The World Bank Strengthening Fiscal Stability and Financial Integrity (P171819) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD144 INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED GRANT IN THE AMOUNT OF US$30 MILLION TO THE PALESTINE LIBERATION ORGANIZATION (FOR THE BENEFIT OF THE PALESTINIAN AUTHORITY) FOR THE WEST BANK AND GAZA STRENGTHENING FISCAL STABILITY AND FINANCIAL INTEGRITY DEVELOPMENT POLICY FINANCING April 10, 2020 Macroeconomics, Trade and Investment Global Practice Finance, Competitiveness and Innovation Global Practice Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. . Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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The World Bank Strengthening Fiscal Stability and Financial Integrity (P171819)
Document of
The World Bank
FOR OFFICIAL USE ONLY Report No: PGD144
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT FOR A
PROPOSED GRANT
IN THE AMOUNT OF US$30 MILLION TO THE
PALESTINE LIBERATION ORGANIZATION (FOR THE BENEFIT OF THE PALESTINIAN AUTHORITY)
FOR THE
WEST BANK AND GAZA STRENGTHENING FISCAL STABILITY AND FINANCIAL INTEGRITY DEVELOPMENT POLICY FINANCING
April 10, 2020
Macroeconomics, Trade and Investment Global Practice Finance, Competitiveness and Innovation Global Practice Middle East and North Africa Region
This document has a restricted distribution and may be used by recipients only in the performance of their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
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The World Bank Strengthening Fiscal Stability and Financial Integrity (P171819)
West Bank and Gaza
FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of March 31, 2020)
Currency Unit: New Israeli Shekel (NIS)
US$1.00: NIS 3.5471
ABBREVIATIONS AND ACRONYMS
. AFD AHLC
Agence Francaise de Developpement (French Development Agency) Ad-Hoc Liaison Committee
MoH MoU
Ministry of Health Memorandum of Understanding
AML/CFT Anti-Money Laundering/Combating Financing of Terrorism
4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 32
4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 34
5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 34
5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 34
5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS ................................. 35
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 36
5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 38
6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 40
ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 42
ANNEX 2: LETTER OF DEVELOPMENT POLICY ..................................................................................... 47
ANNEX 3: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 52
This operation was prepared by a World Bank Group team co-led by Nur Nasser Eddin (Senior Economist), Damir Cosic (Senior Economist), and Abed Khatib (Senior Financial Sector Specialist); and consisting of Adnan Ghosheh (Senior Water and Sanitation Specialist), Dominick Revell de Waal (Senior Economist, SMNWA), Samira Ahmed Hillis (HD Program Leader), Fernando Xavier Montenegro Torres (Senior Health Specialist), Maha Muhammad Bali (Operations Analyst), Lina Tutunji (Senior Procurement Specialist), Ala’ Turshan (Consultant), Riham Hussein (Financial Management Specialist), and Zein Azzam Ibrahim Daqqaq (Team Assistant). The team gratefully acknowledges the support and guidance provided by Kanthan Shankar (Country Director), Najy Benhassine (EFI Regional Director), Mark Ahern (EFI Program Leader), Kevin Carey (MTI Practice Manager), Jean Pesme (FCI Practice Manager), and Mariana Montiel (Senior Counsel). The team expresses its gratitude to the Palestinian Authority (PA), Ministry of Finance, and other PA staff for their collaboration in preparation of this operation.
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SUMMARY OF PROPOSED FINANCING AND PROGRAM
BASIC INFORMATION
Project ID Programmatic
P171819 No
Proposed Development Objective(s)
The Development Objectives of the proposed operation are: (i) strengthen commitment control in line ministries and improve overall public procurement practice, (ii) improve sector governance in water and health service provision, and (iii) strengthen the stability and integrity of the financial sector.
