\ Economic Forecast Report, 2014 Research and Monetary Policies Department December 2013 1 Economic 2014 ا 2014 م Forecast د ات ا
December, 2013. All rights reserved. Suggested Citation: Palestine Monetary Authority (PMA), 2013. Economic Forecast Report, 2014. All correspondence should be directed to: Palestine Monetary Authority P. O. Box 452, Ramallah-Palestine Tel: (972/970) 2 241 5250 Fax: (972/970) 2 240 9922 Toll Free: 1800500700/900 E-Mail: info@pma.ps Web-site: http://www.pma.ps 2014 التنبو ات الاقتصادية Forecast لعام 2 Economic 2014
Economic Forecast, 2014 Preface During the year 2013, Palestinian economic slowdown continued. That slowdown was reflected in the outcomes of the first and second quarters compared with the same quarters of 2012, with GDP growth rates of 2.7 percent and 1.2 percent for the two quarters, respectively. Noticeable regional disparity appeared in the growth rates for the West Bank and Gaza. Whilst the growth rate in Gaza Strip recorded 12.2 percent and 3.5 percent successively for the aforesaid quarters, growth rates for the West Bank slowed to -0.6 percent and 0.3 percent respectively. Compared with the first half of 2013, PMA estimates point to a noticeable improvement in the second half as indicated by several leading economic indicators for various sectors, most importantly the construction sector, external sector and employment in Israel. Despite the improvement in the second half of the year, overall economic performance measured by GDP for 2013 is expected to decline to 3.7 percent, down from 5.9 percent during 2012. The unemployment rate is expected to reach around 23.4 percent versus 23.0 percent in 2012. Real Sector Forecasts Forecasts for key Palestinian economic variables have been prepared under three different scenarios of varying likelihood. It is acknowledged that the forecasts are sensitive to variations in the actual figures of previous years issued by the different data-producing agencies. Most important among these agencies are the Palestinian Central Bureau of Statistics and the Ministry of Finance. Assumptions have been developed separately for each scenario and results appear as follows: 2014 التنبو ات الاقتصادية Forecast لعام 3 Economic 2014
1- Baseline Scenario This scenario is based on the assumptions that no major change in the ongoing peace talks will take place. It also assumes that conditions remain the same as in the previous year including restrictions on the movement of people and goods, barriers and obstacles restricting imports and exports to and from the West Bank, the rate of closure of crossings to Gaza, and the number of Palestinians working in Israel on daily basis. In the financial sector, it is assumed that the government will maintain its policy of fiscal austerity which includes rationing of current expenditures and keeping the value of government investment spending fixed at the same rate as the previous year. It is also assumed that there will be a slight upturn of government revenues as a result of improved tax collection policy and increased non-tax revenues. With regard to foreign aid, financial support from donor countries to Palestinian Authority is expected to remain unchanged, currently at around USD 1 billion. Net remittances are expected to increase at the same rate as 2013, whilst import prices are assumed to increase at an average rate of 1.5 percent considering the inflation and exchange rates of commercial partners. A 4.0 percent rise in real GDP growth rate of Palestine s main commercial partners is also assumed in 2014 1. Moreover, an increase in the relative weight of USD prices of exported goods in international markets by the same rate as import prices is assumed. According to this scenario, GDP growth is expected to decline to 3.2 percent in 2014, compared to 3.7 percent in 2013, reaching USD 7275 million. Consequently, a slight increase in GDP per capita of 1.6 percent is achieved to reach USD 1737. Public and private sectors value added growth is expected to decline to 2.9 percent and 2.5 percent respectively, whereas unemployment rate is expected to increase slightly to 23.6 percent in 2014 compared to 23.4 percent in 2013. 1 Equal to the forecasted real GDP growth rate for Israel, according to the Bank of Israel, since Israel is considered the biggest commercial partner of Palestine. 2014 التنبو ات الاقتصادية Forecast لعام 4 Economic 2014
Also under this scenario, total consumption (as a percent of GDP) is expected to decrease to 116.1 percent (95.5 percent for private consumption and 20.6 percent for public consumption) compared to approximately 119.8 percent in 2013. The contribution of total investment (as a percent of GDP) is expected to decline to 16.0 percent (11.0 percent for private investment and 5.0 percent for public investment) from 16.5 percent in 2013. As to foreign trade, trade deficit (as a percent of GDP) is expected to rise to 45.5 percent from 44.3 percent in 2013, as a result of the growth in imports (as a percent of GDP) to 61.5 percent and a decline in exports (as a percent of GDP) to around 16.0 percent. 