public financial management should support fiscal policies. The World Bank’s
2018 PEFA report notes weaknesses related to the budget calendar, setting of binding expenditure
ceilings, and effectiveness of commitment controls. A gradual move toward a medium-term
budgetary framework, including multi-annual commitment controls, consistent with a medium term
macro-fiscal framework would address these issues. This would also facilitate improving public
investment management, including by developing a prioritized medium-term public investment
plan. In tandem, the authorities should strive to improve cash management. They are enhancing
transparency and accountability by improving the timeliness of the audit of financial accounts by the
State Audit and Administrative Control Bureau, which issued its 2018 and 2019 reports and is on
track to complete the 2020-21 audit by year end. The authorities should undertake a comprehensive
stock taking of arrears and adopt a strategy for their gradual clearance, based on clear and
transparent criteria. Such a strategy could include both cash payment of arrears and securitization
and could benefit from IMF technical assistance. The improvements in the budget planning and
execution process discussed above should also help prevent the accumulation of new arrears.
30. The authorities expressed some reservations about the feasibility of these reforms in
the current context. They agree with the need to first reduce and then eliminate their reliance on
arrears financing and subsequently bring down the amounts owed to suppliers and employees. They
note however that this is contingent on achieving fiscal consolidation and increasing donor
contributions. They explained that a significant part of arrears to suppliers is to the health sector, and
that they are containing health care costs by limiting outside medical referrals, negotiating to cut
pharmaceutical prices, and developing a national health care price list. They do not believe the
22 The Pension Law (Public Pension Law No 7) of 2005 combined (grandfathered) pension schemes inherited from
Egypt (for Gaza civil servants) and Jordan (for the West Bank civil servants) as scheme I (10 percent scheme) and
scheme IV (2 percent scheme) respectively. Scheme II (7 percent scheme) was created for all public-sector employees
(civilian and security) who were aged less than 45 on September 1, 2006. All newly hired public sector employees
became members of this scheme. Scheme III (also known as security services scheme) was mainly for security forces
aged more than 45 as of September 1, 2006. Schemes I, III, and IV are closed to new entrants and are being phased
out. Scheme II is young, and most contributors have not yet reached retirement age.

WEST BANK AND GAZA
current environment is right for wholesale pension reform, reiterating that arrears to the pension
fund do not have an immediate impact on the real economy. In addition, they do not see the scope
for reducing fuel subsidies at a time when wholesale fuel prices have increased significantly, but note
that they are planning to improve targeting and that the fiscal situation may compel them to reduce
fuel subsidies going forward. Lastly, the authorities noted that while a medium-term budget
framework exists in principle, it is not operational given volatile macroeconomic environment.
B. Financial Sector Issues
31. The Palestine Monetary Authority (PMA) should intensify supervisory and regulatory
oversight. This is particularly important in light of banks’ continued high exposure to the PA (¶13)
and the possible emergence of asset quality weakness now that COVID-related loan moratoria and
regulatory forbearance have been discontinued. To tackle these risks, the PMA should further
strengthen its risk-based supervision, informed by multi-factor stress tests developed with IMF
assistance and the recommendations of the IMF TA on onsite risk-based banking supervision. The
PMA should also continue to reinforce its bank resolution, crisis management and financial safety
net toolkits, in line with ongoing IMF TA, and operationalize its emergency liquidity assistance
framework. In anticipation of the possibility of higher NPLs, the PMA will need to improve data
collection on rescheduled and restructured loans and ensure that all banks abide by provisioning
requirements. With respect to macroprudential policies, the PMA has recently introduced a leverage
ratio of 4 percent and continues to enforce concentration limits.
32. Maintaining shekel correspondent banking relations is essential for financial and
economic stability. CBRs rely on letters of immunity and indemnity issued by the GoI to the
two Israeli correspondent banks, who demand such assurances in light of perceived ML/FT risks. The
PMA has worked closely with the Bank of Israel (BoI) to set up an alternative mechanism comprising
either two publicly-owned clearing and settlement companies (one in Israel and one in WBG that
would serve as intermediaries between Israeli and Palestinian banks), or a single publicly-owned
Israeli company that would connect directly to the Palestinian banks. While considerable progress
has been made, the PMA and the BoI have yet to decide which of these two option to implement.
In addition, there is uncertainty about the continuation of ancillary correspondent banking services
such as trade finance and foreign exchange services, currently provided by some of the
correspondent banks. The PMA is also leading the efforts to strengthen the anti-money laundering
and combating the financing of terrorism (AML/CFT) framework in the Palestinian territories,
including through recent amendments to the AML/CFT law that criminalize terrorism financing (TF)
and a decree that transcribes TF-related UN security resolutions into national legislation in line with
international best practices. The PMA has received some IMF technical support to prepare for their
upcoming MENAFATF onsite evaluation, and stands ready to act on its recommendations.
33. The build up of excess physical shekel cash in the Palestinian banking system also
requires attention (Box 2 and SIP). While not prima facie a financial stability risk, it represents a
drag on bank profitability, as well as a security risk associated with frequent cash transports and
storage outside of overfull vaults. In order to reduce physical excess cash, the PMA is promoting
digital means of payment. It has reduced interchange fees on domestic point of sale terminal

WEST BANK AND GAZA
transactions and licensed five digital payments service providers, allowing them to provide
e-wallets. 23 Early indications suggest that unbanked citizens also use these services, thus boosting
financial inclusion. An Israeli measure requiring Israeli employers to pay their Palestinian workers
electronically should help significantly reduce the problem further. Strengthening cross-border
payment infrastructure more generally would also contribute. Still, the BoI should consider
periodically increasing the regular limit on the amount of physical shekel cash it accepts, in line with
estimates of accumulated shekel coins and notes through real economic activity.
Box 2. Excess Cash

Palestinian banks hold excessively large amounts of physical shekel cash. Banks elsewhere typically manage
the amount and currency composition of cash they hold in their vaults through transactions with other
commercial banks and central banks. However, the two Israeli banks that offer correspondent services to
Palestinian banks no longer offer them cash services, and the BoI has set limits on the amounts of shekel
cash it accepts from Palestinian banks, citing ML/FT concerns. Excess shekel cash is defined by the PMA as
shekel cash in banks’ vaults exceeding 6 percent of short-term shekel deposits.1
The main sources of physical shekel cash inflows into WBG comprise Palestinian workers in Israel and the
settlements who are mostly paid in cash, and (mainly Arab) Israelis who use cash to buy real estate, pay
university tuition fees and shop in the West Bank to benefit from lower prices, in part because of a scarcity
of electronic points of sale terminals and high interchange fees imposed on shekel transactions with Israeli
payment cards in the West Bank. Staff estimates suggest that shekel cash inflows from these sources
comprised some NIS 21.2 billion in 2021. Including informal imports into WBG (paid in cash), the total net
2021 physical cash inflows are estimated at NIS 19.8 billion, against a BoI regular cash shipment limit of NIS
18 billion.
1
The PMA requires banks to hold 3 percent of their deposits in each currency at each branch, in cash, in vaults, in
addition to holdings of 3 percent of deposits needed to meet daily customer cash withdrawal needs. The PMA’s reserve
requirement of 9 percent of deposits in all currencies must be met separately.
34. The authorities broadly agree with staff’s recommendations. Nevertheless, they do not
see a significant risk of higher NPLs, but if this were to happen, they would ensure banks abided by
provisioning requirements. The authorities underscored the importance of the MENAFATF mutual
evaluation. They expressed disappointment that the on-site visit was postponed due to the security
environment in early August and are eager to have the visit take place as soon as possible. Their
main ML/TF concern relates to the nonfinancial sector and they welcome IMF TA to address any
potential deficiencies. The authorities see the alternative mechanism for CBRs as feasible but are
unclear about the timeline envisaged by their Israeli counterpart. They expressed concern about a
plan under which the Israeli CBR company would connect only to selected Palestinian banks, as this
would compromise the level playing field and could be seen to undermine the PMA’s bank licensing
authority. They are eager to address the excess cash problem by promoting digital payments
through the reduction of interchange and credit card fees, and see significant scope for reducing the
inflow of physical shekel cash once Israeli authorities require Israeli employers to pay their
23
See the accompanying Selected Issues Paper on Excess Cash in the Palestinian Banking System for details.

