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PROGRAM INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Report No.: AB5918
WBG Palestinian Reform and Development Plan Development
Operation Name
Policy Grant III
MIDDLE EAST AND NORTH AFRICA
Region
Sub-national government administration (44%); Central government
Sector
administration (22%); Power (22%); Other social services (12%)
P118593
Project ID
PALESTINIAN LIBERATION ORGANIZATION
Borrower(s)
(for the benefit of the Palestinian Authority)
Ministry of Finance (MOF) of the Palestinian Authority
Implementing Agency
Ministry of Finance
Ramallah, West Bank
West Bank and Gaza
Tel: (972-2) 400-650 Fax: (972-2) 400-595
[email protected]
August 2, 2010
Date PID Prepared
July 29, 2010
Date of Appraisal
Authorization
September 16, 2010
Date of Board Approval
1. Country and Sector Background
Growth in West Bank and Gaza (WBG) accelerated in 2009 and initial estimates suggest real growth
reached 6.8 percent, well above the 5 percent projected in the PA’s 2009 budget. Most of the growth
was in the West Bank, where the IMF and Palestinian Central Bureau of Statistics (PCBS) estimate
real GDP growth was 8.5 percent. However, despite the continued closure of Gaza, growth there was
estimated to be positive at about 1 percent. Initially PCBS estimated real growth for WBG in 2008 at
2.3 percent, which would be a real per capita decline in GDP. However, they have recently issued
revised estimates that put real growth at about 5.9 percent implying an increase in per capita GDP.
Thus, the 2009 performance is the third consecutive year of per capita GDP growth and may signal
that at least the West Bank economy is beginning to recover after years of decline. But growth is still
less than what might be expected from an economy recovering from such a low base.
The revival of growth in the West Bank is impressive, but it is also precarious. It is being driven by a
combination of large sustained inflows of donor assistance, Palestinian Authority (PA) government
reforms that have increased investor confidence and the loosening of some Israeli security
restrictions. However, the high level of external assistance over the past three years is probably the
most important factor. In 2009, the PA received more than US$1.355 billion in budget support
coming on top of US$1.8 billion in 2008 and almost US$1 billion in 2007. This does not consider
hundreds of millions more in aid that has flowed into the economy through the UN and from bilateral
assistance programs. The large amounts of budget support have allowed the PA to maintain
expansionary fiscal policies to support growth. In 2009, total PA commitments were equivalent to
around 52 percent of GDP, with wage expenditures alone around 24 percent of GDP.
Despite the continuing occupation and closure of Gaza, real growth is projected by the IMF and PA
to be about 7 percent in 2010 rising to 10 percent by 2012-2013. This assumes that the situation in
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Gaza will not deteriorate and that security will remain stable in the West Bank allowing continued
growth. It also assumes continuing large inflows of external assistance. This results in reduced
unemployment and at least in the West Bank, recovering real per capita GDP. These are strong
assumptions, but estimates from the first quarter of 2010 suggest that growth is on track to reach or
exceed projections. Given the recent fall in oil and food prices along with the Bank of Israel’s sound
management of the money supply, the CPI inflation rate fell to about 4 percent in 2009 and is
projected to hold steady in the 3-4 percent range in the medium term.
2. Operation Objectives
The proposed Palestinian Reform and Development Plan Development Policy Grant III (PRDP DPG
III) is designed to support the PA as it continues to implement the reform program detailed in the
Palestinian Reform and Development Plan (PRDP), by supporting actions in two policy areas: (i)
strengthening the fiscal position and (ii) improving public financial management. The PA
implemented the plan throughout 2008, 2009 and the first half of 2010. As detailed in World Bank
monitoring reports, the PA is making adequate progress. To have the largest impact, the proposed
PRDP DPG III maintains the focus on the same two policy areas supported by the two previous
operations.
3. Rationale for Bank Involvement
The main effort of the Bank’s strategy is to continue supporting the PA’s implementation of the
PRDP through the proposed PRDP DPG III. The PRDP’s success depends upon three critical
factors: (i) the PA effectively carrying out promised reforms; (ii) GOI relaxing the closure regime to
allow private sector growth; and (iii) the international donor community providing full support for
the PA’s recurrent budget. There is little the Bank can do on the second factor. Consequently, the
Bank is focusing its efforts on the first and third factors. The Bank continues to provide significant
amounts of technical assistance to help the PA implement its reforms. Through its ongoing policy
dialogue, it is providing the government with advice and encouragement to remain on track. But the
Bank’s most effective efforts are directed at encouraging donor funding of the recurrent budget. The
Bank, in consultation with the IMF, produces quarterly reports on reform progress that provide
donors comfort to increase their support through the Central Treasury Account (CTA). This has been
a successful effort as the PA received nearly US$1.355 billion in budget support in 2009; over
US$107 million of which was provided through the Bank managed PRDP-Trust Fund. This proposed
third DPG is designed to both help the PA close its fiscal gap and to encourage donors to continue to
provide untied budget support through the CTA.
4. Financing
The PRDP DPG III is a single tranche operation of US$40 million. This amount will be disbursed in
one tranche provided that the macroeconomic framework is satisfactory and that the Bank is satisfied
with the implementation of the Program by the recipient.
5. Institutional and Implementation Arrangements
The PA has asked the Bank to monitor progress on the PRDP and the Bank will continue to do so
based on the program of reforms. The PA has been producing quarterly reports, which the Bank
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reviews in consultation with the IMF. The Bank focuses on progress on structural reforms while the
IMF provides detailed input on fiscal and Public Financial Management (PFM) issues.
