PMA Issues Economic Forecast Report 2016

Expecting Real Economic Growth Rate of Around 3.3 percent

The PMA issued the Economic Forecast Report for the year 2016. The Report shows that the Palestinian economy remains susceptible to several challenges and risks that threaten and limit its capacity to grow and achieve sustainable development. Most prominent of these are the ongoing Israeli occupation-which forces the Palestinian economy into dependence on its Israeli counterpart-, dependence on aid and foreign grants and the mounting political and economic uncertainty. The Report indicates the increasing occurrence of exposure of the Palestinian economy to shocks that are closely related to these challenges over the past few years; these relate to: politics and security as in a newly-waged Israeli aggression, or to public finance as in withholding the clearance revenues and its serious implications on the Palestinian economy. In addition, the Israeli government had tightened its siege on Gaza Strip, and on occasions, increased restrictions and obstacles in the West Bank, where Israel imposed restrictions on movement and access of people and goods across the whole of the Palestinian territories. Shocks also included the fluctuation and decline of foreign aid over the past few years and linking the flow of aid to the political positions of the Palestinian National Authority. 

Over recent years, the aforementioned factors have caused the economy to slow down and sometimes even shrink, as in 2014. Needless to say that as a result of such weak economic performance, unemployment rates soared, especially in Gaza Strip, given that realized growth rates were inadequate to absorb the rising labor supply. 

PMA estimations point to an expected real economic growth rate of 3.1 percent during 2015, as compared to a decline of 0.2 percent in 2014. The growth is supported primarily by an increase in investment expenditure associated with the reconstruction process in Gaza, in addition to a pick-up in consumption spending, increasingly financed through debt and banking loans, and a rising number of workers in Israel. It is expected that this growth will culminate in a slight increase in real per capita income by 1.3 percent, as compared to a drop of about 3.1 percent in 2014. Projections also indicate a mild increase in the private sector contribution to real GDP based on the cost of factors of production to 78.8 percent in 2015, as compared to 78.3 percent in 2014. In contrast, public sector contribution to real GDP is expected to drop to 21.2 percent, compared to 21.7 percent in 2014. Unemployment rates are also expected to drop to 25 percent, compared to 27 percent in 2014, alongside a modest decline in inflation rate to reach 1.5 percent, from 1.7 percent in 2014. 

As for the performance of the Palestinian economy in 2016, PMA forecasts point to a relatively mild improvement compared to the previous year. It is expected that real GDP will grow by 3.3 percent, as compared to 3.1 percent in 2015. This growth is expected to reflect on real per capita income, which will grow by 1 percent, compared to 1.3 percent in 2015, to reach USD 1,774. Forecasts also suggest that this growth will primarily be supported by an increase in private consumption funded by a hike in indebtedness and banking loans. This will raise the contribution of private consumption to 92.3 percent of real GDP, as opposed to a drop in public consumption to 25.8 percent. Consequently, the private sector’s contribution to real GDP based on the cost of factors of production will rise to 79 percent, as opposed to a drop in the public sector’s contribution to 21 percent for the same year. Additionally, investment spending associated with the process of reconstruction of the Gaza Strip will increase to 21.3 per cent of predicted real GDP for 2016.

As for the Palestinian external sector, predictions point to a growth in exports by 6.6 percent, and in imports by 8.3 percent. The growth is mainly associated with an increase in consumption. Subsequently, it is expected that these changes in exports and imports will augment the trade balance deficit by about 9.2 percent to constitute 39.4 percent of the real GDP predicted for 2016. It is also expected that this predicted positive growth will reflect favorably on job opportunities and employment, leading to a decline in unemployment rate in Palestine to about 24 percent of total workforce in 2016. 

PMA predictions also point to a rise in the pace of growth in prices during 2016. As such, the inflation rate is expected to rise again to reach an average of 2.0 percent, as opposed to projected 1.5 percent in 2015. 

It is worth mentioning that these forecasts are sensitive to the stability of economic and political conditions, especially given the fact that the Palestinian economy operates with a high-risk environment. In this context, the report analyzes potential risks (shocks), both positive and negative, that are likely to impact key economic indicators. 

The Palestinian economy is expected to grow by 7.1 percent during 2016, assuming a set of positive developments such as an improvement in political and security conditions, an acceleration in the reconstruction process in Gaza and the implementation of major projects and other economy-stimulating measures. In tandem, assumptions include the lifting of the siege imposed on Gaza and the easing of restrictions on the movement of people and goods in general. 

However, in the case of a sharp deterioration of political and security conditions, PMA forecasts point to a decline in real growth by 2.4 percent, compared with 2015. Real GDP per capita is expected to shrink by 4.6 percent. Furthermore, it is expected that such a scenario will have a notable negative impact on unemployment, pushing it up to about 28 percent of total workforce in 2016.