WEST BANK AND GAZA
Palestinian workers electronically. They agree that the BoI should increase its limit on regular cash
shipments in line with economic activity.
C. Structural Reform
35. Reforms of structural policies are critical to spur activity in domestic sectors, especially
for those less impacted by movement and access restrictions. The recent adoption of the
companies law modernized business registration and licensing and strengthened minority investor
protection. This should be followed by adopting and implementing long-standing commercial
legislative reform of the consumer protection law and insolvency and debt settlement regimes. Changes
to the cabinet-approved competition law may also be needed to ensure the independence and
strengthen the prerogatives of the competition department. Digitalization of government services could
help bring about a broader digital transformation of the economy, which would also reduce the impact
of movement and access restrictions. However, this would require reaching an understanding with the
GoI to allow Palestinian operators to use 4G and 5G telecommunication spectra. Lastly, the authorities
should proceed with the reform of the judiciary and create courts dedicated to financial and commercial
cases to ensure speedy and consistent application of the law and protection of property rights.
36. Addressing labor market rigidities and improving education are equally important. The
informal labor market is large, spurred by inflexible labor contracting and, at NIS 1,880 (or 87 percent of
the average private sector wage), a high minimum wage. While the Palestinian labor force is well
educated, the unemployment among the young is very high, driven by skills mismatch. Education
reform centered on vocational training is key to tackle this issue. An improved STEM curriculum and
incentives for employers to hire young graduates for on-the-job training should also be considered.
37. Still, the most important structural reform to boost growth would be the easing of
Israeli restrictions on the movement of goods and people and on investment. These restrictions
are twofold. First, movement, access and investment restrictions, including in Area C, which hamper
growth. Second, trade restrictions in the form of costly non-tariﬀ barriers which harm exports. At
its most extreme, the Gaza blockade has stifled growth and essentially transformed the Strip into a
closed economy. Staff has previously estimated that granting Palestinian businesses access to
and allowing them to invest in Area C (excluding the areas subject to final status negotiations) and
easing trade restrictions could boost growth by as much as 4 percentage points per year to
6 percent. The GoI decision to increase the number of permits for Palestinian workers in Israel and
the settlements is a welcome step in this regard.
38. The authorities agree on the necessity for reforms in the PA’s purview. They see the
need to reduce unemployment and informality, while improving education and pursuing commercial
legislative reform. They underscored, however, that Israel has an important role to play by allowing
better Palestinians to access to Area C and reducing trade restrictions.

WEST BANK AND GAZA
STAFF APPRAISAL
39. The post-COVID recovery of the Palestinian economy is underway, but the fiscal
outlook remains precarious and risks abound. Against the backdrop of repeated political and
security shocks, a weak fiscal position, and higher inflation, the economy is continuing its recovery,
supported in part by increased employment of Palestinian workers in Israel and the settlements. Yet,
unemployment remains stubbornly high, especially in Gaza where it is a major contributor to
poverty. Without a change in policies, public debt will continue its unsustainable increase, largely
financed through arrears, and per capita GDP will decline over the medium term. Moreover, the
outlook is subject to considerable downside risks. The PA’s fiscal situation creates risks to the
banking sector through its high PA exposure and the real economy through arrears financing. Other
risks include a resurgence of the COVID pandemic, disruptions to shekel CBRs, a worsening of the
political and security situation or sharper-than-expected increases in food and fuel prices, which
could trigger renewed unrest.
40. The authorities are acutely aware of the challenges this brings. The 2022 budget
appropriately features considerable spending cuts and an increase in development expenditure
aimed at boosting the economy’s long-term growth potential, while bringing down the deficit. The
specific policies currently in the process of being formulated will be crucial to achieve these
outcomes. They should include addressing the oversized wage bill and tackling net lending, while
reform to health, pension and fuel subsidy expenditure should also be considered. Meanwhile,
financial sector policies should focus on intensifying supervisory and regulatory oversight,
strengthen the AML/CFT regime by addressing MENAFATF recommendations once they come out,
and, together with the BoI, operationalize the alternative correspondent banking mechanism and
work towards resolving the excess cash problem. Structural reform should focus on legislative
commercial reform, addressing labor market rigidities and improving education to spur private
sector growth and job creation.
41. Lasting improvements in economic prospects require transformational reform by the

PA, Israel, and donors. A coordinated effort centered on PA spending reform, Israeli-Palestinian
agreement on the resolution of the outstanding fiscal files (fiscal leakages), relaxation of Israeli
restrictions on the movement of goods and people and on investment, including in Area C, and
modest additional donor support would help restore public debt sustainability and unleash the
potential for private-sector-led economic growth, thus reducing unemployment and poverty.

WEST BANK AND GAZA
Table 1. West Bank and Gaza: Selected Economic Indicators, 2019–27

(Per capita GDP: $3,045; 2020 est.)
(Poverty rate 14 percent in the West Bank and 53 percent in Gaza Strip; 2017 est.) 1/
Projections
2019 2020 2021 2022 2023 2024 2025 2026 2027
Output, employment and prices (annual percentage change)

Real GDP (2015 market prices) 1.4 -11.3 7.1 4.0 3.5 2.4 2.0 2.0 2.0
West Bank 1.6 -11.0 7.8 3.8 3.6 2.5 2.2 2.2 2.2
Gaza 0.4 -12.6 3.4 5.0 3.0 1.9 1.5 1.5 1.5
Unemployment rate (period average) 25.4 25.9 26.4 25.7 25.0 24.5 24.2 24.1 24.0
CPI inflation rate (end-of-period) 1.3 0.1 1.3 5.7 3.8 2.5 2.2 2.3 2.0
CPI inflation rate (period average) 1.6 -0.7 1.2 4.9 3.4 2.7 2.5 2.2 2.0
(in percent of GDP)

Gross capital formation 26.8 24.3 25.8 27.7 25.4 23.6 22.0 20.6 19.7
Gross national savings 16.4 12.1 17.5 17.5 17.2 13.3 11.9 10.6 9.8
Saving-investment balance -10.4 -12.3 -8.2 -10.2 -8.2 -10.3 -10.2 -10.1 -10.0
Public finances 2/ (in percent of GDP)

Total revenues and grants 23.1 25.3 25.3 25.8 26.9 26.0 26.0 26.0 26.0
Revenues 20.3 22.1 23.5 24.1 24.4 24.5 24.5 24.6 24.6
Grants 2.9 3.1 1.8 1.6 2.4 1.6 1.5 1.5 1.4
Total Expenditure 27.6 32.6 30.5 29.2 29.9 30.1 30.3 30.4 30.6
Current expenditures and net lending 25.6 30.8 29.2 27.9 28.6 28.7 28.9 29.1 29.2
Development expenditures 2.0 1.8 1.3 1.3 1.3 1.3 1.3 1.3 1.3
Overall balance (commitment, before external support) -7.3 -10.5 -7.0 -5.1 -5.5 -5.6 -5.8 -5.8 -5.9
Overall balance (commitment) -4.5 -7.4 -5.2 -3.5 -3.1 -4.0 -4.3 -4.4 -4.5
Financing gap/discrepancy (in millions of U.S. dollars) 45 0 1 943 902 1130 1228 1287 1374
Identified financing 4.2 7.4 5.2 -1.5 -1.6 -1.6 -1.6 -1.6 -1.6
Financing gap / Residual 0.3 0.0 0.0 5.0 4.7 5.6 5.9 5.9 6.1
Total external support 2.9 3.1 1.8 1.6 2.4 1.6 1.5 1.5 1.4
Public debt 3/ 34.5 47.1 50.4 49.7 49.5 51.1 53.1 55.3 57.7
Monetary sector 4/ (annual percentage change)

Credit to the private sector 5.3 5.6 5.6 6.0 6.5 6.8 6.5 6.0 5.5
Private sector deposits 10.0 13.9 8.3 6.5 7.5 8.1 7.5 7.0 6.5
External sector (in percent of GDP)

Current account balance (excluding official transfers) -13.3 -14.5 -9.3 -11.1 -9.8 -11.1 -10.9 -10.8 -10.6
Current account balance -10.4 -12.3 -8.2 -10.2 -8.2 -10.3 -10.2 -10.1 -10.0
Exports of goods and services 15.5 15.4 17.6 17.8 17.1 16.9 16.6 16.4 16.1
Import of goods and services 53.5 51.9 56.8 58.7 57.7 57.4 56.9 56.6 56.3
Primary income account, net 17.7 16.0 18.8 18.9 18.8 19.0 19.0 19.2 19.4
Secondary income account, net 9.9 8.3 12.1 11.7 13.6 11.3 11.1 11.0 10.8
Memorandum items:
Nominal GDP (in millions of U.S. dollars) 17,134 15,532 18,037 19,677 21,059 22,146 23,164 24,159 25,146
Per capita nominal GDP (U.S. dollars) 3,443 3,045 3,451 3,678 3,847 3,956 4,047 4,131 4,210
Al Quds stock market index (annual percentage change -0.6 -10.4 -5.8 … … … … … …
Sources: Palestinian authorities; World Bank; and IMF staff estimates and projections.
1/ Using the national poverty line.
2/ Commitment basis.
3/ Data beginning in 2021 include the estimated stock of promissory notes.
4/ End-of-period; in U.S. dollar terms.

