from Pressure Points and Middle East Program

IMF Realism About the West Bank and Gaza

May 20, 2015

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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In the aftermath of the last round of conflict between Israel and Hamas, in the summer of 2014, many donors made big pledges of aid for Gaza at a special conference in Cairo. And many haven’t paid up.

This is one conclusion that emerges in the newest IMF report on the Palestinian economy, dated May 18, 2015. It is a report to the Ad Hoc Liaison Committee, the donor group that meets to coordinate aid. In the report the IMF decries “shortfalls in donor aid relative to Cairo pledges.” The IMF notes that “the reconstruction process in Gaza is moving far more slowly than expected,” and one big reason is “unfilled donor pledges.” Because the United States has met its pledges, it seems likely that the unmet pledges are from Arab donors—or to be more precise, from Arab non-donors.

The IMF report is a broad survey of the Palestinian economy that contains many concrete suggestions for Israel, aid donors, and above all the Palestinians themselves. It suggests that economic progress is not at all hopeless, and that much could be achieved by better policies in Ramallah. Here’s an example:

Staff advised limiting wage growth to 2 percent, keeping real wages broadly constant. This may require a freeze on promotions and cuts in the cost-of-living adjustment, along with further cuts in fuel subsidies. Development spending, including in Gaza, should be linked to the availability of donor aid. On the revenue side, the authorities should continue to strengthen tax administration and consider the early introduction of the 10 percent tax on dividends they are considering, which would contribute to a less regressive tax system.

On the revenue side, IMF “Staff presented analytical work showing that there is significant scope to raise revenue by means of expanding the tax base and eliminating leakages….Reforms should draw on international best practices, which emphasize self-assessment, risk-based audits, strong enforcement, and tax administration along functional lines….”

After discussing Israeli restrictions on the Palestinian economy, the IMF staff stated that nevertheless “there is scope to simplify procedures, improve legislation, and level the playing field for businesses. Several regulations that are pending would improve the business climate.”

The IMF report criticizes both donors and the PA for the misuse of aid:

Although aid contributed to poverty reduction and growth, its volatile nature led to a gradual substitution away from development spending, which requires predictable multiyear commitments. When aid windfalls did occur, they tended to boost government consumption rather than investment.  In addition, donors’ own priorities and development agendas limited alignment of aid with national development priorities.

The  report then usefully compares the Palestinian situation to that in other countries that were dependent on aid—but made real progress.

Several countries with similarly high aid flows have successfully reduced aid dependency. Examples include Ghana, Mozambique, Rwanda and Botswana. Ghana, Mozambique and Rwanda still receive very high aid flows today, but aid ratios to government spending have fallen in all three countries in recent years. Botswana was one of the poorest countries in the world at the time of its independence in 1966, when it relied on grants from Britain for development and most of its recurrent spending. Although aid provided critical resources in the early years of independence, its role declined over time, and by 2006/7 it accounted for less than 2 percent of GDP.

Why recount all of this?

In the Clinton, Bush, and Obama administrations the United States has sought a comprehensive peace agreement between Israel and the PLO, and failed to achieve this time after time. There has been a real opportunity cost from this search for a final status agreement complete with handshakes on the White House lawn and Nobel prizes. The cost has been that we focused solely on the diplomatic process and largely ignored real life as it is lived by Palestinians, and might be improved. The IMF report shows that much could be done, even within current constraints, to improve the Palestinian economy. It’s undramatic, the details are boring, and some of the analyses are technical. No prizes, no time on the evening news. But that is how Palestinian institutions will be built, and how the institutions of a state must come into existence—not at the State Department and not at the United Nations.

The IMF report is a reminder that speeches, great conferences, and dramatic donor pledges (that are never met) do not benefit the Palestinians. And of course efforts to hurt the Israeli economy through boycotts will not help but will actually harm the Palestinians as well. It is long past time to take a more serious approach, and the IMF’s report shows some ways this could be done if the genuine goal is progress rather than taking credit and casting blame.

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