Report No: 27094-62 WESTBANKAND GAZA THETRUSTFUNDFORGAZAAND WEST BANK: STATUS, STRATEGY, AND REQUEST FORREPLENISHMENT DECEMBER 18,2003 LISTOFACRONYMS AAA Analytical and Advisory Activities A H L C Ad-Hoc Liaison Committee CDP Community Development Project EC European Commission ESSP Emergency Services Support Project FY FiscalYear GDP Gross Domestic Product GNI Gross National Income GO1 Government o f Israel IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund L A C C Local Aid Coordination Committee MIGA MultilateralInvestment Guarantee Agency MOF MinistryofFinance MOP MinistryofPlanning NGO Non-governmental Organization OCHA UnitedNations Office for the Coordinationo fHumanitarianAffairs OED Operation EvaluationDepartment PA Palestinian Authority PLO Palestinian Liberation Organization PSESP Palestinian Socio-Economic Stabilization Plan QAG Quality Assurance Group QIIP Quick Impact InterventionProgram TFGWB Trust Fundfor Gaza and West Bank UNSCO Office o f the UnitedNations Special Coordinator inthe Occupied Territories USAID UnitedStates Agency for International Development US$ United States Dollar WB&G West Bank and Gaza WBI World Bank Institute Vice President Christiaan Poortman Country Director Nigel Roberts Country Program Coordinator Markus Kostner Country Officer, Task Manager Claus Astrup CONTENTS 1 INTRODUCTION 5 2.. ....................................................................................................... POLITICAL. ECONOMIC AND SOCIAL CONTEXT ........................................... 5 2.1 THEZNTZFADAAND THEPALESTINIANECONOMIC CRISIS ................................ 5 2.2 INTERNATIONAL RESPONSEINTHE 1990sAND TO THE ZNTZFADA .................... 8 3. THETRUSTFUNDFOR GAZAAND WEST BANK ............................................ 8 3.1 STATUS................................................................................................................ 8 3.2 BANKSTRATEGY .............................................................................................. 10 3.3 PORTFOLIO PERFORMANCEAND MANAGEMENT ............................................ 12 3.4 ANALYTICALAND POLICY WORK ................................................................... 15 3.5 PARTNERSHIPS .................................................................................................. 16 4 PLANNING AND PRIORITIES OF THE PALESTINIAN AUTHORITY .............17 5..STRATEGIC OPTIONS FOR MOVING FORWARD ........................................... 20 5.1 BANKSTRATEGYAND PROPOSEDPROGRAM .................................................. 20 A) ANALYTICAL AND POLICY WORK...................................................................... 21 B) LENDINGAND PORTFOLIO COMPOSITION....................................................... 22 5.2 THECASEFORREPLENISHINGTHE TFGWB ................................................. 24 6. RISK ANDMITIGATION MEASURES ................................................................ 26 ANNEXES ANNEXI: PA's DEBT REPAYMENT PROFILE 29 ANNEXII: COMPLETED ECONOMIC AND SECTOR WORK 30 ANNEX111: 32 ANNEXIv: WEST BANKAND GAZA- BANKPORTFOLIO TABLE WEST BANKAND GAZA- IFC AND MIGA PORTFOLIO 33 ANNEXV: WEST BANKAND GAZA- ATA GLANCETABLE 34 BOXES Box 1: CHRONOLOGY OF THE PEACEPROCESS 2 Box2: PROJECTS PARTICULARLY AFFECTED BY THE INTIFADA AND 9 MITIGATIONMEASURES Box3: IMPACT OF BANKINTERVENTIONS 10 Box4: THESOCIO-ECONOMIC MONITORINGPROGRAM 11 Box5: THESTATUS OF THEPA'SREFORMPROGRAM 14 Box6: PROPOSED PIPELINE PROJECTS 19 TABLES TABLE1: SUMMARY OF MACROECONOMIC TRENDS,1999-2003 3 TABLE2: TRUSTFUNDFORGAZAAND WEST BANKPORTFOLIO SUMMARY 5 TABLE3: THEBANK'S INTERVENTION STRATEGY AND TFGWB PORTFOLIO 7 TABLE4: ECONOMIC SCENARIOS, 2004-5 20 TRUSTFUNDFORGAZA AND WEST BANK STATUS, STRATEGY, AND REQUEST FORREPLENISHMENT 1. INTRODUCTION 1. The Bank has played a key role in the West Bank and Gaza (WB&G) from the early 1990s to the present day'. The Palestinian Authority (PA), the Govemment o f Israel (GOI) and the donor community have relied extensively on the Bank's analysis, project design and implementation capacity, and convening role. From the initial period o f economic recovery and reconstruction through the state-building focus o f the late 1990s to current emergency management efforts, the Bank has helped the parties shape their economic responses to an unpredictable, evolving socio-political reality. An active Bank presence remains in high demand. This paper reviews the status o f the Trust Fund for Gaza and West Bank (TFGWB) and proposes a Bank assistance strategy for the coming two years. Central to this strategy will be a replenishment o f the TFGWB. 2. POLITICAL, ECONOMIC AND SOCIAL CONTEXT 2.1 THEINTIFADA AND THEPALESTINIANECONOMIC CRISIS 2. For illustrative purposes, the intifada can be separated into three economic phases. The first, from October 2000 to Summer 2001, was characterized by the shock o f tight external closure, increased internal closure and the uncertainties created in the productive sectors by the reversal o f previous expectations - leading to sharp declines in economic aggregates that bottomed out by mid-year. A second shock occurred in the period March through September 2002, under the impact o f Operations Defensive Shield and Determined Path, and featured significant material destruction and much tighter internal closure in the West Bank. By the end o f 2002, some signs o f stabilization and recovery could be witnessed, but per capita real incomes have increased only marginally since then. 3. Since the outbreak o f the intifada at the end of September 2000, 862 Israelis and 2,468 Palestinians have met violent deaths2. As a result o f the confrontation and related Israeli measures, all Palestinian economic and social indicators have deteriorated dramatically. The Bank estimates that real Gross National Income (GNI) declined by 35 percent between 1999 and 2002 (Table 1). After 27 months o f the intifada, physical damage was estimated at US$1.7 billion at replacement cost, capital stock had declined by about 20 percent, total investment had fallen from about US$1.45 billion in 1999 to as 'SeeBox 1 for a chronology o f the peaceprocess. Source: Closure/Curfew, Economic, and Sociah'Humanitarian Monitoring Indicators, Report #8, October 15,2003, World Bank. 5 little as U S $ l 5 0 million in 2002, and overall GNI losses had reached some US$5.2 billion- equal to almost one year o fpre-intifada Palestinian national income3. Box 1- Chronology of the Peace Process 1991 October Madrid Peace Conference 1993 September Israeli-Palestinian Declaration o f Principles (Oslo Agreement) October Conference to Support Middle East Peace, Washington D.C. (first pledgingconference) November First formal Ad Hoc LiaisonCommittee, Paris 1994 April Gaza-Jericho Agreement ("Oslo I") May Paris Protocol on Economic Relations between the Government o f Israel and the Palestinian Liberation Organization Summer Establishment o f the Palestinian Authority 1995 September Israeli-Palestinian InterimAgreement ("Oslo 11") November Israeli Prime Minister Rabin assassinated 1996 January Elections for the Palestinian Legislative Council 1998 3ctober Wye River Memorandum 2000 luly Failure o f Camp David Summit September Outbreak o f the second intifada 1001 lanuary Taba negotiations end inconclusively September First informal meeting o fthe "Quartet" 1002 l/larchiJuly Israeli Defense Forces operations "Defensive Shield" and "Determined Path" lune "100 Days Reform Plan" o f the Palestinian Authority lune President Bush's speech on his vision for peace in the Middle East luly Quartet launches Task Force on Palestinian Reform klgust UNSecretary General's Special Envoy's missiononthe humanitarian situation lecember Quartet finalizes the "Road Map for Peace" !003 ipril Mahmoud Abbas ("Abu Mazen") appointed Prime Minister, new Cabinet formed une Aqaba Summit (President Bush, KingAbdallah, Prime Ministers Sharon and Abu Mazen) UlY Cease-fire negotiated jeptember Prime Minister Abbas resigns; cease-fire fails; Ahmed Qurei ("Abu Ala") appointed Prime Minister Ictober Palestinianemergency government formed "Twenty-Seven Months: Intifada, Closures and Palestinian Economic Crisis - An Economic Assessment" (May 2003); World Bank. 6 Table 1- Summary of Macroeconomic Trends, 1999-2003 1999 2000 2001 2002 2003 Real annual change Gross Domestic Product (GDP) 8.9% -5.4% -15.0% -14.5% 4.5% Gross National Income (GNI) 8.4% -6.8% -16.2% -16.4% 3.9% GNIper capita, US$ 1/ 1,806 1,674 1,333 983 1,003 PA budget, US$million Revenues 942 939 273 287 700 Current expenditure 942 1,200 1,099 1,042 1,244 Capital expenditure 0 14 22 9 24 Balance -1 -260 -826 -755 -568 Other Items Poverty rate 20% 31% 46% 59% 61% Population, mid-year (1,000) 3,020 3,150 3,299 3,465 3,635 New Israeli Shekel/US$, annual average 4.14 4.08 4.21 4.74 4.57 Consumer price index, annual change 5.5% 2.8% 1.2% 5.7% 1.O% 1/ At current prices. Sources: Ministry o f Finance, IMF and World Bank Staff estimates. 4. With the Palestinian population growing at over 4 percent each year, per capita real incomes at the end o f 2002 were only about a half o f what they had been three years previously. The share o f the population living in poverty - defined as those consuming less than US$2.1 o f goods and services per daf - has tripledduringthe intifada, to about 60 percent o f the population. The health status o f the Palestinian population has declined, real per capita food consumption has dropped by up to a quarter when compared to 1998 levels, and a 2002 survey conducted by Johns Hopkins and A1 Quds Universities found global acute malnutrition in9.3 percent o f the children across the West Bank and Gaza. 5. The proximate cause o f Palestinian economic decline i s the imposition o f tight restrictions on the movement o f Palestinian goods and people across borders and within the West Bank and Gaza. These "closures" are viewed as essential by the Government o f Israel to protect its citizens from violence. Closures have led to unemployment and a consequent loss o f demand. Unemployment has increased from 10 percent in September 2000 to over 30 percent o f the Palestinian workforce today. In September 2000, some 128,000 Palestinians commuted daily to Israel and the Israeli settlements; by the first quarter o f 2003, this figure had fallen to 49,000. At the same time, 143,000 domestic jobs (or 29 percent o f pre-intifada domestic employment) have been lost. Communities directly affected by the ongoing construction o f Israel's Separation Barrier face particular difficulties, and have seen their access to landholdings, employment, health facilities and schools severely constrained. Inthe case o f "Jerusalem Envelope", the Barrier i s dividing communities and families. 