WEST BANK AND GAZA
Table 2a. West Bank and Gaza: Central Government Fiscal Operations, 2019–27 1/
(In percent of GDP, unless otherwise indicated)
Projections
2019 2020 2021 2022 2023 2024 2025 2026 2027
Revenue and grants 23.1 25.3 25.3 25.8 26.9 26.0 26.0 26.0 26.0
Tax revenue 17.7 19.1 20.5 21.1 21.4 21.4 21.4 21.5 21.6
Direct taxes 1.2 1.2 1.2 1.3 1.3 1.3 1.5 1.6 1.8
Indirect taxes 3.3 3.5 4.3 4.6 4.6 4.6 4.5 4.4 4.2
VAT on domestic purchases 1.8 2.0 2.1 2.3 2.3 2.3 2.1 2.0 1.9
Excises 0.4 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6
Customs duties 1.1 1.0 1.6 1.7 1.8 1.8 1.8 1.8 1.8
Clearance revenues 1/ 14.2 15.1 16.0 16.5 16.5 16.5 16.5 16.5 16.5
Income Tax 0.4 0.1 0.4 0.5 0.5 0.5 0.5 0.5 0.5
VAT on imports 3.5 3.4 3.5 3.5 3.5 3.6 3.6 3.6 3.6
Petroleum Excise 4.3 4.4 4.4 4.5 4.5 4.5 4.5 4.5 4.5
Customs 6.0 7.2 7.7 7.8 7.8 7.9 7.9 7.9 7.9
Other 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0
Tax refunds 1.0 0.7 1.0 1.3 1.0 1.0 1.0 1.0 1.0
Non-tax revenues 2.1 2.4 2.2 2.3 2.3 2.3 2.3 2.3 2.3
Earmarked revenues 2/ 0.5 0.6 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Grants 2.9 3.1 1.8 1.6 2.4 1.6 1.5 1.5 1.4
External budgetary support 2.9 2.3 1.0 1.0 1.7 0.9 0.8 0.8 0.7
Total expenditure and net lending 27.6 32.6 30.5 29.2 29.9 30.1 30.3 30.4 30.6
Current spending 23.8 28.7 27.1 25.9 26.6 26.7 27.0 27.1 27.2
Wages and salaries 10.9 12.9 13.4 13.3 13.4 13.5 13.6 13.8 13.9
Goods and services 3.8 4.2 4.5 4.3 4.0 4.0 4.0 4.0 4.0
Interest payments 0.3 0.4 0.7 0.7 0.8 0.8 0.8 0.8 0.8
Domestic 0.3 0.3 0.7 0.6 0.7 0.7 0.8 0.8 0.8
Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Transfers 8.2 10.4 7.6 6.7 7.5 7.5 7.5 7.5 7.5
Social assistance 3.0 3.8 2.3 1.4 2.3 2.3 2.3 2.3 2.3
Transfers to the pension fund 5.4 6.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Other transfers -0.2 0.6 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Other 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Earmarked payments 2/ 0.5 0.6 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Development spending 2.0 1.8 1.3 1.3 1.3 1.3 1.3 1.3 1.3
Net lending 1.9 2.2 2.1 2.0 2.0 2.0 2.0 2.0 2.0
Overall balance -4.5 -7.4 -5.2 -3.5 -3.1 -4.0 -4.3 -4.4 -4.5
Financing 4.2 7.4 5.2 -1.5 -1.6 -1.6 -1.6 -1.6 -1.6
Net domestic financing 4.5 7.4 5.2 -1.5 -1.6 -1.6 -1.6 -1.6 -1.6
Net domestic bank financing 2.9 3.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Accumulation of new arrears 4.0 6.8 7.1 0.0 0.0 0.0 0.0 0.0 0.0
Arrears repayment (old) -2.5 -2.9 -2.4 -2.0 -2.1 -2.1 -2.1 -2.1 -2.1
Net external financing -0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Borrowing, net -0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Residual/Financing gap 0.3 0.0 0.0 5.0 4.7 5.6 5.9 5.9 6.1
Memorandum items:
Overall balance (before external support) -7.3 -10.5 -7.0 -5.1 -5.5 -5.6 -5.8 -5.8 -5.9
Domestic revenues 3/ 5.5 6.4 6.7 6.9 7.2 7.2 7.2 7.3 7.3
Central government debt (incl. arrears) 34.5 47.1 50.4 49.7 49.5 51.1 53.1 55.3 57.7
Foreign debt 6.9 8.0 7.1 6.5 6.0 5.7 5.5 5.3 5.1
Domestic debt 27.6 39.1 43.3 43.2 43.4 45.3 47.6 50.0 52.6
of which : Stock of promissory notes 4/ n.a. n.a. 2.0 1.0 0.5 0.0 0.0 0.0 0.0
of which : Stock of arrears 18.6 25.1 27.8 … … … … … …
of which: Arrears to the pension fund 11.6 14.1 14.2 … … … … … …
Nominal GDP (in billions of shekels) 61.1 53.5 58.3 63.6 68.0 71.5 74.8 78.0 81.2
Sources: Ministry of Finance and Planning; and IMF staff projections.

1/ Revenue collected by Israel on behalf of and transferred to the Palestinian Authority.
2/ Earmarked revenues and payments are collections from taxes and revenues due to local government units.
3/ Revenues administered by the Palestinian authorities. Excludes clearance revenues.