Organizations
Borrower: PALESTINE LIBERATION ORGANIZATION (FOR BENEFIT OF THE PALESTINIAN AUTHORITY)
Implementing Agency: MINISTRY OF FINANCE
PROJECT FINANCING DATA (US$, Millions) SUMMARY
Total Financing 30.00 DETAILS
Trust Funds 30.00
Special Financing 30.00
INSTITUTIONAL DATA
Climate Change and Disaster Screening
This operation has been screened for short and long-term climate change and disaster risks
Overall Risk Rating
High .
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Results
Indicator Name Baseline Target
The share of expenditures processed under the new commitment control system.
Zero percent December 2018
70 percent December 2020
Share of public entities that publish their procurement plans, procurement opportunities and contract award notices on the single portal procurement website. Annual number of female-owned businesses participating in public bids at the central level of government.
Zero entities at the central level and zero
municipalities December 2018
Three female-owned businesses in 2018
50 percent of entities at the central level and 30
percent of municipalities December 2020
Six female-owned businesses in 2020
Share of public entities at the central and local levels using the Standard Bidding Documents in their procurement.
Zero entities at the central level and zero
municipalities December 2018
50 percent of entities at the central level and 30
percent of municipalities December 2020
Certified local medical residencies are established by the Palestine Medical Council in the fields identified by the observatory of human resources as critical gaps including oncology, hematology, pathology and neurology.
Zero local residencies December 2018
A minimum of one local enrollment in each of the
four residencies in the fields of oncology,
hematology, pathology and neurology in local hospitals by December
2020
Publication of a performance report for water service providers.
Performance report for 2018 published in 2019
covering 89 service providers serving 82
percent of the population
Performance report for 2019 published in 2020
covering 115 service providers serving 90
percent of the population
Average collection rate amongst consumers served by the 15 service providers that have signed MoUs with the PWA to install prepaid meters.
52 percent December 2018
85 percent December 2020
PMA conducting on-site inspections of banks’ AML/CFT internal controls, that systematically incorporate an AML/CFT risk-based approach.
PMA AML/CFT supervision manual
does not
PMA conducted on-site inspections of 50
percent of banks
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systematically incorporate a risk-
based approach
December 2018
covering banks’ compliance with risk-
based AML/CFT requirements
December 2020
Increased minimum capital adequacy requirement for each bank, including capital conservation buffer (on a solo and consolidated levels).
Minimum capital adequacy requirement
for each bank of 12 percent (on a solo and
consolidated levels) December 2018
Each bank complies with minimum capital
adequacy requirement of 13 percent on a solo and consolidated levels (or is
implementing time-bound corrective actions)
December 2020
Islamic financial instruments reviewed and amended by regulator actions based on CSSA decisions.
No regulations issued based on decisions by the CSSA. December
2018
At least two financial instruments amended
through regulator actions based on the decisions of
the CSSA. December 2020
.
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PROGRAM DOCUMENT FOR A PROPOSED GRANT TO
WEST BANK AND GAZA FOR STRENGTHENING FISCAL STABILITY AND FINANCIAL INTEGRITY DEVELOPMENT POLICY FINANCING
1. INTRODUCTION AND COUNTRY CONTEXT
1. The proposed Strengthening Fiscal Stability and Financial Integrity Development Policy Grant (DPG) is a standalone operation that provides financing to the Palestinian Authority (PA) budget and is designed to continue supporting the authorities in achieving the strategic priorities envisaged in the National Policy Agenda (NPA) (2017-2022). The proposed DPG builds upon and complements reform efforts supported by previous operations, and brings a specific focus on governance, transparency, and financial sector stability and integrity. The DPG supports the PA’s efforts to strengthen the quality of public financial management and public procurement practices, continue improvements in sector governance in the health and water service delivery, and implement key financial sector reforms related notably to tightening Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) controls. The proposed DPG amount is US$30 million.
