Palestine Monetary Authority Publishes Economic Forecast Report 2018

Slow Economic Growth is expected for the 2nd Year in a Row

Ramallah - The Palestinian economy operates in an environment of many internal and external risks and challenges, which significantly affects and changes the economic situation. This environment could make the economic activity take on unconventional patterns. Initial estimates showed recovery in economic activity in 2017; however, the unclear economic situation that is reliant on the political situation and changes occurring domestically and externally warns of slowdown in economic activity. Therefore, the economic situation in 2018 will depend on several political and economic variables, namely: (i) The reconciliation of the West Bank and Gaza Strip and its impact on controlling and organizing the fiscal situation (revenue and expenditure) of the government; (ii) Frequent flow to the Palestinian Authority of the clearance revenues Israel collects on its behalf and donors’ commitment to provision of foreign grants; (iii) Easing restrictions on trade and allowing benefiting from resources in Area C of the West Bank; and (iv) An improved investment environment in order to encourage the private sector and allow it to increase its investment and carry out major infrastructure projects.

Palestine Monetary Authority produced forecasts of the most important potential variables in the economy in 2018 and analyzed the likely risks and challenges and their positive and negative impact on the performance of the economy. According to baseline (status quo) scenario forecasts, economic growth rate will slow down to 2.2% in 2018 with impact on the growth of the actual per capita income, which will slightly increase by 0.1%, to $2,943. This growth is primarily supported by growth in private demand for consumption and investment despite the low levels of this demand in previous years. The forecasts of PMA with respect to inflation show more slowdown in the overall level of prices in 2018; hence, the expected overall inflation rate in 2018 will not exceed 0.1% on average.  

The baseline scenario also expects the private sector’s contribution to GDP at factor costs to drop to 78.4%. Public sector’s contribution to real GDP will drop to 21.6% in 2018. Additionally, total consumption spending will increase its contribution to real GDP to 118.8% in 2018 and total investment spending is expected to increase slightly to 20.5% of GDP. External sector’s forecasts indicate that exports will decline by 0.2% and imports (whose increase is mainly associated with an increase in consumption) will rise by 1.7%. Consequently, it is expected that these changes in exports and imports will exacerbate the trade balance deficit by about 2.5% to constitute 39.3% of the forecast real GDP of 2018. It is expected that this growth will not have a significant impact on job creation and employment. Instead, unemployment rates in Palestine will continue to rise, reaching about 29.3% of the labor force in 2018.

The aforementioned forecasts are; however, subject to potential positive and negative shocks of various degrees of severity. The impact of such shocks affects several key indicators of the economy. A positive shock to the Palestinian economy (the optimistic scenario, reconciliation scenario) presumes serious progress in the political track, an improving security situation, peace talks, and an accelerated reconstruction of Gaza Strip, the launch of major projects and the introduction of measures to stimulate the economy, lifting the siege and ending the closure of Gaza, easing restrictions on the movement of people and goods in general, and an increase in the number of Palestinians workers in Israel. In addition, it entails a rise in donor grants to support the budget and development spending, as well as a rise in private sector transfers from abroad, which will exceed annual rates. In light of this, PMA forecasts a 6.3% economic growth, due to an expected 20A% growth in Gaza, increased GDP per capita by 3.1%. Under this scenario, unemployment rates are also expected to improve, dropping to around 27.1% of total labor force.

The pessimistic scenario; however, indicates that the economy remains susceptible to negative shocks. A negative shock scenario assumes a sharp deterioration in the political and security situation, a decrease in the number of Palestinian workers in Israel, a tightening of restrictions on the movement of people and goods, an increase in the days of closures to workers and trade, the withholding of Palestinian clearance revenues by Israel, and a decline in foreign grants to support the budget and development expenditure. Such shock, according to PMA’s forecasts, will lead to further deterioration of economic conditions; economy would contract by 1.4% and real per capita income will decline by 3.6%. There will also be bad impact on unemployment rates, which would increase to 32.4% of the total labor force in 2018.