WEST BANK AND GAZA
Table 2b. West Bank and Gaza: Central Government Fiscal Operations, 2019–27 1/
(In millions of U.S. dollars, unless otherwise indicated)
Projections
2019 2020 2021 2022 2023 2024 2025 2026 2027
Revenue and grants 3,964 3,923 4,563 4,847 5,209 5,253 5,435 5,635 5,862
Tax revenue 3,024 2,970 3,701 3,964 4,149 4,323 4,481 4,658 4,855
Direct taxes 210 187 224 238 251 269 307 345 399
Indirect taxes 557 546 774 865 899 934 940 951 957
VAT on domestic purchases 304 306 371 429 443 457 445 438 425
Excises 63 86 108 104 108 112 116 120 125
Customs duties 186 150 290 327 344 360 373 387 401
Clearance revenues 1/ 2,433 2,350 2,888 3,097 3,193 3,323 3,444 3,579 3,726
Income Tax 63 22 81 86 88 92 96 99 103
VAT on imports 602 534 627 668 688 718 744 774 805
Petroleum Excise 737 687 798 849 875 914 947 984 1,025
Customs 1,034 1,112 1,388 1,477 1,522 1,589 1,647 1,712 1,782
Other -4 -4 -6 18 19 9 10 10 11
Tax refunds 175 114 184 236 195 203 210 217 226
Non-tax revenues 358 370 402 426 439 457 474 490 510
Earmarked revenues 2/ 92 98 142 148 153 159 165 170 177
Grants 490 486 318 308 468 314 315 317 319
External budgetary support 498 354 186 182 338 179 175 172 168
Total expenditure and net lending 4,731 5,068 5,506 5,502 5,806 6,066 6,334 6,581 6,882
Current spending 4,071 4,452 4,891 4,879 5,164 5,398 5,642 5,865 6,137
Wages and salaries 1,866 2,001 2,413 2,510 2,592 2,720 2,852 2,982 3,138
Goods and services 643 657 807 806 772 804 833 862 897
Interest payments 53 56 125 129 149 157 177 181 186
Domestic 48 50 119 122 142 150 169 174 178
Foreign 5 6 6 7 7 7 7 8 8
Transfers 1,402 1,615 1,371 1,253 1,462 1,522 1,577 1,631 1,698
Social assistance 511 591 420 261 440 458 474 491 511
Transfers to the pension fund 932 936 899 938 967 1,006 1,043 1,079 1,123
Other transfers -42 88 51 54 56 58 60 62 64
Other 16 27 33 34 35 37 38 39 41
Earmarked payments 2/ 92 98 142 148 153 159 165 170 177
Development spending 341 277 242 252 260 270 280 290 302
Net lending 319 339 374 371 382 398 412 426 444
Overall balance -767 -1,145 -943 -655 -597 -813 -899 -946 -1,020
Financing 722 1,145 942 -288 -305 -317 -329 -340 -354
Net domestic financing 766 1,145 942 -288 -305 -317 -329 -340 -354
Net domestic bank financing 504 551 88 92 95 99 102 106 110
Accumulation of new arrears 686 1,049 1,285 0 0 0 0 0 0
Arrears repayment (old) -424 -454 -431 -380 -400 -416 -431 -446 -464
Net external financing -44 0 0 0 0 0 0 0 0
Borrowing, net -44 0 0 0 0 0 0 0 0
Residual/Financing gap 45 0 1 943 902 1,130 1,228 1,287 1,374
Memorandum items:
Overall balance (before external support) -1,257 -1,631 -1,261 -963 -1,066 -1,127 -1,214 -1,263 -1,339
Domestic revenues 3/ 949 989 1,216 1,293 1,395 1,458 1,511 1,569 1,640
Domestic tax revenues (percent change) -9 -8 28 16 8 6 5 5 5
Clearance revenues (percent change) 8 -7 15 12 7 5 5 5 4
Total expenditure and net lending (percent change) 5 7 9 0 6 4 4 4 5
Grants (millions of US dollars) 4/ 490 486 318 308 468 314 315 317 319
of which : budget support 498 354 186 182 338 179 175 172 168
Central government debt (incl. arrears) 6,057 7,751 9,372 9,046 9,550 10,268 11,073 11,924 12,941
Foreign debt 1,211 1,312 1,313 1,179 1,167 1,156 1,146 1,136 1,136
Domestic debt 4,846 6,439 8,059 7,868 8,383 9,112 9,928 10,788 11,804
of which: Stock of promissory notes 5/ n.a. n.a. 372 179 89 0 0 0 0
of which: Stock of arrears 3,277 4,137 5,171 … … … … … …
of which : Arrears to the pension fund 2,046 2,327 2,636 … … … … … …
Nominal GDP 17,134 15,532 18,037 19,677 21,059 22,146 23,164 24,159 25,146

4/ Excludes off-budget support through the UNRWA.

WEST BANK AND GAZA
Table 2c. West Bank and Gaza: Central Government Fiscal Operations, 2019–27 1/
(In billions of shekels, unless otherwise indicated)
Projections
2019 2020 2021 2022 2023 2024 2025 2026 2027
Revenue and grants 14.1 13.5 14.7 16.4 18.3 18.6 19.4 20.3 21.1
Tax revenue 10.8 10.2 12.0 13.4 14.5 15.3 16.0 16.8 17.5
Direct taxes 0.7 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.4
Indirect taxes 2.0 1.9 2.5 2.9 3.2 3.3 3.4 3.4 3.5
VAT on domestic purchases 1.1 1.1 1.2 1.4 1.6 1.6 1.6 1.6 1.5
Excises 0.2 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.5
Customs duties 0.7 0.5 0.9 1.1 1.2 1.3 1.3 1.4 1.4
Clearance revenues 1/ 8.7 8.1 9.3 10.5 11.2 11.8 12.3 12.9 13.4
Income Tax 0.2 0.1 0.3 0.3 0.3 0.3 0.3 0.4 0.4
VAT on imports 2.1 1.8 2.0 2.3 2.4 2.5 2.7 2.8 2.9
Petroleum Excise 2.6 2.4 2.6 2.9 3.1 3.2 3.4 3.6 3.7
Customs 3.7 3.8 4.5 5.0 5.3 5.6 5.9 6.2 6.4
Other 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0
Tax refunds 0.6 0.4 0.6 0.8 0.7 0.7 0.8 0.8 0.8
Non-tax revenues 1.3 1.3 1.3 1.4 1.5 1.6 1.7 1.8 1.8
Earmarked revenues 2/ 0.3 0.3 0.5 0.5 0.5 0.6 0.6 0.6 0.6
Grants 1.7 1.7 1.0 1.0 1.6 1.1 1.1 1.1 1.2
External budgetary support 1.8 1.2 0.6 0.6 1.2 0.6 0.6 0.6 0.6
Total expenditure and net lending 16.9 17.4 17.8 18.6 20.4 21.5 22.6 23.7 24.8
Current spending 14.5 15.3 15.8 16.5 18.1 19.1 20.2 21.2 22.1
Wages and salaries 6.7 6.9 7.8 8.5 9.1 9.6 10.2 10.8 11.3
Goods and services 2.3 2.3 2.6 2.7 2.7 2.8 3.0 3.1 3.2
Interest payments 0.2 0.2 0.4 0.4 0.5 0.6 0.6 0.7 0.7
Domestic 0.2 0.2 0.4 0.4 0.5 0.5 0.6 0.6 0.6
Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Transfers 5.0 5.6 4.4 4.2 5.1 5.4 5.6 5.9 6.1
Social assistance 1.8 2.0 1.4 0.9 1.5 1.6 1.7 1.8 1.8
Transfers to the pension fund 3.3 3.2 2.9 3.2 3.4 3.6 3.7 3.9 4.0
Other transfers -0.1 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Other 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Earmarked payments 2/ 0.3 0.3 0.5 0.5 0.5 0.6 0.6 0.6 0.6
Development spending 1.2 1.0 0.8 0.9 0.9 1.0 1.0 1.0 1.1
Net lending 1.1 1.2 1.2 1.3 1.3 1.4 1.5 1.5 1.6
Overall balance -2.7 -3.9 -3.0 -2.2 -2.1 -2.9 -3.2 -3.4 -3.7
Financing 2.6 3.9 3.0 -1.0 -1.1 -1.1 -1.2 -1.2 -1.3
Net domestic financing 2.7 3.9 3.0 -1.0 -1.1 -1.1 -1.2 -1.2 -1.3
Net domestic bank financing 1.8 1.9 0.3 0.3 0.3 0.3 0.4 0.4 0.4
Accumulation of new arrears 2.4 3.6 4.2 0.0 0.0 0.0 0.0 0.0 0.0
Arrears repayment (old) -1.5 -1.6 -1.4 -1.3 -1.4 -1.5 -1.5 -1.6 -1.7
Net external financing -0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Borrowing, net -0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Residual/Financing gap 0.2 0.0 0.0 3.2 3.2 4.0 4.4 4.6 5.0
Memorandum items:
Overall balance (before external support) -4.5 -5.6 -4.1 -3.3 -3.7 -4.0 -4.3 -4.6 -4.8
Domestic revenues 3/ 3.4 3.4 3.9 4.4 4.9 5.2 5.4 5.7 5.9
Domestic tax revenues (percent change) -8.8 -7.7 27.7 15.6 8.3 5.7 4.6 4.8 4.6
Clearance revenues (percent change) 7.7 -6.7 15.3 12.2 7.0 5.2 4.6 4.8 4.1
Total expenditure and net lending (percent change) 4.7 3.5 1.9 4.5 9.6 5.6 5.4 4.8 4.6
Central government debt (incl. arrears) 21.1 25.2 29.4 31.6 33.7 36.5 39.8 43.2 46.8
Foreign debt 4.2 4.3 4.1 4.1 4.1 4.1 4.1 4.1 4.1
Domestic debt 16.8 20.9 25.2 27.5 29.5 32.4 35.6 39.1 42.7
of which: Stock of promissory notes 4/ n.a. n.a. 1.2 0.6 0.3 0.0 0.0 0.0 0.0
of which: Stock of arrears 11.4 13.4 16.2 … … … … … …
of which : Arrears to the pension fund 7.1 7.6 8.3 … … … … … …
Nominal GDP 61.1 53.5 58.3 63.6 68.0 71.5 74.8 78.0 81.2


WEST BANK AND GAZA
Table 3. West Bank and Gaza: Financial Soundness Indicators, 2017–22

