The Palestinian economy has been in a very difficult situation in 2020 facing triple crises reinforcing each other: i) a resurgent COVID-19 outbreak, ii) a severe economic slowdown, and iii) a political standoff with the Government of Israel that disrupted clearance revenues for over six months (May-November 2020).
Consequently, GDP for the entire year is expected to contract by about 8 percent. Even though the Palestinian Authority’s recent decision to resume coordination with Israel is expected to ease the fiscal stress, a large financing gap (deficit after expected grants) of US$760 million is projected for 2020 and additional efforts by the Palestinian Authority, the donor community and Israel remain crucial to secure additional financing.
Given the role that clearance revenues could play as a potential stabilizer for the Palestinian economy, ensuring their uninterrupted flow is a key prerequisite for reducing volatility and maintaining economic stability going forward. The COVID-19 crisis has further compounded financial sector risks, driving stability concerns to new highs especially given the rise in direct and indirect exposure of the banking system to the PA, and the deteriorating quality of credit portfolios for key economic segments.
Hence, policies to mitigate the financial impact of COVID-19 need to be targeted, well-designed, maintain sound prudential regulations, and ensure trust and confidence in the banking system.