The Bank team managing the PRDP DPG III is located in WBG and is thus able to have daily contact
with their PA counterparts. The Bank team continues to include a Governance Advisor who is a
PFM expert at the Jerusalem office to work alongside the Country Economist monitoring the PRDP
DPG III. The task team leaders for the social safety net reform and municipal finance assistance are
also resident in the WBG office. The main ministries responsible for implementing the reforms
supported by the PRDP DPG III are the Ministry of Finance (MOF), Ministry of Social Affairs
(MOSA) and Palestinian Energy and National Resources Authority (PENRA) with which the Bank
has developed a strong relationship. The PFM expert works closely with the IMF mission to both
provide assistance to the MOF and monitor progress on budget related and PFM issues.
6. Benefits and Risks
The PRDP DPG III is designed to help the PA strengthen its fiscal position by reducing its public
sector wage bill to less than 22 percent of GDP and Net Lending to less than 5 percent of GDP by
2010. The PRDP DPG III also supports the PA’s efforts to improve public financial management.
Key indicators for this are producing a timely budget, providing 2009 accounts to its external
auditors and implementing commitment controls.
The PRDP’s success depends on parallel actions by the PA, the Government of Israel (GOI) and the
donor community.
The key risks are:
(i) The PA must maintain strong political support for the PRDP in order to take actions such as
maintaining the public sector wage bill at an affordable level, moving electricity generation from
local governments to commercial distribution companies, initiating reform of the public pension
system and reforming public procurement.
(ii) The PA will not be able to meet its fiscal goals without substantial private sector growth.
However, the GOI continues to maintain restrictions on movement access to resources such as land
and water.
(iii) Donor support is the third determinant of the PRDP’s success. The PRDP assumes high and
sustained donor assistance during the plan’s life. In the long run, the PA is striving toward fiscal
sustainability, but until they reach this goal, they will depend upon large amounts of untied budget
support that will allow it to pay wages and basic operational costs. Because of the PA’s commitment
to reform, donors provided about US1.355 billion in budget support in 2009, less than in 2008 but
still substantial. However, in 2010 budget support may fall below levels projected by the budget.
7. Poverty and Social Impacts and Environment Aspects
A major focus of the PA’s plan is to control growth in the government work force and collect utility
bills, both of which have the possibility of negatively impacting the most vulnerable parts of society.
A large share of the Palestinian population depends on the wages of public employees. The
dependency rate is estimated to be about 6-8 for each public employee and there are currently about
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150,000 employees. Consequently, if the private sector remains stagnant and Israel does not allow
increased employment of Palestinian workers in Israel, the inability to increase public employment
could lead to increased poverty rates. The economic crisis has left many households in a position
where they cannot pay their utility bills. Over half the Gaza households and nearly a quarter of the
West Bank households are in poverty. Thus, increasing collection rates must be done carefully to not
cause undue hardships on the most vulnerable groups.
The PA recognizes these risks, and as they pursue their PRDP goals, they will make protecting
vulnerable groups their top priority. Consequently, the PRDP DPG III will continue to have social
protection as one of its pillars. The PRDP DPG III actions are complementary to and will likely
enhance the performance of other Bank projects and PA programs such as the Social Safety Net
Reform Project (SSNRP) and the Electric Utility Management Project (EUMP).
To ensure the protection of the most vulnerable households, which are often those headed by women,
the PRDP DPG III is supporting the rapid expansion of the targeting data base and unification of the
main cash assistance plans by the MOSA. The Ministry has verified the status of more than 40,000
households using the new Proxy Means Test (PMT) formula and is expecting to add another 15,000
in the West Bank and 24,000 in Gaza by mid-2011. This will help direct aid to the most vulnerable
households to ensure that those that might suffer the most from any negative impacts of the PRDP
receive support. An accurate database and a unified system will help the PA provide assistance to
reduce any gender disparities since female headed households appear to be one of the most
vulnerable population groups. In addition, it is expected that the unified cash assistance plan,
combined with an accurate targeting database, will attract additional financing from other donors.
The implementation of the unified system will mean that some households that were previously
receiving benefits will be dropped since they no longer meet the minimum requirements for cash
assistance. To mitigate the effects of this, households will be provided payments as they are
removed from the system over time. In addition, they may be re-directed to other social assistance
programs including micro-finance, food assistance, temporary employment generation programs, or
vocational training activities.
Efforts to collect electricity bills could negatively impact the most vulnerable groups. However, the
PA, with Bank support, is working to mitigate this risk. The pre-paid meters are being installed in
the more affluent areas first and no households are being disconnected for non-payment. The Bank’s
team working on the power sector is ready to assist the PA to develop a pricing policy and methods
of collection that will allow the poorest consumers to still obtain electricity while increasing
collection from those more able to pay. In the long run, as collection efforts increase, pre-paid
meters may benefit the poor. In many countries, the poorest households cannot afford service on
credit and the introduction of pre-paid meters actually increases access to electricity.
Although Development Policy Grants are not formally subject to Bank safeguards Policies, a review
of the environmental implications of this operation concluded that the PRDP DPG III will not have
significant effects on the country's environment, forests and other natural resources. The
environmental and natural resource implications are driven to a large extent by the nature of an
operation. In the proposed operation, none of the prior actions as listed in the policy matrix will have
environmental impacts or risks.
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8. Contact point
Contact: John L. Nasir
Title: Lead Private Sector Development Spec.
Tel: 972-2-236-6500
Fax:
Email: [email protected]
Location: Gaza, West Bank and Gaza (IBRD)
9. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Email: [email protected]
Web: http://www.worldbank.org/infoshop
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