On April 13, the World Bank presented a report, “Towards a Palestinian State: Reforms for Fiscal Strengthening” to the Ad-Hoc Liaison Committee in Madrid, Spain.
The World Bank identifies fiscal strengthening as a critical area for PA reform to ensure the sustainability of a future Palestinian state. The Palestinian Authority (PA) has been working toward this goal with the Palestinian Reform and Development Plan (PRDP), which was presented in August 2009.
Current Situation: The report discusses the economic state of the West Bank and Gaza Strip and the factors that have led to the current situation. Economic growth in the West Bank and Gaza stood at 6.8 percent in 2009, above the projected 5.5 percent in the PA’s budget. However, GDP remains nearly a third below GDP in 1999. The current growth rate is precarious as it is based on a combination of PA reforms, Israeli loosening of movement and access restrictions and donor funding, the largest factor. The report argues that while Israel has loosened restrictions in the West Bank, it has made limited changes to the underlying restrictions, and continued construction of settlements. Israel continues its closure of Gaza, despite some small exceptions. Even with the economic growth and reforms the PA budget remains in deficit, in large part because of the emergency spending in Gaza following the Gaza conflict. For the economic situation to become sustainable, the report argues, private sector growth, which has not increased at the same rate as public sector growth to date, needs to increase significantly; the PA needs to continue its reforms, Israel must further ease movement and access restrictions and donor funding must become consistent.
Analysis and Recommendations: The report suggests reforms that would strengthen the PA’s fiscal position. These areas include improving and reforming: 1) public financial management and public procurement, which would improve government efficiency and transparency; 2) the social safety net; 3) the pension system; 4) electricity revenue collection; and 5) local governance.
Reform Areas
1. Government Efficiency and Transparency:
Public Financial Management (PFM): The PA has made significant improvements to budget preparations, allocations, and accounting of spending. Areas for PFM improvement include: 1) continuing to increase control of spending, 2) focusing on quality of spending further, 3) approving the budget before or soon after the beginning of the fiscal year and 4) continuing to develop reporting capabilities.
Public Procurement: In 2004, the World Bank identified areas for improvement in PA procurement procedures as: 1) the need for a single authority to establish procurement rules; 2) the lack of rules guiding procurement of consulting services; and 3) an absence of guidelines to resolve disputes. While new laws and regulations related to procurement were drafted in 2006, they have not been ratified. Approving these laws will allow the PA to undertake additional steps to reform the procurement sector.
2. Social Safety Net: Social assistance is not currently administered through a coordinated process; instead, a mix of government and non-governmental, local and international bodies provide this assistance. In early 2009, the PA approved the merger of the two primary cash assistance programs funded by the EU and World Bank into a body to be run by the Palestinian Ministry of Social Affairs. The ongoing implementation of this merger will create one of the most advanced programs in the Middle East and North Africa region.
3. Pension System: PA budget expenditures in 2008 stood at 4 percent of GDP, a higher than average number in the region. Reforms to pensions began in 1998 and a new arrangement was instituted in 2005. More than 74,000 civil servants and 63,000 security personnel were covered by the existing pension system as of June 2009. The PA must now determine the best way to reduce pension liabilities and develop an environment for expanding future coverage.
4. Electricity Distribution and Net Lending: The Palestinian Authority faces a widespread “net lending” problem in which municipalities either do not collect electricity bill revenues or divert them to fund local projects instead of paying for the cost of electricity. The report argues that this problem, which is improving over time, occurs because of a combination of a “culture of non-payment” and local governing bodies’ reliance on electricity funds to cover their budgets. The central government is then responsible for making up the difference to the Israel Electricity Company, a drain on the government’s budget. The PA has had some success recently in collecting a greater proportion of the bills. It passed a new law in April 2009 that would require local bodies to transfer electricity assets to newly established electricity distribution companies, which has not been fully implemented. The report suggests short-term measures to support local governments through a transition to facilitate the full implementation of this law.
5. Central and Local Governments’ Relationship: The PRDP highlights the need for a stronger relationship between the central government and local government units (LGUs), whose numbers have increased greatly since 1993. Many LGUs do not have the capacity to deliver needed services and are not able to generate enough revenue to pay for the services. Electricity revenues have helped some LGUs provide services leading to poor fiscal management. The World Bank proposes several areas for LGU reforms, including: 1) continuing to enhance local capacity; 2) restructuring and consolidating LGUs; 3) enhancing legal frameworks and institutional structures; and 4) enhancing revenues.
