Palestinian Authority Must Cut Spending as Aid Drops, IMF Says

The Palestinian Authority should cut spending and step up efforts to boost domestic tax collection as donor countries fail to meet their commitments, the International Monetary Fund said.

The aid shortfall is among factors that have led to a “significant” slowdown of growth and a liquidity crisis in the West Bank, the IMF said in a report released today. The economies of the West Bank and Gaza Strip are facing increased risks, it said.

The Palestinian Authority received $400 million in aid in the first eight months of the year, compared with an expected $700 million. This has led to an accumulation of “substantial” payment arrears, affecting wages for the first time since 2007, and borrowing up to commercial banks’ limits, the IMF said.

“It is essential that the PA caps expenditure commitments below budgeted levels,” according to the report. “This will require strict cost-saving measures.”

Economic growth in the West Bank probably will slow to 4 percent this year from 7.6 percent last year, according to the IMF forecast. Gaza’s growth is likely to accelerate to 17 percent this year from 15.2 percent last year, following the easing of some import controls by Israel in mid-2010. The Gaza recovery is “bound to wane” without a further easing of Israeli restrictions on private-investment inputs, it said.

The IMF report will be presented at a Sept. 18 meeting of donor nations in New York before a Palestinian request for recognition of statehood by the United Nations during the annual General Assembly meeting that starts Sept. 20.

Demands on Donors

“Donors are experiencing their own financial difficulties, as they face competing demands for aid from other countries, as well as domestic pressures for budget cuts,” the IMF said.

Prime Minister Salam Fayyad said in July that the Palestinian Authority had entered a financial crisis and couldn’t pay full salaries to civil servants because banks wouldn’t lend it more money and donor states hadn’t fulfilled their pledges.

The authority plans to pay August salaries a week late, on Sept. 15, after two months of erratic paychecks, spokesman Ghassan Khatib said Sept. 10.

The Palestinian Authority, led by President Mahmoud Abbas of the Fatah faction, administers the West Bank. The Islamic group Hamas, which won Palestinian parliamentary elections in 2006, ousted forces loyal to Abbas from Gaza in 2007 to gain control of the enclave. Hamas is designated a terrorist group by Israel, the U.S. and the European Union.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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