6. The Palestinian Authority's finances are under great pressure. Tax revenues are directly linked to the level o f economic activity, with more than 80 percent derived from The US$2.1 poverty line is based on what is considered to be the minimum acceptable level o f expenditures (food and non-food) per capita in a benchmark household consisting o f two adults and four children (National Commission for Poverty Alleviation, Palestine Poverty Report 1998). 7 taxes on consumption (VAT, import duties and excise) - almost two thirds o f which are collected by Israel on the PA's behalf and were withheld by GO1 between December 2000 and December 2002. The PA's fiscal situation eased slightly following GOI's decision in December 2002 to resume transfers o f clearance revenue, but it remains precarious due to the recent decline in donor emergency budget support (this averaged US$46 million per month between November 2000 and June 2002; in 2003, however, donors have disbursed less than a half o f this each month). The unfunded PA budget gap in 2003 - when compared to the original budget - is expected to total some US$300 million. 2.2 INTERNATIONALRESPONSE INTHE 1990s AND TO THE INTIFADA 7. International donors have made an extraordinary financial effort in the West Bank and Gaza. Since 1994, approximately US$6 billion have been disbursed, equivalent to about US$200 per capita per year. This signifies both the importance to the world community o f resolving the Israeli-Palestinian conflict, and a belief that peace-building requires a viable economic future for the Palestinian people. 8. Between 1994 and 2000, annual donor disbursements averaged some US$420 million, or US$150 per capita. Since the outbreak o f the intifada, far from being deterred, donor tenacity has increased: disbursements effectively doubled in 2001 and 2002, averaging just under US$l billion each year, or US$320 per person. This i s thought to be the highest sustained rate o f per capita disbursement to any aid recipient anywhere since the Second World War.' Much o f this i s emergency and humanitarian assistance, with priorities shifting fiom development and state-building to preserving the institutional and human capital gains o f the 1990s. As mentioned above, though, such exceptional transfers cannot be taken for granted: the evidence o f donor fatigue in relation to budget support in2003 attests to this. 3. THETRUSTFUND GAZAAND WEST BANK FOR 3.1 STATUS 9. Since the West Bank and Gaza i s not a sovereign state, it cannot apply for membership o f the IMF or the World Bank Group, and i s therefore not eligible for the sources o f financing normally available to member countries. To overcome these legal and practical obstacles, the Bank's Board of Governors on November 11, 1993 approved a US$50 million grant to be transferred from surplus into a Trust Fundfor Gaza (TFG, subsequently renamed the Trust Fundfor Gaza and West Bank, TFGWB, and increased Other recent high-profile post-conflict cases include Bosnia (US$5.4 billion over 5 years, or roughly US$215 per person per annum) and Timor-Leste (US$350 million over 2 years, averaging US$235 per personper year). 8 in permissible territorial scope as the area under the jurisdiction of the Palestinian Authority was enlarged)6. 10. To date, the TFGWB has been replenished four times for a total allocation o f US$380 million, most recently in September 1999 (Table 2). An additional US$67.7 million have accrued to the TFGWB from investment income and from service and commitment fees on outstanding Credits, bringingthe total resources o f the TFGWB to US$447.7 million. As o f October 2003, US$414.8 million o f this hadbeen committed to 28 projects, leaving an uncommitted balance of US$32.4 million'. Total disbursements from the TFGWB amount to US$316.4 million, or 76 percent o f commitments. Table 2 -TrustFundfor Gaza andWest BankPortfolio Summary Fiscal Allocation from Accrued No. o f No. o f Net Disbursements Year Bank Net Investment Projects Active Commitments (US$ million) Income/Surplus Income and Approved Projects (US$ million) (US$ million) Service Charges (US$ million) FY94 50 FY95 0.1 2 2 50.0 10.9 FY96 90 1.o 2 4 60.0 19.9 FY97 90 5.3 7 11 83.5 39.7 FY98 90 7.1 2 13 20.0 50.2 FY99 7.5 3 15 54.0 27.1 FYOO 60 11.7 3 16 30.4 34.4 FYOl 15.6 4 19 36.5 41.5 FY02 10.7 2 20 30.5 26.4 FY03 6.9 2 17 37.4 54.8 FY04' 1.8 1 17 12.5 11.5 Total 380 67.7 28 I 414.8 316.4 * A s o f ( Note: Canceled amounts under individual projects revert back to TFGWB for hture use. They are included in the table as a negative commitment in the year of cancellation. For example, in FY03 the Board approved new commitments for a total o f US$45 million. As US$7.6 million from the PalestinianHousing Project were canceled (see Box 2), net commitments were US$37.4 million. 11. Under the Resolutions governing the TFGWB', the Board approves the terms o f assistance on a case-by-case basis. Before the intifada all WB&G projects were provided on IDA terms, with one exception'. Since then, as the PA's fiscal situation has Formally, the Borrower under Trust Fund Credit Agreements (TFCA) is "the Palestinian Liberation Organization (PLO) for the benefit of the PA". This structure is in line with the Oslo Accords between Israel and the PLO. Under this arrangement the PLO makes the proceeds o f TFGWB Credits available to 'theAudit PA, and the P A undertakes to pay service charges and commitment fees, and to repay the principal. fees imply that there is a slight difference between total resources o f the TFGWB and the resources available for disbursement. 'ResolutionNos. 93-11 and IDA 93-7 as amended by Resolutions NOS. and 96-11, and IDA 95-3 and 95-6 96-7. The US$10 million grant for the Palestinian NGO Project approved by the Board on July 11, 1997. 9 deteriorated and the Bank has reoriented its strategy more towards meeting emergency needs, the Board has approved five projects on grant terms". 12. The P A has accumulated a total debt to IDA o f US$272.9 million". The 10-year grace period on IDA Credits means that the PA has not yet made any principal payments. The first, US$300,000 on the US$30 million Credit for the Emergency Rehabilitation Project, falls due on August 1, 2004. In2005, principal payments to IDA will increase to US$800,000. The PA's outstanding debt and projected debt service obligations are presentedinAnnex I. 3.2 BANKSTRATEGY 13. The Bank's engagement in WB&G has been characterized by a need to adapt. Three phases o f our involvement can be discerned (Table 3). During the first, from 1994-6, the Bank emphasized establishing the Palestinian Authority (for which the Technical Assistance andHolst TrustFunds (para. 22) were instrumental), and the rehabilitationof basic physical infrastructure (roads, schools, health clinics, water and wastewater networks) in order to provide immediate and tangible benefits to the population. In the second phase, from 1997-2000, as the PA's fiscal situation stabilized and the closures o f 1995-6 were lifted, the Bank's program featured an increased focus on institution building,private sector development, and regulatory and institutionalreform. Bank assistance during the intifada, from late 2000-the present, constitutes the third phase of Bank intervention and features a balance between maintaining medium-term developmentalactivity where feasible andproviding emergency assistancedesigned to sustain Palestinian institutions and mitigate poverty. 14. As outlined inthe most recent TFGWB Status Report", four o f the Bank's eight post- September 2000 projects give significant emphasis to capacity building: the Education Action Project i s enhancing the Ministry of Education & Higher Education's policy making, planning and budgeting operations; the Second Palestinian NGO Project i s strengthening NGOs' ability to deliver sustainable services to the poor and developing cross-network organizational skills; the Integrated Community Development Project (ICDP) is increasing the management abilities o f villages and small municipalities; and the Emergency Municipal Sewices Rehabilitation Project i s supporting the PA's effort to establish a rational, transparent and predictable intergovernmental fiscal transfer system. 10The Emergency Response Program (US$12 million, December 2000); the Second Palestinian NGO Project (US$8 million, February 2001); the Second Emergency Sewices Support Project (US$25 million, December 2002); the Emergency Municipal Sewices Reha6ilitation Project (US$20 million, December 2002); and the Emergency Water Project (USS12.5 million, July 2003). Of this total of US$77.5million, US$41.O millionhavebeendisbursed. The debt is defined as disbursed amounts under all existing Trust Fund Credits. The total amount of committed Credits equalsUS$327.3 million. l2Status Report to the Board on the Trust Fundfor Gaza and West Bank and Strategic Outlook, February 7,2002, p. 19. 10 Table 3 -The Bank's InterventionStrategy and TFGWB Portfolio Strategic Projects Launched Commitment Status Objective (US%million) 1994-1996: Rehabilitation of 50.0 Completed infrastructure -- Emergency RehabilitationProjectI& I1 EducationandHealthRehabilitationProject 20.0 Completed 1997-2000: Capacity building - Community DevelopmentProject I& I1 18.0 Completed at national, local, 40.0 Completed 10.0 Completed 25.0 On-going 2.8 On-going On-going -- Health SystemDevelopmentProject ----- LegalDevelopmentProject MunicipalDevelopmentProjectI and sectoral levels PalestinianNGO ProjectI Bethlehem2000 Project Municipal DevelopmentProjectI1 7.5 7.9 On-going PalestinianProfessionalExpatriateProject 3.O On-going Regulatoly and Gaza Water and SanitationServices Project 31.0 Completed institutional reform -- SolidWaste andEnvironmentalManagement 9.5 On-going - Project 15.0 On-going Electricity Sector InvestmentManagementProject 21.o On-going Private sector --- SouthernArea Water Project Micro-EnterpriseProject 2.2 Completed development -- PalestinianInvestmentGuaranteeFund Gaza Industrial EstateProject 10.0 On-going PalestinianHousingProject 17.4 On-going 10.0 On-going 2001-present Institutionbuilding EducationAction Program 7.0 On-going 8.0 On-going 10.0 On-going Emergency -- IntegratedCommunity -- PalestinianNGO ProjectI1 SupportProject EmergencyResponse Program 12.0 Completed Response:job 20.0 Completed creation and -- Emergency Services SupportProjectI1 Emergency Services SupportProjectI 25.0 On-going service delivery Emergency - Emergency MunicipalServicesRehabilitation Response and 20.0 On-going institution-building - Project EmergencyWater Project 12.5 On-going Note: Time periodrefers to calendar years. 