(In percent)
Dec-17 Dec-18 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22
Capital adequacy
Tier I capital to risk-weighted assets 15.5 16.0 15.6 15.5 15.2 15.0 13.9 14.1 14.3 14.6 14.3 14.3 14.9
Regulatory capital to risk-weighted assets 16.6 16.8 16.6 16.4 16.1 15.9 15.7 16.0 16.2 16.4 16.1 16.1 16.7
Asset quality 1/
Nonperforming loans (percent of total loans) 2.3 3.0 4.1 4.0 3.9 3.7 4.2 4.2 4.2 4.3 4.2 4.2 4.2
Nonperforming loans net of provisions to capital 5.2 2.2 5.7 4.4 3.1 1.9 3.8 3.7 2.9 2.6 1.5 1.5 1.1
Coverage ratio (provisions as percent of nonperforming loans) 58.4 86.2 75.0 80.4 86.2 91.7 86.1 86.4 89.0 90.3 94.4 94.6 95.7
Loan to deposit ratio 67.0 69.0 67.5 69.5 69.9 70.4 66.6 66.9 65.8 64.6 65.1 65.2 65.4
Earnings and profitability 2/

Return on assets (ROA) 1.5 1.5 1.3 1.1 0.8 0.8 0.8 1.4 1.3 1.3 1.2 1.4 1.4
Return on equity (ROE) 16.1 15.2 8.7 8.4 5.2 5.7 5.4 11.7 9.5 9.5 9.3 10.3 10.4
Interest income to gross income 70.9 72.1 72.5 71.6 72.2 73.9 74.4 72.0 71.5 72.3 72.8 71.3 73.5
Non-interest expenses to gross income 62.0 63.3 63.4 63.5 65.7 64.1 63.7 59.5 59.6 59.5 59.8 59.5 59.0
Liquidity
Liquid assets to total assets 32.3 29.8 32.0 29.3 29.2 28.3 33.2 32.8 33.0 33.7 33.2 34.2 30.9
Liquid assets to total deposits 41.6 38.6 40.9 37.7 37.2 36.9 42.1 41.9 41.9 42.7 42.0 42.9 39.2
Liquid assets to short-term liabilities 43.0 42.2 45.5 43.0 42.2 41.4 47.5 46.3 46.8 47.4 47.2 48.4 47.3
Source: PMA.
1/ Nonperforming loans includes loans more than 90 day overdue.
2/ ROA and ROE follow the 2019 IMF Financial Soundness Indicators Compilation Guide for 2019Q4 onwards. Figures for earlier
years follow the 2006 Guide and are thus not comparable.

WEST BANK AND GAZA
Annex I. Risk Assessment Matrix 1
Nature/Sources Relative Expected Impact If Realized Policies to Mitigate Risks

of Risk Likelihood
Domestic Risks
High
The PA’s fiscal Large fiscal deficits persist, financed by Pursue gradual fiscal consolidation,
trajectory remains an increasing stock of arrears. centered on expenditure reform.
High
unaltered. Cascading arrears cause all-round Take stock of arrears and devise a
liquidity shortages, damaging growth strategy to clear them. Ensure the
and financial stability. Debt (including banking system remains well
arrears) is unsustainable. capitalized.
High
Fiscal crisis spilling The PA’s fiscal trajectory, if unchecked, Ensure that the banking system
over to the banking Medium/High could hurt banks’ asset quality given remains well capitalized. Gradually
sector the banking sector’s high direct and reduce banks’ exposure to the PA.
indirect exposure to the PA, potentially Strengthen bank supervision and
undermining financial stability and crisis management capacity.
harming economic growth.
High
Reduced financial Loss of Israeli-Palestinian Work with Israeli counterparts to
services by Israeli correspondent bank relations would operationalize an alternative CBR
correspondent banks lead to trade and financial disruption mechanism and strengthen cross-
High
which would encourage a further shift border payment systems.
into cash/informality. As a result, Strengthen the AML/CFT
WBG’s financial system would suffer, framework and build
harming growth. implementation capacity, including
with possible technical assistance.
High
Escalating social Unemployment, poverty, frustration Sound macroeconomic
tensions due to lack with the lack of progress on the peace management and economic reform
of opportunities or process and dissatisfaction with could help instill confidence and
High
prospects for peace domestic politics and the rise of food alleviate economic strain at the
and rising food and and fuel prices may lead to the margin. Provide targeted and
fuel prices. escalation of civil unrest or another temporary support, provided the
confrontation with Israel. This would fiscal situation allows it. However,
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most
likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessmentof
the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability
between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the
source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive
risks may interact and materialize jointly.

WEST BANK AND GAZA
Nature/Sources Relative Expected Impact If Realized Policies to Mitigate Risks

of Risk Likelihood
undermine growth and intensify the economic policies can do little to
humanitarian crisis in Gaza. mitigate discontent with the
political situation and the lack of
progress on peace.
High
Israel tightens In response to unrest or renewed The authorities could try to seek
restrictions on conflict, Israel may shut the border to additional grants to be able to
movement of good Medium people and constrain goods traffic partially compensate the
and people further further. Economic growth would be hit population for the associated
hard and quickly. Many Palestinian additional hardship.
guest workers would lose their
income, lowering transfers into WBG.
Medium
Donor support Donor support remains at its current Pursue a comprehensive reform
remains low or low level or declines further. This agenda that improves the
declines further would make the implementation of macroeconomic situation. Entice
High a reform agenda more difficult. donors to contribute to this turn
Given that donor grants already around through increased grants.
stand at historic lows, the impact of
a further decrease would worsen the
baseline only modestly.
Global Risks
Medium/High
Local COVID-19 Outbreaks of more contagious Provide targeted support to those
outbreaks. vaccine-resistant COVID variants in need by shifting spending away
Medium
force new lockdowns or inhibit from lower priority areas.
commerce. This results in extended Strengthen banking sector crisis
supply chain disruptions, slower management capacity.
growth and job losses, adversely
impacting public finances, and could
undermine bank asset quality.
Medium/High
Intensifying Further sanctions resulting from the Provide targeted and temporary
spillovers from war and related uncertainties support, provided the fiscal
High
Russia’s war on exacerbate trade and financial situation allows it.
Ukraine and disruptions and commodity price
commodity price volatility. This may lead to price and
shocks. real sector volatility, food insecurity,
social unrest, and acute food and
energy crises.

WEST BANK AND GAZA
Annex II. Debt Sustainability Analysis 1

West Bank and Gaza’s government debt is unsustainable under unchanged policies. 2 Its debt
continues to rise over the medium term reaching almost 62 percent, a level that poses considerable
challenges given the country’s narrow revenue base, uncertainties over the flow of clearance revenues,
and weak economic growth hindered by Israeli restrictions including on the mobility of labor, goods
and capital. High gross financing needs pose a significant challenge. Moreover, West Bank and Gaza is
subject to considerable shocks which can further worsen debt sustainability. A combined macro-fiscal
shock and a political unrest shock would push debt above 80 percent of GDP by 2027, while gross
financing needs would increase by almost 9 percent of GDP by 2027 relative to the baseline.
Structure of Public Debt
1. Government debt continued to grow in 2021 but at a slower pace than in 2020, thanks
to the economic recovery. After surging by more than 12 percentage points in 2020 due to the
COVID-19 pandemic and spending policies (e.g., vaccine purchases, support to vulnerable groups,
reinstatement of full wages for about 6,000 civil servants in Gaza), gross public debt 3 increased by
3.3 percentage points in 2021 reaching 50.4 percent of GDP. 4 The lower growth rate was driven by
the economic recovery. Staff estimates suggest that the increase in nominal GDP by 9 percent in
2021 contributed to a reduction in the stock of debt (excluding promissory notes) by 3.9 percent of
GDP in 2021, while the change in the numerator added 5.2 percent of GDP to the stock of debt, in
line with the recorded deficit.
2. Most of the government debt is domestic, with arrears accounting for well-over half of
total debt.
• Domestic debt (including arrears and promissory notes) represented 86 percent of total debt at
end-2021. Arrears are the largest component of domestic debt, representing more than double
the amount of bank debt. About half of the arrears were to the pension fund and represented
unfunded liabilities. Formal debt to the banking sector increased only modestly in 2021 as banks
sought to comply with the informal prudential limit the PMA set for direct exposure to the PA.
1 Prepared by Iacovos Ioannou.