2- The Optimistic Scenario This scenario is based on assumptions of a positive shock to key economic variables as a result of positive developments on the political track. It assumes major advances in peace talks will take place and lead to a launch of projects and introduction of various measures to boost the economy like significant easing of restrictions on movement of people and goods, decline in the number of days of closure of crossings to Gaza Strip, increase in the number of Palestinians working in Israel on daily basis as well as increased donor money inflows for budget support and development aid. According to this scenario, GDP growth during 2013 is expected to increase by 10.9 percent to USD 7817 million. A consequent increase in GDP per capita of 8.5 percent to USD 1854 is expected. A private sector value added growth of 10.8 percent and a public sector value added growth of 11.3 percent are expected as well as a decline in unemployment rate to 21.0 percent. Total consumption (as a percent of GDP) is expected to increase to 145.6 percent of which 108.2 percent is private consumption and 37.4 percent is public consumption. Total investment (as a percent of GDP) is foreseen to rise to 28.2 percent of which 20.9 2014 التنبو ات الاقتصادية Forecast لعام 5 Economic 2014
percent is private investment and 7.3 percent is public investment. As for foreign trade, a growth of exports (as a percent of GDP) by 18.2 percent and a decline of imports (as a percent of GDP) to 55.8 percent are expected, according to this scenario. Consequently, trade deficit (as a percent of GDP) is expected to drop to 37.2 percent. 3- The Pessimistic Scenario This scenario is based on the assumption of a negative shock affecting key economic variables as a result of a sharp deterioration in political conditions during 2014. This is assumed to have an adverse impact on economic activity. Such an impact is assumed to include a decrease in the number of Palestinians working in Israel on daily basis, a tightening of restrictions on movement of people and goods, an increase in days of closure for workers and trade, a proliferation of trade barriers, Israel withholding tax revenues as well as a decline in foreign aid from donor countries to support the budget and aid development. As a result of this scenario, GDP growth is expected to decline to -0.5 percent to USD 7014 million in 2014. This will be reflected on GDP per capita which will decline by -2.0 percent to reach USD 1675. Private and public sectors value added growth is expected to decline by -1.5 percent and -0.5 percent respectively. Unemployment rate is expected to rise to 27.2 percent. As for GDP components, total consumption (as a percent of GDP) is expected to decrease to 110.1 percent of which 91.6 percent is private consumption and 18.5 percent is public consumption. Total investment (as a percent of GDP) is expected to decline to 9.3 percent of which 7.2 percent is private investment and 2.1 percent is public investment. According to this scenario, foreign trade, exports (as a percent of GDP) are expected to reach 14.9 percent and imports (as a percent of GDP) to reach 70.4 percent. As a result, trade deficit (as a percent of GDP) is expected to rise to 55.5 percent. 2014 التنبو ات الاقتصادية Forecast لعام 6 Economic 2014
Forecasted growth rates of real GDP in 2014 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 2008 2009 2010 2011 2012 2013 2014 Baseline Scenario Optimistic Scenario Passimistic Scenario Inflation Rate Forecasts PMA estimates indicated an average inflation rate of 2.0 percent for Q4 of 2013, the highest quarterly increase in 2013, albeit close to the rate for the same quarter of the previous year. These estimates are made in view of the slight expected rise in cost of imports and a greater decrease in global food prices. Inflation rate is also expected to rise during the first quarter of 2014 and to decline during the last quarter to the same rate registered during the corresponding quarter of 2013. In that context, given IMF-predicted decrease in global food prices in 2013 and continued decrease in 2014, it is expected that the average annual inflation rate in Palestine will reach 1.7 percent during 2013 and around 2.2 percent during 2014. It is worth mentioning that certain risk factors can lead to an increase in the expected inflation. These are related to higher increases in global food prices and an increase in inflation rate for Palestine s commercial partners that exceed the assumed rate under the basic scenario. 2014 التنبو ات الاقتصادية Forecast لعام 7 Economic 2014
Balance of risks in inflation Forecasts 2013, 2014 Economic Forecast 2014 Actual 2012 Estimates 2013* Basic Scenario Optimistic Scenario Pessimistic Scenario Annual Percentage Change Real GDP 5.9 3.7 3.2 10.9-0.5 GDP per capita 2.7 1.8 1.6 8.5-2.0 Private Sector, Value 5.3 3.5 2.5 10.8-1.5 Added Public Sector, Value 7.9 5.2 2.9 11.3-0.5 Added Inflation 2.8 1.7 2.2 - - Percent of Real GDP Total Consumption 128.3 119.8 116.1 145.6 110.1 Public 29.8 22.4 20.6 37.4 18.5 Private 98.5 97.4 95.5 108.2 91.6 Total Investment 15.8 16.5 16.0 28.2 9.3 Public 4.7 5.2 5.0 7.3 2.1 Private 11.1 11.3 11.0 20.9 7.2 Trade Deficit 44.2 44.3 45.5 37.2 55.5 Total Exports 16.0 16.7 16.0 18.2 14.9 Total Imports 60.2 61.0 61.5 55.8 70.4 Memo Items GDP (USD) 6797.3 7049 7275 7818 7014 GDP per capita (USD) 1679.3 1709 1737 1854 1675 Unemployment Rate 23.0 23.4 23.6 21.0 27.2 Exchange Rate USD/ILS 3.79 3.63 3.60 3.60 3.60 *According to estimates of PMA research team. 2014 التنبو ات الاقتصادية Forecast لعام 8 Economic 2014