15. In response to economic hardship and fiscal crisis, the Bank has placed increasing emphasis on fast-disbursing operations, with US$89.1 million committed to various emergency projects since the beginning o f the intifada13.Initially, consistent with the Bank's emergency support during periods o f closure in the 1990s, priority was given to job creation (the Emergency Response Program, FYO1). The scale o fjob losses rendered such efforts marginal in their overall impact, however, and from 2001 onwards the Bank's emergency strategy shifted towards sustaining basic services, largely through l3 These are Emergency Response Program (ERP), which financed over 200 labor-intensivemicro-projects, two Emergency Services Support Projects (ESSP I and II),which provide operating cost support to the main social service ministries (Education, Health, and Social Affairs), the Emergency Municipal Services Rehabilitation Project (EMSRP), which helps municipalities sustainbasic services (solid waste, electricity, water & sanitation) as well as strengthenbudget and planningprocesses, and the Emergency Water Project (EWP), which alleviatessevere water shortage in the southernWest Bank. 11 operating cost su~port'~. additional element in the Bank's emergency response was a An reallocation o f US$10.3 million from six Credits into public infrastructure repair. The Board approved this reallocation inAugust 2OO2I5. 3.3 PORTFOLIO PERFORMANCEAND MANAGEMENT 16. The performance o f the WB&G portfolio has been good, particularly when the difficult operating environment i s taken into account. At 23.3 percent in FYO1, 18.9 percent in FY02, and 46.7 percent in FY03, WB&G disbursement ratios have generally exceeded regional and Bank averages duringthe last three yearsI6.The exceptionally high disbursement ratio in FY03 i s partly explained by fast-disbursing emergency interventions o f simple design. A recent Country Portfolio Performance Review pointed to several factors that account for the good performance o f the WB&G portfolio, including (i) strong commitment and ownership by the PA and the competence o f the Bank's counterparts; (ii) outsourcing infrastructure project implementation to the private sector; and (iii)the hands-on approach to supervision by Bank task teams in the decentralized Country Office. 17. Lessons from previous experience in WB&G and elsewhere, as well as from OED and QAG evaluations, are carefully incorporated into new projects to enhance quality, relevance and impact. OED's 2001 evaluation o f the WB&G programI7urgedthe Bank to pursue reforms in public sector management more vigorously, inparticular inthe areas o f civil service reform, local government, and structural economic management. Since then we have initiated work on civil service reform in tandem with the Department for International Development (DFID), in the areas o f civil service restructuring (where DFID is taking the lead) and pension reform (where the Bank is taking the lead). Inthe local government area, the Municipal Fund component o f the Emergency Municipal Services Rehabilitation Project marks an important step in donor efforts to improve the hnctioning o f local government systems. In economic management, Bank staff teams have throughout 2003 provided close support to the new Ministry o f Planning (MOP), helping MOP produce the first coherent investment planning documents since the PA was created (para 21). 18. Although the overall quality o f the portfolio remains satisfactory, several projects have been compromised during the intifada, largely because the bulk o f the portfolio was designed for very different circumstances. While the restructuring o f six projects noted above helped maintain portfolio performance, five o f the 17 projects in the portfolio are l4The Annex in Twenty-Seven Months.... (op. cit.) features a comparison of welfare instruments -- food, cash schemes, job creation, budget support -- and concludes that budget support to the PA and municipalities has greater impact from the macro-economic and welfare perspectives than employment generationactivities as implementedthus far. l5The six projects being the Municipal Inj?astructure Development Projects I & 11,the Education Action Project, the Bethlehem 2000 Project, the Gaza Industrial Estate Project and the Solid Waste and Environmental Management Project. l6Disbursementsratios for MiddleEast andNorthAfrica Regionwere 14.6percent in FYOl 13.8percent inFY02, and 16.9percentinFY03.The Bank-wideaverageswere 20.5,20.7, 20.7 percent,respectively. l7WestBank and Gaza: An Evaluation of Bank Assistance, OED, July 2,2001. 12 now rated unsatisfactory (Box 2). All o f these will be closed or restructured by the end o f March 2004. One feature o f the management o f the portfolio i s the activist attitude o f the whole country team towards restructuring. In the coming three months, moreover, the Country Management Unit will intensify its monitoring o f the portfolio by introducing a new customized WB&G portfolio management system. Box 2 - ProjectsParticularlyAffected by the Intifada, andMitigationMeasures 1 Difficulties are notable among projects aiming to support private sector development. The main objective o f the Palestinian Housing Project is to develop a secondary mortgage market. The project has not been able to reach anticipated levels o f disbursement because demand for real estate financing is severely depressed. In 2002, the Bank and its counterparts agreed to cancel US$7.6 million o f the original U S 2 5 million credit, and any balances remaining at the closing date o f March 31,2004 will likewise be canceled. Similar, the Gaza Industrial Estate Project, which was established to spearhead private sector development inGaza andto foster PalestiniadIsraelibusiness links,hasbeenunableto generate the expected numbers of investors or to create the anticipated level o f employment. The project was restructured in August 2002 and i s currently further scaling back as the business environment continues to discourage new investment and employment creation. Despite the difficulties these two projects have experienced, they have both fostered appreciable institutional development. For example, the Palestinian Mortgage and Housing Corporation, established under the Palestinian Housing Projects and owned in majority by private investors, remains economically viable and is currently preparing a bond issue'8. In addition to these two private sector development projects, the Palestinian Expatriate Professional Project (PEPP) and the Solid Waste and Environment Management Project (SWEMP) will not now achieve their original development objectives because o f unforeseen constraints. In the case of the PEPP, the deterioration in living conditions in the WB&G has made it very difficult to recruit high-caliber Palestinian expatriates for key positions in P A ministries and agencies. To cater to immediate needs, the Bank agreed with the Ministry o f Finance on shorter, emergency-oriented assignments. Under SWEMP, a major component is the construction o f a regional landfill in Jenin district, where closure-related lack o f access has made it impossible to proceed as planned. The fifth project rated as unlikely to meet its development objectives is the Legal Development Project, which is due mainly to a lack of commitment by the P A to legal reform. As a result, almost half o f the Credit was canceled in December 2001, and the project will be closed inDecember 2003. 19. When assessing portfolio performance, it i s important to emphasize that Bank activities are having tangible impact - even under conditions far from ideal for project implementation. One substantiating indicator i s that only one o f five projects completed duringthe intifada has beenratedunsatisfactory by OED (Box 3). l8 This compares with the situation faced under the Micro-Enterprise Project, which closed on July 30, 2002 (Box 3). Due to the negative business environment, on-lending from commercial banks never reached anticipated levels, and the project was rated unsatisfactory upon completion. In both cases, however, low disbursements were an appropriate response to market conditions. 13 Box 3 -Impact of BankInterventions 9 Emergency Response Program (OED outcome rating: Satisfactory). ERF' was launched in response to the sharp increase in unemployment in the early months o f the intifada. The US$12 million project generated some 250,000 person days o f employment over eight months o f implementation and served as a catalyst for similar donor interventions - including US$25 million channeled through the Bank- administered PEACE facility. Local Government units and NGOs implemented a total o f 242 sub-projects. Areas o f particular focus were construction and rehabilitation o f classrooms, water wells, sewerage pipes & local road networks, and landreclamation activity. > Micro-Enterprise Project (OED outcome rating: Unsatisfactory). The objectives o fproject were to promote private sector development through commercially viable lending to micro-enterprises, and to build capacity in local commercial banks. The project's outcome was considered unsatisfactory because lending to micro-enterprises never reached the levels anticipated at appraisal - through limited lending was the appropriate commercial response to market conditions. This appropriateness o f the response i s reflected in OED rating the project's Institutional Development Impact as Substantial: "The banks have developed the internal skills required to extend micro-enterprise lending as soon as peace is reestablished in WB&G. Based on their good performance during project implementation, they are likely to keep these skills and builduponthem". 