2. The Palestinian territories have faced long lasting political instability and periodic episodes of violence over the last two decades, exacerbating macroeconomic volatility. Inflows of transfers have significantly dropped in recent years, making it more pressing to unlock growth constrained by a challenging business environment. The trade and movement restrictions have created a high risk of disruption in projects and trade and have kept investment levels low, resulting in a bias towards non-traded services which have less potential for productivity growth. Most recent data show that economic growth has further weakened in 2019 due to the fiscal crisis which resulted from the standoff between the PA and the Government of Israel (GoI) over the transfer of clearance revenues.1
3. Driven by episodes of conflict, poverty rates in the Palestinian territories have increased during 2011-17, with nearly one in three persons living in poverty, and with growing divergence between the West Bank and Gaza. Data from the Palestinian Central Bureau of Statistics (PCBS) show that the overall share of population below the poverty line has increased from 26 percent in 2011 to 29 percent in 2017. This, however, masks a substantial divergence in trends between the West Bank and Gaza. The poverty rate in the West Bank declined from 18 to 14 percent, while poverty in Gaza increased dramatically from 39 to 53 percent leaving every second Gazan below the national poverty line.2
4. As envisaged in the World Bank Group’s Assistance Strategy for the West Bank and Gaza, DPGs remain a key instrument aimed at supporting the PA’s strategic priorities, advancing policy dialogue, and providing essential financing for the PA’s budget. Between 2006 and 2018, the relative size of the PA’s total fiscal deficit (before grants) fell from 27 percent to around 7 percent of GDP—an impressive achievement. Nonetheless, the PA continues to face a difficult fiscal situation mainly emanating from the dire situation in Gaza, while fiscal operations in the West Bank actually break even (see table 1). The PA currently spends 33 percent of its budget in Gaza while collecting less than 10 percent of its revenues there. This results in a structural gap in the PA’s finances that cannot be filled in the short to medium term as it requires progress on resolving the internal divide, accompanied with easing restrictions on Gaza allowing economic activity to expand, ultimately improving revenue
1 See Recent Economic Developments section for more on the fiscal crisis and its causes. 2 According to Atamanov and Palaniswamy (2018), Measuring Poverty in West Bank and Gaza, there is no statistical significance in the difference between poverty in female-headed and male-headed households (as per consumption-based index).
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generation and tax collection by the PA. Without this, donor assistance, though on a downward trend, continues to be a major source of funding for the PA’s budget and key for keeping Gaza afloat. In fact, analysis by the World Bank has shown that in recent years, transfers and aid have been the only source of external inflows that have financed consumption and sustained the livelihood of Gaza’s population.3 Without such transfer of real resources, the Gaza economy will be in a permanent subsistence crisis, making it difficult to imagine the territory being part of a long-term political arrangement.
Table 1: Palestinian Authority finances disaggregated by the West Bank and Gaza, 2016 (latest available disaggregated data)
US$ million Gaza West Bank Total
Expenditure 1,496 3,065 4,561
Wages 817 1,235 2,052
Goods and Services 110 557 667
Social Transfers 235 714 949
Net Lending 190 79 269
Social contributions4 73 123 196
Development Spending 72 265 337
Other __ 91 91
Revenue 325 3,146 3,471
Clearance Revenues 285 2,053 2,338
Tax and Nontax 40 1,186 1,226
Tax refund (minus) __ 93 93
Fiscal Balance -1,171 81 -1,090
Source: PA Ministry of Finance, Norway and World Bank.
5. The proposed DPG will provide much needed financing to ease some of the fiscal stress, now compounded by the COVID-19 pandemic, and enable the PA to finance some of its key operations. The fiscal stress that had resulted from the standoff between the PA and the GoI over the transfer of clearance revenues has significantly eased since September 2019 when the PA resumed accepting these transfers. Nevertheless, whereas 2020 would have been the opportunity to unwind the imbalances that built up during the standoff, the COVID-19 pandemic is expected to place high demands on the budget as the PA tries to address the large medical needs, provide assistance to households that have been pushed below the poverty line and businesses that have lost their income. Also, additional deductions from clearance revenues by the GoI estimated to exceed US$180 million in 2020 will further squeeze public finances. Furthermore, aid to the PA’s budget has significantly plummeted in recent years, reaching US$600 million5 in 2019 - the lowest in decades - and it is not expected to pick up in the coming years. As a result, the PA’s financing gap going forward is projected to be much higher than in previous years. The PA has exhausted its domestic sources of financing to muddle through the clearance revenue crises, which leaves it with limited options to finance the gap. The proposed DPG will provide much needed financing to ease some of the fiscal stress and enable the PA to finance some of its key operations.