2 This DSA uses the 2021 Market Access Countries DSA template developed by the IMF; it is based on preliminary
data at end-2021, and estimated and actual 2021 debt flow data. Methodological differences related to the treatment
of new debt (short term vs. long term; domestic vs foreign), the calculation of interest payments (interest rates
depending on maturity and variable over time) and the resulting estimation of gross financing requirements account
for the modest deviations in debt indicators over the medium term relative to the staff report tables.
3Debt coverage includes accounts payable and pension liabilities in line with the IMF’s Public Sector Debt Statistics:
Guide for Compilers and Users (2013).
4The change in debt incorporates an increase due to the inclusion of promissory notes (estimated at 2.0 percent of
GDP) in the stock of debt. Excluding the stock of promissory notes, gross public debt increased by 1.3 percentage
points of GDP.

WEST BANK AND GAZA
• External debt represented about 14 percent of total debt. Some 86 percent of foreign debt is
long term. The biggest creditor is the Al Aqsa Fund (39 percent of external debt), followed by
the World Bank and the Qatar National Bank (each with about 20 percent). Bilateral creditors
(Italy, Spain) account for about 12 percent of external debt.
3. There is considerable uncertainty about the stock of debt. This uncertainty exists mainly
for two reasons. First, the stock of arrears is not audited. The government typically accumulates
arrears to suppliers, contractors and
the pension fund. 5 In addition, the West Bank and Gaza: Total Debt Liabilities of the PA
(In percent of GDP)
policy in place since November 2021
of paying only partial salaries to
public sector employees has led to 2019 2020 2021
the accumulation of wage arrears of Gross debt liabilities 34.5 47.1 50.4
1.2 percent of GDP at end-June 2022. Domestic debt 27.6 39.1 43.3
The pension fund and the PA are in Loans and overdrafts 8.9 14.0 13.5
the process of reconciling arrears Promissory notes 1/ … … 2.0
Arrears 1/ 18.6 25.1 27.8
claims regarding late payment
External debt 6.9 8.0 7.1
penalties and interest. Pending a
Sources: Ministry of Finance; and IMF staff estimates
mutual agreement, staff has excluded 1
Figures are estimates due to insufficient official data.
interest and penalties from the stock
of arrears. The second source of
uncertainty stems from promissory notes (PNs). The authorities issue PNs to suppliers and
contractors to clear arrears, but they do not record these PNs as debt, essentially treating them as
an instrument to extinguish a liability. 6 Staff’s preliminary estimates suggest that the total stock of
PNs at end-2021 was two percent of GDP but there is considerable uncertainty surrounding this
estimate. In 2022, the PA paid banks $160 million (0.9 percent of GDP) to eliminate the stock of PNs
held by banks. The transaction was made possible after the PA secured bank loan in equivalent
amounts and similar maturities from the banks holding the PNs. The authorities also indicated that
they would cease issuing PNs altogether. The outstanding stock of PNs is expected to be paid off
fully by end-2024.
4. Arrears are assumed to be the main source of new financing. Domestic bank financing is
assumed to be limited because banks have high exposure to the PA preventing them from
extending significant amounts of new loans. The government is also not able to issue securities in
domestic or international markets. Reflecting these limited financing options, the authorities have
been accumulating new arrears on a regular basis to cover deficits. Accordingly, the DSA assumes
that the authorities will continue to rely on arrears as the main source of new financing. While
5 Expenditure arrears are defined as the difference between spending on a commitment and cash bases. Arrears to
the pension fund (both for civil servants and security personnel) comprise required government and employee
contributions that the government does not transfer to the pension fund.
6Initially, most PNs had a very short maturity (e.g., three months), but over time it has increased. At end-2021, the
majority of PNs had a maturity of less than one year but a portion was long term, with the longest maturity being
24 months.

WEST BANK AND GAZA
arrears to suppliers and contractors do not formally bear interest, for the purpose of the DSA these
arrears are assumed to accrue interest of 5 percent (i.e., a similar rate to bank loans) annually. To
further capture the uncertainty surrounding the level and terms of debt, the DSA includes a
contingent liability shock in which the debt stock in 2022 is 5 percent of GDP higher than currently
projected.
Macroeconomic Outlook
5. The macroeconomic outlook will remain difficult under unchanged policies. The
economy is expected to weaken over the medium term, with annual growth falling to 2 percent.
Inflation is expected to rise in the near term and gradually converge to near 2 percent, broadly in
line with Israel’s inflation target. Public finances should improve in the near term as the authorities
unwind some of the COVID-19 stimulus. Nevertheless, over time, they will worsen under unchanged
policies with the fiscal deficit rising to 4–4½ percent of GDP. There are considerable fiscal risks
associated with the baseline forecast. These include the possibility of political unrest that would
harm growth, higher than currently expected deductions of clearance revenues related to prisoner
payments, and a stock of arrears that may be larger than currently estimated.
Debt Sustainability
6. Under the baseline scenario, gross public debt is projected to increase to about
62 percent of GDP by 2027. Both the level of debt and its rate of increase—about 11 percentage
points of GDP over six years—would increase risks, especially when considering gross financing needs
and institutional and policy constraints. West Bank and Gaza has a narrow revenue base, a
considerable share of the revenues collected on its behalf by Israel is subject to deductions which
are often unpredictable, and donor support has been declining for years. Limited fiscal policy
instruments, lack of financing options, social tensions which make reforms more difficult, and
restrictions on the movement of goods and people which obstruct economic growth further
complicate debt management.
7. West Bank and Gaza is vulnerable to frequent shocks that could further worsen the
debt outlook. A growth shock would push the level of public debt to 76 percent of GDP by 2027
while a combined macro-fiscal shock—which adds a temporary fiscal deterioration to the growth
shock—results in a public debt level of 82 percent of GDP by 2027. Similarly, a contingent liability
shock that captures a one-time upfront increase in the stock of debt related to arrears in
conjunction with lower growth and higher funding costs for the government, pushes debt to
77 percent of GDP by 2027. Finally, a “political unrest” shock, which aims to mimic the shocks that
West Bank and Gaza experienced in recent years, suggests that even a temporary but sizeable shock
can lead to a sharp deterioration in the debt outlook. High financing needs would make it difficult
for the authorities to manage shocks of this magnitude given also limited policy tools and buffers.
As a result, the economy is likely to experience sharp downturns if faced with large shocks with
unforeseen political and social consequences.

WEST BANK AND GAZA
Figure 1. West Bank and Gaza: Public Sector Debt Sustainability Analysis—Baseline Scenario
(In percent of GDP unless otherwise indicated)
1/
Debt, Economic and Market Indicators
Actual Projections As of December 31, 2021
2011-2019 2/ 2020 2021 2022 2023 2024 2025 2026 2027 Sovereign Spreads
Nominal gross public debt 32.0 47.1 50.4 50.5 50.7 52.8 55.4 58.4 61.7 EMBIG (bp) 3/ n.a.
Public gross financing needs 9.5 17.1 17.4 16.0 15.1 14.9 19.3 19.1 19.9 5Y CDS (bp) n.a.
Real GDP growth (in percent) 4.1 -11.3 7.1 4.0 3.5 2.4 2.0 2.0 2.0 Ratings Foreign Local
Inflation (GDP deflator, in percent) 1.9 -1.3 1.8 4.9 3.4 2.7 2.5 2.2 2.0 Moody's n.a. n.a.
Nominal GDP growth (in percent) 6.1 -12.5 9.0 9.1 7.0 5.2 4.6 4.3 4.1 S&Ps n.a. n.a.
Effective interest rate (in percent) 4/ 1.4 0.9 1.6 1.8 2.3 2.7 3.0 3.2 3.4 Fitch n.a. n.a.
Contribution to Changes in Public Debt