9 Palestinian NGO Project (OED outcome rating: Satisfactory). The project had three objectives: (i) to deliver services through NGOs to the poorest in Palestinian society; ii)to improve the institutional capacity o f NGOs; and (iii)to strengthen the working relationship between the P A and the NGO sector. The project financed 305 sub-projects, reaching over 213,000 direct beneficiaries. According to a beneficiary assessment, 71 percent o f beneficiaries were fully satisfied with the services provided, and only 13 percent were dissatisfied. A stakeholder workshop held during preparation for the Implementation Completion Report revealed the view that the project had significantly improved N G O professional capacities, including the ability to maintain adequate systems o f financial accountability and to undertake participatory needs assessments. The project also supported the drafting o f an NGO Law that is considered 1 model in the region. b Second Community Development Project (OED outcome rating: Satisfactory). The objective o f 2DP I1 was to rehabilitate infrastructure in poor and marginalized communities. About 200 local ,nfrastructure projects were implemented (partly financed by parallel contributions from the European hvestment Bank and the OPEC Fund). Beneficiary impact assessmentsindicate a wide array o f benefits to 'amilies and communities, including (i)improved access to schools, clinics and markets through road .ehabilitation (families pointed to the importance o f easier travel to school for girls' school attendance); (ii) mproved hygiene from better water quality; and (iii)improving the work o f local government units and heir participation with local communities by providing better physical facilities. CDP I1also responded to :hanged local priorities resulting from the economic crisis o f the intifada - for example, the labor and local naterials content o f road rehabilitation projects were increased by replacing asphalt with locally- nanufactured interlocking tiles. Gaza Water and Sanitation Sewices Project (OED outcome rating: Moderately Satisfactory). The nain objective o f GWSSP was to improve the quality, quantity and management o f water and sanitation ervices in Gaza through the employment o f a private sector operator. Water quality improved significantly ISa result o f GWSSP, and today 99.8 percent o fpiped water in Gaza is chlorinated, compared with only 50 iercent at project inception. Reduced leakage increased water supply, and water consumption increased rom 70 liters per capita per day (lcd) in 1996 to 100 lcd by 2000 before declining again to about 80 lcd. ?hemanagement contract which governed the private operator's responsibilities is considered an example Ifbestpracticewithin the Bank, andhasbeensuccessfully replicatedelsewhere inthe region. 14 3.4 ANALYTICALAND POLICYWORK 20. The Bank's analytical and policy work has, from the outset, laid the basis for the institution's role in WB&G. The Bank's Analytical and Advisory Activities (AAA) are usedby all parties - the PA, Israel and the donors - to interpret the state o f the economy and to help define the key institutional, policy and financing challenges facing the Palestinians. Duringthe intifada inparticular, the Bank has played a major part in setting the parameters o f the donor response. Our AAA work also identifies priority areas for Bank project intervention - see Box 6 and Annex 11. 21. The Bank's analytical and policy work i s o f two main types - monitoring social and economic trends, and addressingstrategicpolicy issues both at the sectoral and economy- wide level. P The demand for timely monitoring and in-depth analysis o f social and economic trends has increased in today's volatile environment, in which assumptions are under constant revaluation. Duringthe three years o f the intifada, the Bank has developed a variety o f monitoringtools, described inBox 4. Box 4 -The Socio-Economic Monitoring Program The backbone o f the Bank's monitoring work has for several years been the report on Recent Economic Developments published in the quarterly West Bank and Gaza Update. This report has been supplemented by several other analyses duringthe intifada. The Bank's two Economic Assessments ("Fifteen Months ", "Twenty-Seven Months '7 are the most comprehensive reviews o f the economy in the intifada and have received wider circulation than any other report o f the MNA Region during the period. A key objective o f the Economic Assessments was to inform the discussion on Palestinian economic issues among donors, the P A and the Government o f Israel, and on detailed specific actions that each o f the three stakeholders would need to take to revive the failing Palestinian economy. The reports were prepared with wide participation, in the belief that such dialogue would enhance the potential commitment by all parties to the final recommendations in each report". At the explicit request o f the donor community (both the Local Aid Coordination Committee and the Humanitarian and Emergency Policy Group), the Bank in February 2003 led an assessment o f the "Economic and Social Impact of the Separation Barrier". This was published in May 2003. At the firther request o f the donors, the Bank has prepared two progress updates - in August (on the barrier north of Jenin) and in September (on the Jerusalem Envelope). The donors' request was sparked by concern about the effect that the barrier is having on Palestinian livelihoods, the viability o f local economics and ongoing development projects. Further reports will be releasedperiodically. In addition, the Bank, with support from UNSCO and OCHA, has since the summer of 2003 provided bi- weekly socio-economic updates to those involved in monitoring the progress o f the parties under the Roadmap process. In addition, monthlypolls on Palestinian views on the economy are being conducted by the Palestinian Central Bureau o f Statistics under Bank supervision. The Bank will shortly launch a series o f Jield-based, qualitative and quantitative microeconomic studies to shed further light on how communities, households and firms are coping with the crisis. This dimension o f economic knowledge i s not currently available to the donor community, and i s inhighdemand because o f its direct relevance to the programming o f donor assistance. l9 Drafts o f both reports were shared with a special Technical Committee o f P A officials, as well as with donors and the Government o f Israel. 15 P A number of strategic papers have been prepared duringthe same period. These include (i) detailed reviews o f emergency instruments: Employment Generation Schemes (September 2002), (ii) sector policy documents: A Review of Palestinian Social Safety Nets (December 2002); A Palestinian Higher Education Financing Strategy (January 2003), Reform of the PA 's Pension System (February 2003), An Information Technology Strategy (October 2003); (iii) forward-looking macro- a policy perspective exercise: Long Term Policy Options for the Palestinian Economy (November 2002); and (iv) a review o f donor coordination: Aid Management and Coordination During the Intifada (July 2003). Each o f these exercises i s described inAnnex 11. 3.5 PARTNERSHIPS 22.From the beginning, the Bank has helped shape donor efforts in WB&G. The publication "Developing the Occupied Territories: An investment in Peace" was issued to coincide with the signing of the Declaration o f Principles in September 1993, and provided the blueprint for initial donor engagement. The Bank established two early multi-donor facilities, the Technical Assistance Trust Fund, which acted as the main conduit for capacity building funds in 1994-6, and the Holst Fund, through which donors channeled the bulk o f their support for the Palestinian budget in 1995-7 and for emergency employment schemes in 1996-7. During the late 1990s, the Bank was at the forefront o f efforts to reform the Palestinian Authority (PA), and in 2001-2 led the initial donor response to the PA's current Reform Program. Since the advent o f the intifada, the Bank has steered the international community's emergency response through its strategic "intifada" reports series2'. 23. The Bank i s Co-Chair of the Local Aid Coordination Committee (LACC), Secretariat o f the Ad-Hoc Liaison Committee (AHLC), and a key member o f the International Task Force on Palestinian Reform and the Humanitarian and Emergency Policy Group2`. The Bank has also shown that it can convene donors around its analytical and policy findings, and works closely with the IMF (which takes prime donor responsibility for fiscal matters) and with UNSCO/OCHA (on humanitarian affairs). 24. As a financial contributor and administrator o f other donors' funds, the Bank has played an important role. Disbursements o f Bankladministered funds amount to US$776 milIion since 1994, comprising US$316.4 million from the TFGWB and US$459.6 20Fifteen Months: Intifada, Closures and Palestinian Economic Crisis -An Economic Assessment (March 20021, and Twenty-Seven Months: Intifada, Closures and Palestinian Economic Crisis - An Economic Assessment (May 2003). 21The Intemational Task Force on Palestinian Reform was formed at the initiative o f the United States in July 2002 as a multi-donor support group to the PA. The task force has a local counterpart, the Local Task Force on Palestinian Reform, chaired by Norway, and consisting o f six Reform Support Groups. The Humanitarian and Emergency Policy Group was formed in September 2002 inresponse to the deteriorating humanitarian situation, and serves as an emergency policy steering group for the LACC. It i s chaired by the European Union and has as members the Bank, the United States, Norway and UNSCO. OCHA serves as Secretariat. 16 million in joint co-financing or Bank-administered trust fund disbursements. This amounts to some 12 percent o f total donor outlays. Thus, over the life o f the program in WB&G, the Bank has attracted US$1.3 injoint co-financing or administered trust fund resources for each US$1 committed from the TFGWB. 25. The Bank also coordinated very closely with IFC and MIGA prior to the intifada. Three projects have been jointly financed with IFC - the Micro-enterprise Project, the Gaza Industrial Estate Project and the Palestinian Housing ProjecP2- while in FY98 MIGA initiated its Palestinian Investment Guarantee Fundwith a contribution of US$10 million from the TFGWB. As noted in para. 18 and Box 2, however, all o f these projects have been compromised by the current crisis. The WB&G program has also on a number o f occasions drawn upon WBI's resources to enhance the effectiveness of our capacity building activities - for instance in health sector reform, gender mainstreaming, and urban and municipal management. 4. PLANNINGAND PRIORITIESOF THE PALESTINIANAUTHORITY 26. Over the past year, the PA has launched several initiatives which, taken together, provide a coherent strategic vision - arguably for the first time in the last ten years. The most important of these i s the Palestinian Reform Program, launched in June 2002 in response to calls from within Palestinian society and from the international community. The stated goal o f the Refofin Programi s to make the PA "more efficient and effective in the service o f the national goodz3". Considerable progress has been achieved in some reform domains, although progress inothers has beenmodest or poor (Box 5). 27. The launch o f the Reform Program was followed by the timely submission and approval o f a responsible PA Budget for 2003 - the first time that the PA budget timetable specified in the Basic Law had been adhered to. In July 2003 after the formation o f the Abu Mazen cabinet, the Ministry o f Planning presented donors with the Quick Impact Intervention Program (QIIP), designed to build on the Roadmap momentum and secure additional funding from donors to cover residual 2003 financing gaps. The QIIP i s notable for its clear strategy, and the consistency between the strategy and the projects/activities submitted for financing. However, donor response to the QIIP has been constrained by the faltering political situation and by the mid-cycle timing o f the appeal. By early October 2003, around US$257 million had been committed against a requested amount o f US$417 millionto be disbursedby end-2003. 