3 World Bank report to the Ad Hoc Liaison Committee. March 2019. 4 The breakdown for this expenditure item was calculated by disaggregating the full figure provided by the Ministry of Finance per the share of employees in Gaza and the West Bank. 5 This figure includes budget support and development financing.
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6. The financing significance of this operation is not only in the funds it provides, but that it directly leverages financial support from other donors through the Palestinian Recovery and Development Plan (PRDP) Trust Fund. The PRDP Trust Fund is administered by the World Bank and disburses funds quarterly based on satisfactory progress of the reform program supported by DPGs and an adequate macroeconomic policy framework. The proposed operation will also provide a positive signaling effect to other donors at a time when direct donor assistance to the PA is of utmost importance for the Palestinian economy and public finances.
7. Against a grueling background, the PA has continued to tackle difficult reforms in critical areas such as public financial management (PFM) and transparency, which are supported by this operation. For instance, the PA has taken a proactive approach in 2019 when it comes to anti-corruption by adopting “The National Cross-Sectoral Strategy to Bolster Integrity and Combat Corruption (2020-2022)”. The Palestinian Anti-Corruption Commission (PACC) followed an inclusive approach in drafting the strategy that involved active participation of civil society organizations. The strategy candidly lays out the context and provides a critical assessment of the existing laws, institutions, and political will. It clearly specifies priority areas, including prevention, community participation, law enforcement and international cooperation, and provides a comprehensive, albeit realistic, implementation plan to improve the situation. The strategy also sets up a clear process for coordination with civil society and the private sector. With respect to PFM, a recent Public Expenditure and Financial Accountability (PEFA) assessment has shown that, despite some weaknesses, the PA’s PFM system is operating at a satisfactory level. Improvements have been made in a number of areas since the last assessment in 2013 and compared to other countries in the Middle East and North Africa region (MENA), the West Bank and Gaza PFM system has improved the most over recent years, according to the PEFA secretariat (Figure 1). To mitigate fiduciary risks, the PA has focused on strengthening its expenditure control in 2019 by rolling out a commitment control system in line ministries. In 2019, the PA efforts also targeted improving the efficiency and accountability of the management of public resources through adopting a number of public procurement reforms. Both the rollout of a commitment control system and procurement reforms are supported by this operation given their importance in mitigating fiduciary risks.
Source: PEFA Secretariat, 2020.
Figure 1: Evolution of PEFA scores by comparator countries
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8. In response to evolving risks, this DPG supports critical financial sector integrity and stability reforms as a risk mitigation strategy. Previous DPGs supported the PA’s shift to a stronger private sector focus. As a result, a particular emphasis in the last few operations was on improving the business environment. Building on previous efforts, this operation focuses on reforms in the financial sector, which is key to promoting a dynamic and inclusive private sector that is resilient in the face of evolving risks. It is important to signal the reform direction for the financial sector - including on AML/CFT - given the stresses that the sector has endured, stemming from the potentially destabilizing risks to cross-border correspondent banking relationships (linked to progress on financial sector integrity) and the buildup of arrears and increased reliance of the PA on bank financing amid the 2019 fiscal crisis.