Actual Projections
cumulative debt-stabilizing
2011-2019 2020 2021 2022 2023 2024 2025 2026 2027 , 2022-27 primary balance 9/
Change in gross public sector debt 1.3 12.6 3.3 0.1 0.1 2.1 2.7 3.0 3.3 11.4 -0.8
Identified debt-creating flows 2.0 11.8 3.1 -0.6 0.1 2.0 2.6 3.0 3.3 10.5
Primary deficit 3.3 7.0 4.5 2.8 2.3 3.3 3.5 3.5 3.7 19.0
Primary (noninterest) revenue and gr 26.3 25.3 25.3 25.8 26.9 26.0 26.0 26.0 26.0 156.7
Primary (noninterest) expenditure 29.6 32.3 29.8 28.6 29.2 29.3 29.4 29.6 29.7 175.7
Automatic debt dynamics 5/ -1.2 4.7 -3.4 -3.4 -2.2 -1.2 -0.8 -0.6 -0.4 -8.6
6/
Interest rate/growth differential -1.2 5.3 -3.2 -3.4 -2.2 -1.2 -0.8 -0.6 -0.4 -8.6
Of which: real interest rate -0.1 0.8 -0.1 -1.5 -0.6 0.0 0.2 0.5 0.8 -0.6
Of which: real GDP growth -1.1 4.5 -3.0 -1.8 -1.7 -1.2 -1.0 -1.1 -1.1 -7.9
Exchange rate depreciation 7/ 0.0 -0.5 -0.3 … … … … … … …
Other identified debt-creating flows 0.0 0.0 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Please specify (1) (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Promissory notes 0.0 0.0 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Residual, including asset changes 8/ -0.7 0.9 0.2 0.7 0.1 0.0 0.0 0.0 0.0 0.9
25
15
projection
Debt-Creating Flows 20
(in percent of GDP)
10
15
5 10
5
0
0
-5
-5
-10 -10
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 cumulative
Primary deficit Real GDP growth Real interest rate
Exchange rate depreciation Other debt-creating flows Residual
Change in gross public sector debt
Source: IMF staff.

1/ Public sector is defined as central government.
2/ Based on available data.
3/ Long-term bond spread over German bonds.
4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate;
a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.
7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).
8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.
9/ Debt stabilizing primary balance in 2025.

WEST BANK AND GAZA
Figure 2. West Bank and Gaza: Public Debt Sustainability Analysis

—Composition of Public Debt and Alternative Scenarios
Composition of Public Debt
By Maturity By Currency
(in percent of GDP) (in percent of GDP)
70 70
Medium and long-term Local currency-denominated
60 Short-term 60 Foreign currency-denominated
50 50
40 40
30 30
projection
20 projection 20
10 10
0 0
2011 2013 2015 2017 2019 2021 2023 2025 2027 2011 2013 2015 2017 2019 2021 2023 2025 2027
Alternative Scenarios
Baseline Historical Constant Primary Balance
Gross Nominal Public Debt Public Gross Financing Needs

(in percent of GDP) (in percent of GDP)
70 25
60
20
50
40 15
30
10
20
5
10
projection projection
0 0
2020 2021 2022 2023 2024 2025 2026 2027 2020 2021 2022 2023 2024 2025 2026 2027
Underlying Assumptions
(in percent)
Baseline Scenario 2022 2023 2024 2025 2026 2027 Historical Scenario 2022 2023 2024 2025 2026 2027
Real GDP growth 4.0 3.5 2.4 2.0 2.0 2.0 Real GDP growth 4.0 2.3 2.3 2.3 2.3 2.3
Inflation 4.9 3.4 2.7 2.5 2.2 2.0 Inflation 4.9 3.4 2.7 2.5 2.2 2.0
Primary Balance -2.8 -2.3 -3.3 -3.5 -3.5 -3.7 Primary Balance -2.8 -3.5 -3.5 -3.5 -3.5 -3.5
Effective interest rate 1.8 2.3 2.7 3.0 3.2 3.4 Effective interest rate 1.8 2.3 2.7 3.0 3.2 3.4
Constant Primary Balance Scenario
Real GDP growth 4.0 3.5 2.4 2.0 2.0 2.0
Inflation 4.9 3.4 2.7 2.5 2.2 2.0
Primary Balance -2.8 -2.8 -2.8 -2.8 -2.8 -2.8
Effective interest rate 1.8 2.3 2.7 3.0 3.2 3.4
Source: IMF staff.

WEST BANK AND GAZA
Figure 3. West Bank and Gaza: Public Debt Sustainability Analysis—Stress Tests
Macro-Fiscal Stress Tests
Baseline Primary Balance Shock Real Interest Rate Shock
Real GDP Growth Shock Real Exchange Rate Shock
Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs
(in percent of GDP) (in percent of Revenue) (in percent of GDP)
80 350 30
70 300 25
60
250
20
50
200
40 15
150
30
10
100
20
50 5
10
0 0 0
2022 2023 2024 2025 2026 2027 2022 2023 2024 2025 2026 2027 2022 2023 2024 2025 2026 2027
Additional Stress Tests

Baseline Combined Macro-Fiscal Shock
Political unrest Contingent liability shock
Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs
(in percent of GDP) (in percent of Revenue) (in percent of GDP)
90 400 35
80 350 30
70 300
25
60 250
50 20
200
40 15
150
30
100 10
20
50 5
10
0 0 0
2022 2023 2024 2025 2026 2027 2022 2023 2024 2025 2026 2027 2022 2023 2024 2025 2026 2027
Underlying Assumptions
(in percent)
Primary Balance Shock 2022 2023 2024 2025 2026 2027 Real GDP Growth Shock 2022 2023 2024 2025 2026 2027
Real GDP growth 4.0 3.5 2.4 2.0 2.0 2.0 Real GDP growth 4.0 -2.1 -3.2 2.0 2.0 2.0
Primary balance -2.8 -3.3 -4.3 -3.5 -3.5 -3.7 Primary balance -2.8 -4.4 -7.6 -3.5 -3.5 -3.7
Real Interest Rate Shock Real Exchange Rate Shock
Real GDP growth 4.0 3.5 2.4 2.0 2.0 2.0 Real GDP growth 4.0 3.5 2.4 2.0 2.0 2.0
Combined Shock Contingent liability shock
Real GDP growth 4.0 -2.1 -3.2 2.0 2.0 2.0 Real GDP growth 4.0 2.5 1.4 1.0 1.0 1.0
Source: IMF staff.

WEST BANK AND GAZA
Figure 4. West Bank and Gaza: Public Debt Sustainability Analysis—Risk Assessment
Heat Map
Debt level 1/ Real GDP Primary Real Interest Exchange Rate Contingent
Growth Shock Balance Shock Rate Shock Shock Liability shock
Real GDP Primary Real Interest Exchange Rate Contingent

Gross financing needs 2/
Growth Shock Balance Shock Rate Shock Shock Liability Shock
External Change in the Public Debt Foreign

3/ Market
Debt profile Financing Share of Short- Held by Non- Currency
Perception
Requirements Term Debt Residents Debt
Evolution of Predictive Densities of Gross Nominal Public Debt

(in percent of GDP)
Baseline Percentiles: 10th-25th 25th-75th 75th-90th
Symmetric Distribution Restricted (Asymmetric) Distribution

90 90
80 80
70 70
60 60
50 50
40 40
30 30 Restrictions on upside shocks:
no restriction on the growth rate shock
20 20
no restriction on the interest rate shock
10 10 no restriction on the primary balance shock
no restriction on the exchange rate shock
0 0
2020 2021 2022 2023 2024 2025 2026 2027 2020 2021 2022 2023 2024 2025 2026 2027
Debt Profile Vulnerabilities

(Indicators vis-à-vis risk assessment benchmarks, in 2021)
West Bank and Gaza Lower early warning Upper early warning
3.5%
1 45 60
14% 14%
0.5 15 20
1 2 1 2 1 2
Annual Change in Public Debt Held Public Debt in

Short-Term Public by Non-Residents Foreign Currency
Debt (in percent of total) (in percent of total)
(in percent of total)
Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not
baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock
but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark,
yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.
Lower and upper risk-assessment benchmarks are:
200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15
and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