22Inthe case of GIE US$10 million from the TFGWB, US$9 millionin equity andloans from the IFC, and US$65 million from the United States Agency for International Development (USAID), the European Investment Bark, the PA and private investors.The Palestinian Housing Project is financed by US$17.4 million from the TFGWB, and up to US$4 million in equity and USSl5 million in loans from IFC. The Micro-enterprise Project was co-financedwith USs7.5 millionfrom IFC. 23Source: The PA's 100DaysReformPlan;www.jmcc.org. 17 Box 5 -The Status of the PA's ReformProgram Progress has been most notable in the area o f Financial Accountability. Achievements include the consolidation o f all PA revenues into a Single Treasury Account under the clear control o f the Minister o f Finance, the consolidation o f all P A commercial activities into a properly monitored Palestinian Investment Fund, the gradual elimination o f cash-based transactions in favor o f payments through the banking system, the posting o f monthly fiscal results on the Ministry o f Finance website within days o f the end o f each month and the rationalization o f the management o f the Petroleum Corporation - resulting in a revenue increase o f $2.4 million in September (an increase o f 30 percent) compared to the January-August monthly average. Other noteworthy development include the drafting o f an income tax law which, if passed, would be one o f the most modern in the region, and the launching o f training for internal auditors at the Ministry o f Finance. In the Public Administration & Civil ServiceReform domain, a pilot restructuring exercise covering five ministries has been launched with assistance from DFID. The Ministries o f Finance and National Economy have managed to incorporate, or bring in line, the formerly independent institutions and agencies in their area o f responsibility; however, other institutions still remain to be addressed. In addition, pension reform options are under consideration. Regardingthe Elections domain, while good progress has been made inthe preparation o f elections and a Constitution is being drafted, the Palestinian Legislative Council has not yet passed an election law. Under Judiciary and Rule oflaw, delineation o f the responsibilities o f the Supreme Judicial Council and the Ministry o f Justice remain a stumbling block, and the "abolished" state security courts have continued to operate. Lack o f financial and human resources at the Ministry o f Justice remains an important obstacle to improve the functioning o f the courts. In the Market Economy domain, the Office o f LandAuthority has been legally established as an independent office. ForLocal Government,UNDP has prepared a draft diagnostic study o f the sector as the basis for a significant program o f professional upgrading. Uncertainty surrounding the current Emergency Government has slowed the reform process. The Bank has been involved in the Public Administration and Civil Service Reform Support Group (RSG) and, since October 2003, in the Local Govemment and the Market Economy RSGs. 28. This Fall the PA will present to the Palestinian Legislative Council an integrated recurrent and capital budget for 2004. The Bank, with support from the IMF, the European Commission (EC) and UNSCO, has assisted the Ministries o f Finance, Planning and National Economy to prepare an economic management strategy for 2004-5 as the basis for this submission (the Palestinian Socio-Economic Stabilization Plan, or PSESP). The two key priorities under the PSESP are (i) to finance the PA's external budget deficit and thereby ensure the functionality o f the PA and the delivery of basic public services; and (ii) to sustain a minimumlevel o f humanitarian services. Inaddition, the PSESP contains a prioritized menu o f capacity building, rehabilitation and development projects that can realistically be implemented in today's harsh operating environment, 29. The PSESP will be presented to an Ad Hoc Liaison Committee donor meeting on November 19. This will mark the first time that a submission to donors for financial support i s congruent with donor annual funding cycles and with the PA's own planning process. Equally encouraging i s the harmonization o f the PSESP with the Consolidated Appeals Process (CAP) by the UnitedNations system under the leadership o f OCHA. An important number o f projects in the CAP are integrated into the PSESP, increasing the 18 clarity o f the overall resource mobilization effort. The CAP will be launched on the same day as the AHLC meeting. 30. The PSESP i s based on three economic scenarios modeled by the Bank and the Fund for 2004-5 (table 4). > Scenario A: political stagnation. The positive impact on domestic activity and incomes in 2003 o f fewer curfews and marginally improved access to the Israeli labor market, as well as the resumption o f tax transfers by GOI, i s projected to subside in 2004-5. As a result, GDP growth rates would decelerate and poverty remains close to 2003 levels, with the absolute number o f the poor growing inline with populationincreases. > Scenario B: political progress. The economic situation would improve more rapidly, fuelled by larger worker remittances and lower restrictions on the movements o f people and goods. GDP growth would accelerate in 2004, but poverty rates would remain relatively unaffected in 2004, and would decline slightly in2005. Budgetary revenues would increase inline with GDP growth, but the PA's financing gap would remain significant, > Scenario C: political deterioration. The Palestinian economy would lapse back into recession in 2004, illustrating once again the asymmetric effects o f closures (rapid economic decline when imposed, gradual recovery when lifted). Under this scenario, GDP would fall in 2004, reaching a new low-level equilibrium in 2005. Poverty would increase. Revenues would fall significantly, widening the PA's fiscal gap. 31. The need for budget support and humanitarian assistance would remain considerable under all three scenarios, with fiscal recovery a more distant prospect and poverty persisting at high levels. Projected budget support needs in 2004 range between US$621- 705 million. The need for humanitarian assistance i s estimated to exceed US$200 million underall three scenariosz4. 24 Financial requirements for humanitarian assistance are derived from disbursed assistance in 2002 amounts (US$215 million for cash and food assistance, job creation programs and the support to emergency appeals o f the United Nations Relief and Works Agency for Palestinian Refugees-UNRWA), adjusted for the change in the number o f poor under the three scenarios. 19 . Table 4 - Economic Scenarios, 2004-5 Scenario - A- Stagnation B- Progress C- Deterioration 2003 2004 2005 2004 2005 2004 2005 Real annual change ~ GDP 4.5% 3.5% 3.5% 9.3% 8.3% -5.3% 2.1% GNI 3.9% 0.9% 3.1% 10.0% 8.9% -8.2% 2.0% GDP per capita -0.4% -1.0% -0.7% 4.6% 3.9% -9.4% -2.0% GNIper capita -1.0% -3.4% -1.1% 5.3% 4.5% -12.2% -2.1% PA budget, US$million I/ Revenue 700 741 782 747 824 666 691 Current expenditures21 1,244 1,349 1,285 1,342 1,317 1,349 1,285 Capital expenditures 24 24 24 26 28 22 23 Balance -568 -633 -528 -621 -521 -705 -617 Withheldrevenue releasedby GO1 294 180 0 180 0 180 0 Net accumulation o f arrears -233 -180 0 -180 0 -180 0 Financing gap (before budget 507 633 528 621 521 705 617 support) Closurepolicy Workers inIsraellsettlements 31 50,000 50,000 50,000 65,000 75,000 33,000 33,000 Movement restrictions inchanged unchangec eased eased ncreased increasec Povercurrent exchange rates. 11At rate 61% 61% 62% 60% 58% 67% 69% 2/ Include payments deducted at source by the Government o f Israel from disbursements o f withheld clearance revenue for bills owed by Palestinian municipalities. 3/ Includes Jerusalem Palestinians who do not requirepermits to work inIsrael. 5. STRATEGICOPTIONSFOR MOVING FORWARD 5.1 BANKSTRATEGYAND PROPOSEDPROGRAM 32. Inthe coming two years, the objective o f the Bank's strategy and program would be to balance efforts to manage the emergency with a continued focus on a medium-term development agenda. This objective builds on the bi-focal strategy espoused in the Bank's two Economic Assessments, which i s now reflected inthe QIIP and the PSESP. In pursuito fthis, the Bank would concentrate on the following strategy elements: Monitoring and analyzing emerging socio-economic developments and donor interventions - thereby continuing to serve as an interpreter o f economic developments and their strategic implications for the PA and the donors as they try to manage the emergency, and to balance short-term and longer-term needs (main instruments - the socio-economic monitoring program, co-chairmanship o f the LACC and serving as Secretariat o f the AHLC); Supporting the development of sound economic strategies, policies and institutions - thereby helping lay the groundwork for institutional sustainability 20 and future statehood (main instruments - macro-economic and sector policy studies, participation in the International and Local Task Forces on Palestinian Reform and TFGWB projects); 9 Strengtheningcapacities for and financing the delivery of basic services to the poor - through the development o f efficient and transparent institutions in five key Palestinian "institutional domains" - the PA ministries, the municipalities, the universities, NGOs and private sector representative bodies (main instrument - TFGWB projects); 9 Convening Palestinian and Israeli economic interest groups, on the basis of the Bank's reputation as a technically sound, non-political actor - as circumstances permit, and with a particular focus on academic institutions and the private sector (main instruments - colloquia, other Bank trust hnds). 