The Palestinian economy faces daunting challenges due to rising political uncertainty and a stalled peace process. In this difficult and fragile environment, it is essential that the main stakeholders – the Palestinian Authority (PA), Israel, and donors – work together to maintain macro-fiscal stability, safeguard institutions, and ensure a steady inflow of donor aid to avoid a deterioration in economic conditions, according to the latest report issued today by IMF staff for the Ad Hoc Liaison Committee (AHLC).

“The costs of inaction are potentially severe: sustained recession, rising unemployment, and, ultimately, social unrest,” Christoph Duenwald, Mission Chief for the West Bank and Gaza, said.

The AHLC is scheduled to discuss the IMF report and the state of the Palestinian economy at a meeting in New York later this month. The IMF provides technical services to the West Bank and Gaza, including policy advice in the macroeconomic, fiscal, and financial areas, as well as technical assistance. The report reviews recent developments, discusses the risks to the outlook, provides advice on policies to strengthen the economy, and recommends actions to be taken by all parties concerned.

IMF staff recommends that the PA retain policy discipline to address fiscal pressures and a large projected financing gap in 2015 projected at US$500 million (or 3.7 percent of GDP). Measures should focus on limiting the rise in the wage bill, introducing new government administrative fees, and strengthening tax administration.

The report also urges Israel to enhance economic cooperation, ease restrictions on movement and access in the West Bank, and to work with other countries in the region to lift the blockade of Gaza, which is impeding postwar recovery. The recent conflict in Gaza has had a devastating impact on all sectors of the economy, in addition to the human loss.

Donors should maintain aid to the Palestinian economy at this critical juncture, the report says.

“Measures by the PA to ensure macro-fiscal stability and a resumption of growth can only go so far. The strong and predictable support of the donor community—notwithstanding other competing claims on aid budgets—remains as important now as it ever has,” Duenwald said.