Palestine’s economy forecast to grow 3.5% in 2022, World Bank says

The Palestinian economy, which largely relies on foreign aid and grants, is expected to grow 3.5 percent in 2022.

This is being driven by the ongoing recovery in private consumption amid the full easing of Covid-19-related restrictions and a surge in the number of Palestinians working in Israel, according to a new World Bank report.

However, the forecast is lower than the 7.1 percent economic growth that Palestine recorded in 2021 and the 5.7 percent growth in real gross domestic product in the first quarter of this year.

“In 2022, growth in the Palestinian Territories is expected to slow as the low base effect weakens, public consumption slows and inflationary pressures persist,” the World Bank said.

Inflation is expected to come in at 3.6 percent for the full year amid higher food and fuel prices, while public consumption will fall as the Palestinian Authority pays fractional salaries to its employees, the Washington-based lender said.

“If prices continue to increase in 2022 at historical rates, households could face average total cost increases of up to 80 percent for bread, flour and vegetable oil between January 2022 and January 2023,” the World Bank said.

“Consumption patterns suggest that these price shocks will hurt poorer households relatively more than wealthier deciles of the population.”

Food and commodity prices have skyrocketed worldwide due to the ongoing conflict in Ukraine.

Palestine is at risk of higher inflation and food insecurity this year because the bulk of its wheat supplies are imported from Russia and Ukraine, either directly or via Israel, the UN Conference on Trade and Development said in a report last week.

The West Bank and Gaza Strip are the second-highest food importers (by share) in the region, with a significant share of wheat flour and sunflower oil imports coming from Ukraine and Russia, the World Bank said.

Between January and April 2022, the food component of the Palestinian index of consumer prices (CPI) rose sharply to its highest level in the last six years, according to the report.

The report also noted that demand has increased as job numbers have risen this year.

The number of Palestinians working in Israel and the West Bank settlements rose to 203,000 in the first quarter of this year, from 153,000 in the fourth quarter of 2021.

“The average daily wage of these workers is more than double the average daily wage in the West Bank, implying a larger impact on demand,” the report said.

Overall, the unemployment rate in the Palestinian Territories was 24.2 percent in the second quarter of this year, up from 26.4 percent in 2021.

However, the headline rate masks a wide regional divergence, with April-June unemployment in the West Bank reaching 13.8 percent, while in Gaza it was 44.1 percent, reflecting “the difficult social and economic conditions” in the region, the world, reflects bank said.

The report also said that the Palestinian Authority’s (PA) budget deficit fell by 70 percent in the first half of 2022 compared to the same period in 2021 due to strong revenue growth.

It “maintained spending as increases in certain spending items were offset by a sharp decrease in spending on the National Cash Transfer program at high social costs.”

“Although direct borrowing by the PA from the domestic banking sector is gradually declining, PA and public sector employees together still account for nearly 40 percent of total banking sector lending, posing destabilizing risks,” the World Bank said.

“Distressed loans and classified loans have also increased since 2018.”

Reforms are needed on both the revenue and expenditure sides for a more sustainable fiscal position, including reforms to the payroll, the public pension system and “untargeted transfers,” the report says.

Total revenue is expected to grow more than 10 percent to $4.67 billion in 2022, compared to $44.23 billion last year.

Meanwhile, the PA deficit is expected to reach $770 million on a commitment basis in 2022, the World Bank said.

“A stable and predictable continuation of donor support to the PA through budget support operations will be crucial as it continues on its reform agenda,” the World Bank said.

She added that the PA has strengthened its anti-money laundering and countering the financing of terrorism framework to strengthen partnerships with the donor community.

“The reforms of the PA are necessary but not sufficient to put the Palestinian territories on a sustainable development path,” it said.

“The Israeli government’s cooperation remains essential to reduce economic constraints and sources of tax leakage, and to help create greater fiscal space for social assistance.”

Updated September 18, 2022 12:37 p.m