33. In pursuit o f these elements we plan to deliver a program o f analytical and policy work and a pipeline o f TFGWB projects in areas in which the Bank has demonstrated a comparative advantages, and with due attention to other donors' efforts. A) ANALYTICAL AND POLICYWORK 34. The major Bank-initiated studies underway or planned for FY04-05 are described below. All o f these seek to inform PA policy at the macro or sectoral level, and to guide donor strategic and financial responses. Continuation o f the socio-economic monitoring program described above (Box 4) The PASSocio-Economic Stabilization Planfor 2004-5 (FY04), and work in FY05 on Palestinian Public Expenditures - we anticipate continuing to provide close staff support to the PA planning process inFY05. A Rapid Environmental Survey - restricted access, physical damage and shortages o f public funds are leading to serious issues o f land degradation and water pollution. The review will be conducted with local Palestinian environmental partners and will identify "hotspots" needing urgent intervention. This review will be completed in FY04 and would be shared with the GOI. An Infrastructure Assessment - this will review PA infrastructure policy, including private participation in the provision and management o f infrastructure services in today's climate o f limited investment, inadequate provision for operations and maintenance and physical destruction. N o such global review exists, and the PA and donors alike will benefit from guidance on policy and investment priorities. The study i s due for completion in FY04. It is proposed to keep the Israeli Ministry o f Infrastructure informed o f the 21 progress o f the study owing to joint Palestinian/Israeli involvement in certain aspects o f infrastructure planning andprovision. 0 Completing needed core diagnostics work in FY04 through a Country Financial Accountability Assessment (CFAA) and a Country Procurement Assessment Review (CPAR). The CFAA and CPAR will both strengthen fiduciary standards and provide the PA and donors with an independent assessment o f progress achieved under the Palestinian Reform Program in the areas o f financial transparencylaccountability. 0 A Human Development and Social Protection Study - this major exercise, to be completed in FY05, will convene all stakeholders (PA ministries, municipalities, donors, NGOs) around a common strategy to sustain essential social services intoday's decaying fiscal and service environment, and to look beyond the emergency towards a program o f social recon~truction~~. This work will be complemented by a situation analysis o f Vulnerable Children and Youth. 0 An NGO Review - no detailed mapping of the local NGO sector inthe West Bank and Gaza exists, although NGOs are a key vehicle o f service provision and an institutional basis for Palestinian identity. The review will assess the economic contribution o f NGOs and the quality and efficiency o f their work, as well as exploring issues o f governance and transparency. The review will be facilitated by respected international experts and will feature an interactive process o f dialogue with NGOs, the PA and donors. It i s due for completion by early FY05. A Water and Wastewater Study - this FY05 study will take a medium-term perspective on wastewater treatment, with the aim o f increasing the reuse o f water in a situation o f increasing demand and shrinking access to water resources. GO1 would be consulted during this exercise, due to its shared interest inthe issue A Trade Facilitation Study - this study will build on the Long Term Policy Optionsfor the Palestinian Economy carried out in 2002 (see Annex II), and will look into practicalways inwhich the PA and donors can assist Palestinian businesses to access international markets. The study will review customs procedures, quality standards and current gaps in trade infrastructurez6.The studywill be completed inFY05. B) LENDING PORTFOLIOCOMPOSITION AND 35. The proposed pipeline emphasizes building the capacity o f key public and non- governmental institutions to deliver basic services, with a sectoral focus on education, 25This work will draw on an EC-sponsoredHealth Sector Review, to which Bank staff are contributing. 26The Trade Facilitation Study will employ a Bank-developedtool kit that has successfullybeenused in a numberof other countries. 22 health, watedenvironment, and urban services. The program described in Box 6 was established through careful selection. Determining factors were (i)the Bank's demonstrated ability to design catalytic projects with sector-wide implications; (ii) the priorities indicated by the PA during regular dialogue and in the course o f preparing the PSESP for 2004-5; and (iii) existing or planned interventions by other donors. By design, the program is valid under all three economic scenarios (see para. 30). However, the proposed projects are subject to adaptation in design, scope and sequencing as conditions require. 36. Under current and projected economic circumstances, it i s not deemed appropriate that the PA be asked to contract additional debt to IDA. Accordingly, and in line with recent practice, it i s proposed to process all projects under this strategy as TFGWB grants. Box 6 -Proposed Pipeline Projects FY04 EmergencyService SupportProject I1SupplementalGrant (US$15 million) - submitted for Board approval on December 2,2003. Social Safety Nets Reform(USSlO million) -based on the Bank's Social Safety Net Study (Annex 11), this project seeks to halt the hrther erosion o f living standards and human capital among the poorest segments o f the Palestinian population, and will provide targeted support to enable children to remain in school and to receive regular health care. The project also aims to lay the foundation for an effective public welfare system inWB&G. Gaza Water and Sanitation Services Project I1 (GWSSP 11, U S 1 5 million) - the project would sustain the achievements o f GWSSP I,under which a private management contract resulted in significant improvements in the management and operation of the Gaza water network. The envisaged privatization of the network remains a longer-term goal. Budget Support (US$20 million) would complement a multi-donor Budget Support Facility (BSF) to be established by the Bank. BSF resources would be disbursed to the Single Treasury Account of the Ministry o f Finance against a commonly agreed set o f reform indicators that build on the existing reform agenda. BSF procedures would ensure that funds are used for the purposes intended. FY05l06 B Pension Reform Project (US$5 million) - following the Bank's Report on Reform ofthe Pensions System (Annex 11), this project would provide the technical support required to engineer a fundamental restructuring o f the pension system in the WB&G, providing the institutional backbone for a major program o f donor finance. The funding needs during the transitional period are significant, in part because the P A has accumulated considerable pension arrears during the intifada, and total costs are likely to exceed US$350 million over several years. Several donors have expressed willingness to provide financing ifthe system can be reformed and placed on a viable financial footing. * Higher Education Project (US10 million) - guided by the recommendations o f the Higher Education Financing Strategy (Annex II), project would aim to put inplace a sustainable financing the structure for institutions of higher education as well as to initiate a process o f curriculum reform which aligns tertiary education better with market needs. The project would also aim to reform the management o fhigher education institutions. + Health Sector Development Project I1 (HSDP 11, US$10 million) - HSDP I1 would build on the findings o fthe Human Development andSocial ProtectionStudy (para. 34) as well as expand continued 23 Proposed Pipeline Projects continued successful pilot projects initiated under HSDP I(for instance, the clinic management information system). HSDP I1would also serve as a mechanism to contribute to systemic reforms in health sector institutions and policies, particularly at the tertiary level. MunicipalFinanceand LandTitlingProject (US$lO million) -this project would further contribute to the development o f a sustainable municipal financial system, building on the development o f a Municipal Fundunder the ongoing Emergency Municipal Services Support Project. It would also tie in with complementary sector reform work in the Southern Area Water, Gaza Wafer and Sanitation Services and Electricity Sector Investment and Management projects. In addition, the project would finance a land registrationprogram (a longstanding constraint to collateralization), thereby providing a basis for local property taxes while creating the opportunity to expand commercial credit, particularly to small-scale borrowers inthe WB&G. The NGO Capacity Building Project (NGO 111, US$7 million) - the first two successful NGO projects represent the only donor initiative that devolves sub-grant-making decisions to Palestinian NGOs. The project would build on these projects and on the findings of the NGO Review (para. 34) to enhance system-wide standards o f professionalism and to promote networking and shared capacity- buildingactivities. Wastewater Reuse and Environmental Management (US$lO million) - building on the results o f the Rapid Environmental Survey and the Water and Wastewater Study (para. 34), the project would aim to serve as a magnet for donor financing intended to improve environmental management and promote better water use and reuse. 5.2 THECASEFORREPLENISHINGTHE TFGWB 37. Currently, only US$32.4 million o f the TFGWB remain uncommitted, and US$130.8 million undisbursed. New commitments in the three years FYO1-03 averaged US$39.2 million per annum, and disbursements US$40.9 million2'.In addition to the ESSP II Supplemental (US$15 million) submitted for Board approval in parallel with this replenishment request, two projects valued at US$25 million are planned for Board submission later this FY. Without replenishing the TFGWB, however, this will not be possible. A replenishment would, thus, be used to fund the implementation o f the Bank's proposed strategy (para. 32). 38. The TFG (later TFGWB) was devised as a means to hold and administer funds "for the benefit o f the member countries o f the Association", by providing financial assistance "to Gaza and for such areas, sectors and activities in the West Bank which are or will be under the jurisdiction o f the Palestinian Authority pursuant to the relevant Israeli- Palestinian agreements, consistent with the Association's purposes.. ....in accordance with the applicable provisions o f the Articles o f Agreement o f the Association"28.The 1996 Report o f the Executive Directors which recommended the transfer o f US$90 million from Bank surplus, moreover, argued that the TFGWB should be replenished"in view of.. .....ongoing efforts toward establishing peace in the Middle East, the possible 27FYOl - US$36.5 committed, US$41.5 million disbursed; FY02 - US36 million committed, US$26.4 million disbursed; FY03 -US$45 million committed, US$54.8 million disbursed. 28IBRD/IDAResolutionNos. 93-11/IDA93-7 as amendedby ResolutionNos.95-6/IDA 95-3 o fAugust 1, 1995. 24 effects o f such a peace on regional and international economic cooperation and growth, and inorder to promote the purposes o f the Bank inthese circumstances". 