9. To maintain a long-term perspective, this DPG builds upon and complements reform efforts supported by previous operations. The proposed standalone operation (like all previous 9 DPGs to the PA) builds on earlier operations to reflect the World Bank’s focus on supporting a long-term development agenda rather than emergency financing. One of the main areas of focus of the DPGs over the years has been strengthening PFM and accountability of the PA and improving the transparency and information quality pertaining to its fiscal reporting. The proposed DPG complements previous efforts through rolling out a commitment control system in line ministries, as mentioned above, requiring them to secure a budget allocation prior to contracting an expense. DPGs also played a key role in supporting the PA’s efforts in reforming public procurement through supporting the adoption of a modern Public Procurement Law (PPL) in 2014 and the establishment of the entity in charge of implementing the law, the Higher Council of Public Procurement Policies (HCPPP). This operation builds on these efforts by launching a procurement portal where awards and notices will be published and mandating the use of Standard Bidding Documents. Previous DPGs also focused on improving the quality and sustainability of service delivery in the energy, health, and water sectors amid others. This operation builds on this work through supporting the PA’s efforts in enhancing sector governance in water and health service delivery.
Box 1: More than a decade of DPGs, what has been achieved?
The World Bank has worked closely with the PA since 2008 through 9 DPGs to support reform efforts in key areas. On the fiscal front, the DPGs supported reforms to control the public sector wage bill through instituting systems that ensure that hiring and promotions are supported by adequate budget allocations. On the revenue side, the DPGs focused on unifying different tax departments enhancing the efficiency of the collection efforts and on revising the Investment Promotion law to reduce the scope of tax incentives for new investments and limit their duration. The DPGs also focused on increasing government transparency and accountability through improved PFM. This was achieved through improving the efficiency and transparency of the budget preparation process and launching a modern computerized accounting system in the Ministry of Finance (MoF). Further, the DPGs supported higher transparency in budget implementation through the publication of a number of monthly reports by the MoF covering: expenditure and revenue statements, disaggregated data on social transfers in addition to transfers to Local Government Units (LGUs). The efficiency of public finances has also been improved through various reforms on public procurement supported by the DPGs. Efforts through different DPGs also focused on making the energy sector more financially viable through supporting the establishment of the Palestinian Energy and Regulatory Commission as the main regulator, supporting the establishment of distribution companies, and setting financial and technical performance targets to monitor the performance of these distributors. To improve targeting of social safety nets and ensure that the most vulnerable populations are protected, the DPGs supported reforms to integrate all cash assistance programs under the Ministry of Social Affairs and verify households in the database for targeted social assistance. In the health sector, DPGs targeted an area that weighs heavily on public finances through reforming the medical referral process. This was done through centralizing the referral process and bringing the referral audit function
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under the direct authority of the General Directorate for Health Insurance. Further, the DPGs supported establishing a framework that governs referrals to Israeli as well as local medical facilities. More recent operations have widened the focus to include business environment reforms. Efforts under the DPGs in this area included facilitating the land registration process, modernizing the Companies Law, streamlining procedures for issuance of business licenses, and adopting regulations for Licensing Payment System Providers which would enable the establishment of new electronic payments systems to foster competition and reduce costs.
Source: World Bank Development Policy Grant documents.
10. The reform program supported by the operation has been discussed with a wide range of development partners and has received wide endorsement. For example, the World Bank has held various consultation sessions with the PRDP Trust Fund donors who have shown strong support for the DPG-supported reforms. The Bank has also closely coordinated with the International Monetary Fund (IMF) to ensure alignment, especially in relation to financial sector reforms supported by the operation. Consultations were also held with the EU representatives. In areas where the Bank and the EU are both active, DPG prior actions and results have been closely aligned with the EU’s Results-Oriented Framework (ROF). Given the importance of the financial support that the DPG provides and leverages, and the role that aid plays in supporting development and stability in the Palestinian economy, positive signs regarding the operation have also been received from neighboring countries.
