Strengthening Fiscal Resilience and Business Environment

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The DPG supports the strategic priorities of the Palestinian Authority (PA) envisaged in its development strategy, the National Policy Agenda (NPA) (2017-2022) and provides essential financing for the PA’s 2019 budget. The DPG supports the PA’s reform efforts aimed to strengthen fiscal resilience and foundations for private sector investments and ultimately job creation. The US$30 million grant will directly leverage another donor financing in the amount of approximately US$45 million through the Palestinian Reform and Development Plan (PRDP) Trust Fund. The operation also sends a strong positive signal to other donors that directly provide bilateral budgetary support to the PA. While this operation is a standalone operation, it continues the practice started under the previous operation of presenting prior actions in a medium-term reform context. The structure of the economy of Palestinian territories has transformed dramatically over the last two decades. The manufacturing and agriculture sectors’ share of Gross Domestic Product (GDP) contracted by around 40 percent and 75 percent, respectively, during 1994-2016. The share of public service sector (such as education, health, and security) in national income expanded by around 60 percent during the same period, largely financed by donors. This dramatic structural transformation in the economy has resulted in failure to generate sufficient private sector jobs to absorb the growing labor force (mainly youth and women) and revenues to provide services to a rapidly rising population. However, it is critical to highlight that intensified settlement activities, little progress in internal reconciliation, restrictions on movement, curtailed access to large areas of territory and restrictions on external trade continue to constitute the main impediments to private sector investment and job creation in West Bank and Gaza. Driven by episodes of conflict, poverty rates in the Palestinian territories have increased during 2011-17, with nearly one in three persons living in poverty, and with growing divergence between the West Bank and Gaza. Economic growth, social assistance and a well targeted cash transfer program run by the PA have helped reduce poverty in the Palestinian territories in the years following the second Intifada. However, political instability and multiple episodes of war in Gaza over the last ten years have significantly eroded these welfare gains. Following the 2007-08 and 2014 conflicts in Gaza, poverty increased significantly, pushing up the overall poverty rate in the Palestinian territories. Data from the Palestinian Central Bureau of Statistics (PCBS) shows that the overall share of population below the poverty line has increased from 26 percent in 2011 to 29 percent in 2017. This, however, masks a substantial divergence in trends between the West Bank and Gaza. Poverty rate in the West Bank declined from 18 to 14 percent, while poverty in Gaza increased dramatically from 39 to 53 percent leaving every second Gazan below the national poverty line.