WEST BANK AND GAZA
Annex III. IMF Technical Assistance to the

Palestinian Authority, 2017–22
The IMF has provided TA to West Bank and Gaza (WBG) on public financial management (PFM), revenue
administration, banking regulation and supervision, stress testing, anti-money laundering and combating the
financing of terrorism (AML/CFT), national accounts, and external sector statistics. Technical support was also
provided to the Ministry of Finance (MoF)’s macro-fiscal and large taxpayer units in 2018–19. Priorities for
capacity building over the medium-term include banking supervision, the development of the national
payments system, and AML/CFT. Periodic review and assistance to improve the quality of external sector and
national accounts statistics are also needed. LEG, MCM and STA will continue to provide TA on these topics,
with support from METAC. FAD is re-assessing current fiscal sector TA needs and priorities, together with the
authorities but stands ready and tentatively plans to deliver TA on key critical areas, including expenditure
reform, taxation, macro fiscal planning and cash management in 2022–23.
Mission Date Mission Date of TA Report
Fiscal Sector: IMF Fiscal TA’s key objectives in 2017–19 were to consolidate the progress made in PFM in
2007–16, strengthen budget preparation and macro-fiscal forecasting, and boost revenue mobilization by
helping modernize tax administration. Technical support was also provided to the MoF’s macro-fiscal and
large taxpayer units in 2018–19. FAD TA has resumed in 2022, after a three-year hiatus. Planned areas of
focus of CD in the next two years comprise wage bill reform, net lending (within the context of the broader
fiscal relations between the PA and municipalities), medium term budgeting and multi-annual commitment
controls, cash management and revenue administration.
April 3–13, 2017 Budget Preparation and Macro-Fiscal Forecasting May 2017
April 30–May 11, 2017 Customs Risk Management May 2017
August 27–31, 2017 Operationalization of the PFM reform strategy September 2017
September 4–13, 2017 Budget Preparation and Macro-Fiscal Forecasting October 2017
November 27–December 7, Budget Preparation and Macro-Fiscal Framework December 2017

2017
April 8–19, 2018 Supporting the Development of the Macro-Fiscal June 2018
Unit’s Capacity
August 12–19, 2018 Supporting the Development of the Macro-Fiscal January 2019
Unit’s Capacity
October 28–November 8, Supporting the Development of the Macro-Fiscal November 2018

2018 Unit’s Capacity
February 17–28, 2019 Supporting the Development of the Macro-Fiscal April 2019
Unit’s Capacity
March 10–21, 2019 Revenue Administration/Large Taxpayer Office March 2019

WEST BANK AND GAZA
February 18–25, 2022 Training on Improving Tax Compliance in n.a.

Digital Economy
March 14–17, 2022 Virtual Regional Workshop on Public Sector n.a.

Debt Statistics
May 10–June 7, 2022 Review of Revenue Administration Reform n.a.

Strategies
June 1–14, 2022 Strengthening Quarterly Macro Fiscal n.a.

Reporting
Monetary and Financial Systems: In 2017–18, TA efforts focused on implementing IFRS9 and preparing for
and facilitating the transition to Basel III. MCM TA priorities during 2019–22 were informed and guided by
the findings and the recommendations of the Financial Sector Stability Review conducted in 2018 (and the
associated technical assistance roadmap). During 2019–22, TA centered on bolstering crisis management
arrangements, strengthening banking resolution provision and tools, and improving stress-testing to better
reflect specificities of WBG’s financial sector and test for multi-factor shocks. TA will also be provided in
2022–23 on AML/CFT ahead of and after the MENAFATF evaluation.
May 19–22, 2017 Workshop to develop the CFT legal n.a.

framework of West Bank and Gaza (in
Amman, Jordan)
September 24–October 3, 2017 Implementation of IFRS9 December 2017
February 25–March 8, 2018 Implementation of IFRS9 March 2018
March 14–23, 2018 Financial Stability/Stress-Testing March 2018
July1–5,2018 Implementation of IFRS9 November 2018
September 23–27, 2018 Basel III n.a.
October 17–November 1, 2018 Financial Sector Stability Review (FSSR) May 2019
March 3–7, 2019 CFT framework n.a.
March 24–28, 2019 Basel III n.a.
December 3–12, 2019 FSSR Follow-up: Contingency Planning for July 2020
Crisis Preparedness and Management*
January 3–31, 2021 FSSR Follow-Up: Financial Institution October 2021

Restructuring & Resolution*
April 26–May 6, 2021 Macro Stress-Testing n.a.
June 18–September 29, 2021 Macro Stress-Testing* n.a.
May 3–7, 2021 FSSR Follow-Up: Financial Institution October 2021

Restructuring & Resolution*
January 9–February 6, 2022 Developing a Crisis Management Plan* n.a.
March 2–17, 2022 Bank Resolution Law Reform* n.a.
March 21–April 29, 2022 National Payment Systems* n.a.

WEST BANK AND GAZA
May 8–11, 2022 AML/CFT* n.a.
June 26–July 5, 2022 Strengthening On-Site Risk Based n.a.

Supervision
Statistics: TA on statistical issues has focused on implementing and aligning existing statistical compilation
and dissemination systems with the latest international statistical standards for national accounts and
external sector statistics (ESS) datasets. In general, the transparency and timeliness of the data produced by
the Palestinian Central Bureau of Statistics, the MoF, and the PMA are on par with those of countries that
maintain good data management and dissemination standards, but additional work is needed to improve
data consistency in ESS and produce quarterly and annual chain-linked national accounts.
May 7–11, 2017 National Accounts n.a.
November 12–16, 2017 Price Indexes March 2018
December 17–21, 2017 National Accounts October 2018
March 11–15, 2018 National Accounts July 2018
June 24–28, 2018 National Accounts October 2018
July 22–August 2, 2018 External Sector Statistics October 2018
December 16–20, 2018 Price Statistics April 2019
February 10–14, 2019 National Accounts April 2019
December 13–15, 2019 National Accounts February 2020
June 8–11, 2020 Residential Property Price Indices August 2020
August 9–13, 2020 Compilation of Input-Output Tables September 2020
February 21–25, 2021 Re-Chain Linking the National Accounts April 2021
August 22–September 2, 2021 Institutional Sector Accounts – Sequence of November 2021

Accounts
February 27–March 10, 2022 Institutional Sector Accounts – Sector April 2022
Accounts
June 26–July 7, 2022 Balance of Payments n.a.
July 24–August 4, 2022 Annual National Accounts n.a.

n.a. – not applicable or not yet available.
* Reports classified as confidential or strictly confidential.

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WEST BANK AND GAZA

REPORT TO THE AD HOC LIAISON COMMITTEE1

Overcoming these challenges will require transformational reform with efforts

RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK _______________________________________ 4

A NEED FOR REFORM _________________________________________________________________________ 12

STAFF APPRAISAL _____________________________________________________________________________ 23

2 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 3

RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK

(World Bank, 2022).

4 INTERNATIONAL MONETARY FUND

Figure 1. West Bank and Gaza: Recent Economic Developments, 2011–22

Real GDP Growth Contribution to Real GDP Growth

-10 Net exports of goods and services

-4 10 West Bank and Gaza West Bank

INTERNATIONAL MONETARY FUND 5

Figure 2. West Bank and Gaza: High Frequency Indicators, 2015–22

Industrial Production Index PMA Business Cycle Indicator

Real and Nominal Effective Exchange Rates

6 INTERNATIONAL MONETARY FUND

B. …But the Fiscal Situation Remains Difficult…

recurrent spending, and a cut in development 80

2020, government debt (including arrears) 40

Prudential limits on bank lending and the lack of

record as part of their debt (Annex II).

INTERNATIONAL MONETARY FUND 7

Figure 3. West Bank and Gaza: Fiscal Sector Indicators, 2016–21

Expenditure Revenue and Donor Aid

Budget Financing Public Debt

Sources: Ministry of Finance (MoF); and IMF staff estimates.

8 INTERNATIONAL MONETARY FUND

9. Under unchanged policies public finances remain unsustainable. Government debt

shocks. A significant part of the problem is

2021, and neither does it raise any significant -4

increase over the medium term. 10

C. …While the Banking Sector Has Generally Been Stable…

46 percent. Banking sector assets comprise 116 percent of GDP.

INTERNATIONAL MONETARY FUND 9

Figure 4. West Bank and Gaza: Financial Sector Developments, 2015–22

Sources: PMA; and IMF staff estimates.

10 INTERNATIONAL MONETARY FUND

D. …And Significant Risks Are Ever Present.

12. The fiscal situation brings about risks

INTERNATIONAL MONETARY FUND 11

A NEED FOR REFORM

15. The 2022 budget envisages

by lower recurrent spending, notably on

spending to 3.9 percent of GDP in the budget. Wages and salaries

development expenditure in its baseline

16. Any reforms will have to be

12 INTERNATIONAL MONETARY FUND

for 44 percent of total spending and 57 percent 50

of total revenues (excluding grants) in 2021.

sector wages (incl. allowances), caused by high

top-heavy grading structure with more staff at

INTERNATIONAL MONETARY FUND 13

14 INTERNATIONAL MONETARY FUND

wholesale price that would remove non-applicable components of the tariff.

INTERNATIONAL MONETARY FUND 15

institutions, the specific modalities and 15