2. MACROECONOMIC POLICY FRAMEWORK
2.1. RECENT ECONOMIC DEVELOPMENTS
11. Economic momentum faltered in 2019. After two strong quarters at the end of 2018, preliminary data by the PCBS show that growth of real Gross Domestic Product (GDP) in the Palestinian territories weakened in the first three quarters of 2019. Specifically, quarter-on-quarter growth was minus 3.3 percent in the first quarter of 2019, followed by negative growth of 2 percent in the second quarter before returning to a positive 1 percent in the third quarter. Notably, the slowdown was driven by a decline in private and public consumption and in investment. However, comparing the first three quarters of 2019 with the same period of 2018, the Palestinian economy registered a growth of 1.9 percent, with the West Bank expanding by 2.3 percent while Gaza grew by 0.4 percent. To a large extent, this is a base effect as the first half of 2018 was a particularly weak period.
12. While the total fiscal deficit has declined significantly over the past decade, the reduction has reached a plateau and the ability to finance it in an optimal manner has not improved. Between 2006 and 2019, the relative size of the PA’s total fiscal deficit (before grants) fell from 27 percent of GDP to around 8 percent—an impressive achievement. This was a result of efforts to streamline public spending, notably the wage bill and net lending (de facto transfers to municipalities), as well as to improve domestic revenue collection. Nonetheless, the PA continued to face large fiscal deficits in recent years, mainly emanating from Gaza, while fiscal operations in the West Bank mostly break even. Inflows of donor aid have been a major source of financing for the deficit, but those have significantly declined in recent years and have been insufficient to cover the overall financing need. As a result, the PA has resorted to debt financing from the domestic banking sector and used the irregular practice of running up arrears to private suppliers and to the public pension fund to finance the remaining gap.
13. After a major fiscal shock in 2019, public revenues were three percent lower compared to 2018. For a period of six months, the standoff over the transfer of clearance revenues6 dominated the developments both in public
6 Clearance revenues are mostly VAT and import duties collected by the GoI on behalf of the PA which are to be transferred monthly based on the revenue sharing arrangement instituted by the Paris Protocol. They represent almost two-thirds of all revenues collected by the PA.
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finances and the real economy. Starting in March 2019, clearance revenue receipts stopped completely after additional unilateral deductions by the GoI and the subsequent PA decision to reject these transfers altogether. However, with two ad hoc transfers in August and October 2019, the PA has received US$960 million in total, which accounts for most of outstanding clearance revenues collected.7 According to figures provided by the MoF, clearance revenues received in 2019 were 1.6 percent higher compared to the same period last year despite the additional deductions. The increase was mainly driven by two main tax categories: i) petroleum excise receipts which increased by 16 percent following an increase in fuel imports to Gaza from Israel as shipments from Egypt are no longer forthcoming, and ii) customs and value-added tax (VAT) receipts which grew by 4 percent following an increase in imports. However, the increase in clearance revenues was not enough to offset the steep decline of 13 percent in domestic collections due to the uncertainty created by the fiscal crisis, resulting in a decline in total public revenues.
14. Public spending grew by four percent in 2019, even though the PA operated under an emergency budget throughout the year8. The PA operated under an emergency budget in 2019 which set the expenditure ceiling at 1/12 of the 2018 budget per month, as a regular budget was not passed. To manage the fiscal crisis, the PA rationed cash by paying only 60 percent of public salaries to its employees in the West Bank and in Gaza9 while protecting those that make NIS 2,000 per month and below, during March-September 2019. The PA built up arrears to suppliers of goods and services by paying 40 percent of the amount that was committed during the crisis period. The PA also did not pay all committed transfers as, for example, payments to the poor through the National Cash Transfer Program (NCTP) were cut back.10 However, starting September 2019 and as clearance revenues started flowing, the PA cleared most of the arrears to its employees, paid some of the arrears to private suppliers as well as paid down the increase in domestic debt. Overall, public spending grew by 4 percent, year-on-year, driven by an increase in the wage bill—the largest spending item—by 3.3 percent and net lending (de facto transfers to municipalities) by 46 percent as LGUs built up arrears to suppliers for bulk water and electricity.