39. Given the unforeseen turn in political events since the last replenishment in FYOO, it i s important to reconfirm that the use o f the proceeds o f the TFGWB continues to meet basic criteria - i.e. (i) TFGWB resources are benefiting the Bank's membership; (ii) that that they are being used in areas over which the Palestinian Authority has jurisdiction as defined by valid agreements between the PLO and the State o f Israel; and (iii)that TFGWB funds are beingmanagedinaccordance with the Articles o fAgreement. 40. On the first point, the Board has since the beginningo f the intifada frequently voiced strong support for the Bank's activities in WB&G, as a review o f Board discussions on the WB&G over the past three years attests. Board members have made it clear that they believe the Bank's financial assistance contributes materially to Palestinian economic welfare and to the search for peace in the Middle East". Thus TFGWB activities today are seen as congruent with the interests o f the Bank's membership. Second, the TFGWB continues to finance activities in areas in which the PA has jurisdiction over civilian matters according to the terms o f the Oslo Agreement o f 1995, which i s legally still in force. Third, the Bank applies all its normal procedures and safeguards in administering the proceeds of the TFGWB, and does so whether a project is Credit- or Grant-financed. Thus the criteria applicable to the administration o f the TFGWB continue to be met. 41. With the Bank a relatively modest financial player in WB&G today3', continued TFGWB contributions need to bejustified by their catalytic effect, thereby enhancing the impact o f other members' funds. This the Bank achieves ina number o f ways. P Bank lending helps mold overall donor assistance strategy. TFGWB projects derive from and "materialize'' the strategic analysis that the Bank carries out on the donors' behalf (and at their request) in our periodic Economic Assessments, and latterly through intense staff involvement in the preparation o f the PA's QIIP and PSESP (paras. 27f.). The first three Bank emergency operations all helped ,create important trends in emergency support: the Emergency Response Program (FYO1) stimulated donor funding for emergency job creation programs, while the Emergency Service Support Projects I and II (FY02, FY03) created a facility through which donors could provide non-salary budget support to the PA. Commitments o f US$57 million from the TFGWB have evinced joint financing commitments o f US$91.8 million thus far from 9 donors3', and parallel co-financing estimated at a further 29 Also, in September 2003, at an extraordinary session on WB&G at the Bank/FundAnnual Meetings in Dubai, the G-7 Finance Ministers in principle endorsed the PA's request for US$1.2 billion in donor support in2004 even though prospects for rapid political progress appear slim. 30 Disbursements from the TFGWB and from joint (administered) co-financing amounted to only 4% o f total donor disbursements in FY02, rising to 9% in FY03 (US34.7 million and US$93.8 million respectively). 31 The EC, the Islamic Development Bank, Italy, the UK, Canada, Finland, Denmark, the Netherlands and Sweden. 25 US$81 million, for a total o f US$229.8 million altogethe?*. The latest two TFGWB emergency projects, the Emergency Municipal Sewices Rehabilitation Project (FY03) and the Emergency Water Project (FY04) have created models o f assistance combining emergency operating cost support with institutional development and infrastructure intended to meets medium-termneeds; TFGWB commitments o f US32.5 million have so far evinced US$99.5 million inparallel co-financing. It is essential for the Bank's standing among donors that we participate meaninghlly in the types o f projects we are advocating, and that we are seen as capable o f designing and supervising them successfully. It i s this "street credibility" that empowers analytical work like the extended discussion o f welfare instruments (job creation, food aid, budget support and cash provision) in the Bank's 2003 Economic Assessment. P TFGWB resources enable the Bank to make a material contribution to collective efforts to support the Palestinian Reform Program. The ongoing Emergency Municipal Sewices Rehabilitation Project i s serving as a vehicle for improved financial accountability at the local govemment level. The proposed Social Safety Nets Reform Project (FY04) would lay the foundations o f a more effective public welfare scheme, while the Higher Education Project (FY05) would promote a process o f financial, managerial and curriculum reform in Palestinian tertiary education institutions. The proposed Pensions Reform Project (FY05) would form the comerstone o f a thorough and urgently-needed reform o f the Palestinian public pension system, which i s no longer affordable without major restructuring. P TFGWBprojects work. Inspite ofthe intifada, the WB&G portfolio is performing well, and only one completed TFGWB projects has been rated"unsatisfactory" by OED. Design lessons from Bank projects have proven valuable to other donors, and show that difficult operating conditions need not vitiate the potential impact o f donor interventions. 6. RISKANDMITIGATIONMEASURES 42. The Bank's engagement inthe WB&G was always understood to be high-risk.It is an engagement dependent on a political process which has inthe last three years gone badly wrong, and which remains highly unpredictable. Short o f a collapse o f the P A or a loss o f PA jurisdiction in the WB&G, we believe that experience shows the Bank is capable o f adapting to unpredictable circumstances and continuing to deliver. The Bank's program remains relevant, operational risk i s being managed, and the Bank's credibility has been maintained. While the Bank i s not directly engaged in the political process, our socio- economic activism serves as an important signal to other donors. 32The Bank does not provide general emergency budget support. If one excludes this (dominant) form o f emergency assistance, US$229.8 million represent approximately one-thirdof donor emergency financing commitmentssince the beginningof the intifada. 26 43. Closures, movement restrictions and periodic violence have impeded the implementation o f donor-financed operations in the WB&G duringthe intifada, and have substantially increasedproject-specific risks. Project implementation has been affected by price rises, shortages o f goods and materials, and increased commercial risk (discouraging private investment and cross-border partnership). It has become increasingly difficult to attract international consultants to the limiting our ability to implement more complex project activities. Bank staff need to take careful security precautions and are subject to various forms o f movement restriction and search, all o f which complicate our work. 44. The Country Team has taken a number steps to cope with project risks: P Project implementation has been progressively decentralized, and an increasing number o ftasks are now managedby the Country Office34. P New projects are scrutinized carefully for simplicity of design and potential flexibility. The Country Director and Sector Directors ensure that projects are fully ready for implementation by the time they are presented to the Board, with no substantive conditions o f effectiveness left outstanding. P A Country Portfolio Performance Review was carried out in 2003 and will be repeated annually, with semi-annual in-country portfolio reviews to be carried out with the Ministry o f Planning. The principal objective o f these reviews is to formalize a process o f continuous project adjustment. As a result o f the recent Country Portfolio Performance Review, several pre-intifada projects have been slated for major restructuring or closure by end-March 200435(see also para. 18 and Box 2). As mentioned above, the Country Management Unit will shortly introduce a new customized WB&G portfolio management system. P The Bank has stepped up its operationaldialogue with the GO1- inparticular through the Task Force for Project Implementation (TFPI), a multi-donor committee in which we interface on a daily basis with the Israeli Defense Forces on issues o f access and damage to donor-financed infrastructure. 9 There is a longtradition of careful Bank fiduciary management inWB&G going back to the Holst Fund (under which the Bank managed early donor contributions to the PA's budget in a manner widely seen as exemplary, and which served as a model for later Bank post-conflict programs). Our projects frequently feature a higher level of fiduciary control than requiredunder Bank operational guidelines, such as bi-annual audits and mandatory physical verifications o f expenditures. 33This is due to a combination o f reasons that include soaring insurance premia, the insecure working environment, and visa restrictions. 34For example, our entire Economic and Social Monitoring Program, the proposed Human Development and Social Protection Study, and the NGO study are all managed in the field. In addition, most o f our emergency operations are supervised on a day-to-day basis by field-based staff. 35The seven projects are: GazaIndustrial Estate, Legal Development, Palestinian Professional Expatriate Program, Palestinian Housing, Southern Area Water,Electricity Sector Investment and Management, and Solid WasteandEnvironmental Management. 27 The CFAA and CPAR, once completed, will be usedto update the Bank's control systems inWB&G. 53. One cannot rule out the possibility o f a demise o f the PA. In today's world this mightoccur for one of two reasons: (i) donors fail to provide reasonable levels of Should budget support, the Treasury will be unable to pay full salaries and to finance operating costs, and the PA's ability to deliver basic services may in time melt away. This risk o f this is less than the recent decline in donor budget support might suggest, since it is understood that the PA represents the donors' main conduit for support to the Palestinian people. Sustained brinksmanship seems more likely than a catastrophic withdrawal o f budget support. (ii)The political echelon o f the PA could cease to function - either for reasons related to internal Palestinian politics, or through force majeure. Management does not presume to predict such events, but merely to note that if they occurred, then TFGWB operations as currently constituted would not be feasible: the TFGWB Resolutions make it clear that Trust Fund proceeds are to be used in areas "under the jurisdiction o f the Palestinian Authority pursuant to the relevant Israeli-Palestinian agreements." 28 Annex I PA's Debt RepaymentProfile 2041 0 0 1.3 0.6 0 0 1.3 2042 0 0 0.6 0.0 0 0 0.6 Total 327.3 50.7 0.1 378.1 29 Annex I1 Completed Economic and Sector Work36 9 A Review of Employment GenerationSchemes (September 2002). The report was prepared by the Bank under the auspices o f the Sector Working on Job Creation. The Report analyzed the behavior and actions taken by implementing agencies, contractors and beneficiaries o f employment generation programs financed by a wide range o f donors, and provided recommendations on the use o f appropriate labor-based design and technologies for future programs. The Bank i s currently testing some o f the report's recommendations in the employment generation component o f the Emergency Municipal Services and Rehabilitation Project. 9 Long Term Policy Optionsfor the Palestinian Economy (November 2002). This report examines Palestinian trade, labor, and growth outcomes during the last three decades. It compares alternative models o f economic relations between the WB&G and Israel, and assesses the technical merits o f each in the context of a Final Status Agreement. The Long Term Options Report has generated a healthy and open-minded debate on Palestinian past growth outcomes and possible trajectories for the future. The report will be one o f the main reference documents at an Israeli/Palestinian economic conference which the Bank i s planning to co- sponsor with the Bank o f Israel inthe Spring o f 2004. > A Social Safety Net Report (December 2002). The report focuses on the role and capacity o f the Ministry o f Social Affairs in the context o f the intifada. Among the report's recommendations i s that the existing Special Hardship Program (SHP) be fully funded since it efficiently targets the poorest and most vulnerable families in Palestinian society. The report also recommends that the SHP be reformed to address lowering school attendance and worsening health outcomes occurring as poverty in the WB&G deepens. This recommendation has led to a proposed project in support o f the reform o f the formal social safety net system. 9 Palestinian Higher Education Financing Strategy (January 2003). At the request o f the PA, the Bank assisted the Ministry o f Education and Higher Education (MOEHE) develop a financing and reform strategy for the higher education sector. This strategy i s now serving as a blueprint for MOEHE's efforts to modernize university education in WB&G and to attract donor financing to the sector (which the proposedHigher Education Project i s expected to do). 9 Reform of the PA's Pension System (February 2003). During the last one and a half years the Bank has been working intensively with the Ministry o f Finance 36September2002 -July 2003, excluding socio-economicmonitoring. 37A total of 12 Sector Working Groups (SWG) were established as part of the original donor coordination structurecreatedat the beginningof the Oslo process.As priorities have shifted during the intifada towards emergency interventions, a number of SWGs have ceased functioning, while a few - like the Job Creation SWG -have regainedprominence. 30 and the Gaza-based Pensions and Insurance Corporation to identify a pensions reform program. The interim result was this report, which pinpointed the main deficiencies in the current systems - two separate systems (one in Gaza and another in the West Bank), financial non-sustainability, inadequate governance structures and substantial PA arrears - and suggested a remedial strategy. Although pension reform in the WB&G i s politically sensitive, the PA has asked the Bank to initiate preparation of a Pensions Reform Project to correct key deficiencies and serve as catalyst for other donor financing. >An analysis of Aid Management and Coordination During the Intifada (July 2003). As a co-chair o f the LocalAid Coordination Committee, the Bank initiated a study to assess the strengths and weaknesses o f the donor response during the intifada, and the responsiveness, relevance and quality o f the leadership provided by the PA and the co-chairs. The report points to several positive aspects of aid management and coordination, including the functioning of the Reform Support Groups and the enhanced role played by the Task Force for Project Implementation. The report also identifies deficiencies, including the existing system's over-complexity, the gradual diminution o f the PA's role in and management o f the aid system, and the need to improve operational coordination and the harmonization o f donor procedures. The report's emphasis on PA leadership has guided the support by the Bank and others to the preparation o f the fully owned Quick Impact Intervention Program and Palestinian Socio-Economic Stabilization Plan 2004-5. 31 Annex I11 West Bank and Gaza Portfolio October 7,2003 Trust Fund for Gaza and the West Bank Co-financing Committed Disbursed Undisbursed Disbursed Committed Disbursed Undisbursed Disbursed CURRENTPROJECTS US0Million Percent US9 Million Percent * 197PalestinianHousing Project 17.4 6.3 11.1 36%1 i 97 Legal DevelopmentProgram 2.8 2.5 0.3 89% 15.0 0.0 15.0 0% 97 PalestinianExpatriateProfessionalProgram 3.0 1.8 1.2 60% 0.3 0.3 0.0 100% 98 GazaIndustrialEstate 10.0 4.7 5.3 47% 99 Bethlehem2000 25.0 24.4 0.6 98% 3.6 3.4 0.2 95% 99 SouthemArea Water and SanitationProject 21.0 15.6 5.4 74% 00 Electricity Sector ManagementProject 15.0 10.6 4.4 71% 00 Health SystemDevelopmentProject 7.9 6.2 1.7 78% 00 MunicipalInfrastructureand DevelopmentProjectI1 7.5 3.4 4.1 46% 5.0 0.0 5.0 0% OlSolid Waste andEnvironmental ManagementProject 9.5 2.8 6.1 29% 01 EducationAction Project 7.0 2.3 4.7 33% 01 PalestinianNGO I1Project 8.0 2.9 5.1 36% 11.6 4.3 7.3 37% 02 EmergencyServices Support Project 20.0 20.0 0.0 100% 36.9 25.2 11.6 68% 02 IntegratedCommunity DevelopmentProject 10.0 1.3 8.7 13% 03 EmergencyServices Support ProjectI1 25.0 16.1 8.9 64% 27.3 5.0 22.3 18% 03 EmergencyMunicipal ServicesRehabilitation Project 20.0 2.3 17.7 11% 04 EmergencyWater Project 12.5 0.0 12.5 0% Total 221.6 123.2 98.3 56% 99.8 38.3 61.5 38% COMPLETEDPROJECTS 96 Municipal Infrastructureand DevelopmentProject 40.0 40.0 0.0 100% 5.4 5.4 0.0 101% 97 MicroenterpriseProject 2.2 2.2 0.0 100% 95 EmergencyRehabilitation Project 30.0 30.0 0.0 100% 63.9 63.9 0.0 100% 97 MIGA Fund 10.0 10.0 0.0 100% 96 EmergencyRehabilitation ProjectI1 20.0 20.0 0.0 100% 3.5 3.5 0.0 100% 97 Community DevelopmentProject 10.0 10.0 0.0 100% 2.8 2.8 01 EmergencyResponseProgram.' 12.0 12.0 0.0 100% 95 Education and Health Rehabilitation Project 20.0 20.0 0.0 100% 29.1 29.1 0.0 100% 99 Community DevelopmentProject 11 8.0 8.0 0.0 100% 97 Gaza Water and SanitationProject' 31.0 31.0 0.0 100% 98 PalestinianNGO Project 10.0 10.0 0.0 100% 4.6 4.6 0.0 100% TOTAL (Current & Completed) 414.8 316.4 98.3 76% 209.1 147.7 61.4 71% DONORFUNDED TRUSTFUNDS The Holst Fund (closed) 285.7 285.7 0.0 100% Technical Assistance Trust Fund (closed) 22.8 23.6 0.0 104% PEACE Facilitv I 25.0 15.4 9.5 62% ~~~ ~ TOTAL DONOR FUNDEDTRUSTFUNDS 333.5 324.8 9.5 97% GRANDTOTAL 414.8 316.4 98.3 76%1 542.6 412.4 71.0 87% 32 ANNEX IV International Finance Corporation Statement of IFC's Held and Disbursed Portfolio Amounts in US Dollar Millions Country: West Bank & Gaza FY Approvahtltution Nai Loan Equity Quasi All Loan Equity Quasi All IFC Held IFC Held IFC Held Pari Held IFC Disb IFC Disb IFC Disb Part Disb 1994 AP B 0 3.73 0 0 00 0 3.73 0 0.00 1997 Arab Bank 0 0 0.15 0.00 0 0 0.15 0.00 1997 ComBank P 0 0 0.15 0.00 0 0 0.15 0.00 1997 Jordan Natic 0 0 0.90 0.00 0 0 0.90 0.00 1997 PIEDCO 8.00 1.oo 0 0.00 1.oo 1.oo 0 0.00 1999 PMHC 0 3.00 0 0.00 0 2.23 0 0.00 1998 PTF 0 12.60 0 0.00 0 4.55 0 0.00 1998 PTF-Mgt Co 0 0.20 0 0.00 0 0.04 0 0.00 1999 PTiC 5.80 1.35 0 0.00 5.80 1.35 0 0.00 1997 SEF Arab C 0.80 0 0 0.00 0.80 0 0 0.00 1999 SEF Cold SI 0.10 0 0 0.00 0.10 0 0 0.00 1999 SEF Jer.chc 1 1 0 0 0 0 00 1 1 0 0 0 0.00 Total 15.80 21.88 1.20 0.00 8.80 12.91 I.20 0.00 Portfolio: MlGA Guarantee Investment Fund - Subscriptions Guarantees issued ~~ - Amount Source US$ Project Date Credit from Trust Fund for Gaza and Soiomons' POOIS US$^ million) I 30-Jun-99 33 West Bank and Gaza at a dance Developmentdiamond' Life expectancy - J GNI Gross per - capita enrollment 1 Access to improvedwater source WestBank and Gaza Lower-middlemcome WOW Economic ratios. Trade T Indebtedness Wesf Bankand Gaza STRUCTURE of the ECONOMY 1982 1992 2001 2002 (% of GDP) Agriculture 7.3 6.3 Industry 16.4 13.3 Manufacturing 13.1 10.7 Sewices 76.3 80.4 Privateconsumption 83.2 79.0 Generalgovernmentconsumption 44.9 51.7 Importsof goods and sewices 48.3 46.6 ' GDI +GDP 1982-92 1992-02 2001 2002 (average annualgrowth) Growth of expolts and Imports (%) Agriculture .. -4.2 -5.5 -19.8 Industry .. -6.7 -29.1 -24.8 Manufacturing -0.5 -12.3 -24.2 Sewices .... 2.4 -6.1 -16.7 -20 Privateconsumption .. -2.3 -15.5 -21.3 -30-- General governmentconsumption 13.6 -2.1 -0.6 Grossdomesticinvestment .... -22.7 -76.9 -44.0 Imports of goodsand sewices .. -4.2 -29.0 -12.9 Note:2002 data are preliminaryestimates *The diamondsshowfour key indicatorsin the country(in bold) comparedwith its income-groupaverage. If data are missing,the diamondwill be incomplete. 34 WestBank and Gaza PRICESand GOVERNMENTFINANCE 1982 1992 2001 2002 lnflatlon (Oh) 1 Domesticprices (% change) I20 Consumerprices 1.2 5.7 15 implicit GDP deflator 6.9 17.2 I O Governmentfinance 5 (% of GDP, includes currentgrants) 0 Currentrevenue 19.9 23.8 97 98 99 00 01 02 Current budget balance -7.1 -5.0 * GDPdeflator *CPI Overallsurplus/deficit -7.7 -5.1 I TRADE I 1982 1992 2001 2002 iExportand Import levels (us$mill.) (US$ millions) Total exports (fob) 391 299 577 410 13,500 Commodity 1 Commodity2 Manufactures Total imports (cif) 729 1,232 1,731 1,406 Food Fuel and energy Capitalgoods 96 97 98 99 00 01 Exportprice index (1995=700) 153 162 Importprice index (1995=100) 168 177 0 Exports imports Terms of trade (1995=100) 91 92 BALANCE of PAYMENTS 1982 1992 2001 2002 i Currentaccount balanceto GDP (%) (US$ millions) I Exportsof goods and services 588 418 0 Importsof goodsand services 1,947 1,581 1 -5 Resourcebalance -1,359 -1,164 10 -15 Net income 492 372 -20 Net current transfers 443 443 1-25 Current account balance -424 -348 -30 35 Financingitems (net) -40 Changesin net reserves -45 1 I Memo: Reservesincludinggold (US$ millions) Conversionrata (DEC, local/US$) 4.2 4.7 EXTERNAL DEBT and RESOURCEFLOWS 1982 1992 2001 2002 (US$ millions) Composition of 2001 debt (US$ mill.) Total debt outstandingand disbursed IBRD IDA Total debt service IBRD 0 0 IDA 0 0 Compositionof net resourceflows Officialgrants Official creditors Privatecreditors 0 0 Foreigndirect investment Portfolioequity World Bank program Commitments 0 0 A - IBRD E. Bilateral Disbursements 0 0 B IDA D Other multilateral . ~ F Private Principalrepayments 0 0 C IMF - G Short-term -- Netflows 0 0 Interestpayments 0 0 Nettransfers 0 0 35