15. Despite severe fiscal stress, the spillovers to the real sector have been lessened by various measures and coping mechanisms that have insulated the impact on disposable income. The PA has worked with banks and utilities to reduce the mortgage and utility installment payments of the affected public employees, who account for around one-quarter of total employment. Large cuts in public spending were likely to have negatively impacted economic activity given the existence of large fiscal multipliers.11 However, the private sector, which accounts for around two-thirds of total employment, has proven resilient so far to operating on an arrears basis – as it already had done in the past. Thus, liquidity has been preserved through loan rescheduling and forbearance, and underlying indicators of growth performed better than expected. Several higher frequency indicators—such as industrial production, imports, exports, and the share of returned checks—have not shown signs of dramatically deteriorating economic activity. The economic environment in Israel, with growth close to potential, low inflation,
7 This amount does not include deductions offsetting the amount paid by the PA to Palestinian prisoners, averaging around US$12 million per month. In addition, the GoI continues to withhold an additional NIS 289 million (US$80 million), according to the PA. 8 The overall expenditure figures for 2019 have been adjusted compared to those provided by the MoF in order to eliminate the effect of reporting changes introduced in 2019 and present the figures on a commitment basis. 9 The alignment of the treatment of employees in the West Bank with those of Gaza is a revised policy of the PA as previously only Gazan employees were facing reductions in salaries. 10 The Q2 2019 NCTP payment was delayed until August without a PA contribution. The payment was only made possible as the World Bank and the European Union moved their planned quarterly contributions to earlier in the year. The World Bank contribution is part of the Social Protection Enhancement Project that makes four quarterly contributions to the NCTP. 11 Fiscal multipliers are estimates of the short-term impact on output of changes in fiscal policy. This is consistent with research that finds that countries in MENA with high unemployment, fixed exchange rates, and low trade-to-GDP ratios have large fiscal multipliers, implying that exogenous reductions in public spending can have large and negative impacts on output. See Lederman D. and Rojas, C., 2018. “On the International Heterogeneity of Fiscal Multipliers,” mimeo.
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and a strong NIS, has also likely generated positive spillovers to the Palestinian economy. Around one in ten working Palestinians are employed by Israeli firms, and this is an important source of additional income for Palestinian households.
Table 2: Palestinian territories: Key Macroeconomic Indicators, 2016-2022 Est. Forecast
2016 2017 2018 2019 2020 2021 2022
Real economy, annual percent change, unless indicated otherwise Nominal GDP 10.3 4.7 0.9 1.0 3.1 2.8 2.9 Real GDP 8.9 1.4 1.2 0.9 2.4 2.5 2.6 GDP per capita (nominal) 7.1 1.9 -1.7 -1.6 0.5 0.2 0.1
Source: PCBS, MoF for history and World Bank staff for projections.
16. The unemployment rate in the Palestinian territories has improved in the fourth quarter of 2019, but it has remained near historic peaks. Unemployment peaked at 27.4 percent in the second quarter of 2018 -- the highest rate in years. While unemployment abated in the second half of 2018, it picked up again in the first half of 2019 as a result of the slowdown in the economy. It reached 26.8 percent in the first quarter of 2019, but it has since eased to 24 percent in the fourth quarter due to the remission of the clearance revenues standoff. This headline story, however, masks a regional divergence. In Gaza, 42.7 percent of those in the labor force were unemployed
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in the fourth quarter of 2019. This is an increase of two percentage points over the same quarter of 2018. The situation in the West Bank has been very different with the unemployment rate stagnating at around 17 percent over recent years. It has even dropped to 13.7 percent in the fourth quarter of 2019 as a result of an increase in the number of persons employed in Israel.
17. Gaps in employment are significant by gender and region, with low female entrepreneurship due to lack of financial inclusion and information access. In Gaza, female unemployment reaches up to 58 percent compared to 37 percent male unemployment and 24 percent of unemployment among women in the West Bank. Such disparities are a result of gender-based differences in laws and discriminatory practices that disadvantage women (such as lack of laws around equal pay for equal work, lack of paternity benefits, among others) in addition to employer biases and preferences for hiring men when jobs are scarce, inadequate childcare, lack of flex work options and mobility restrictions coupled with unreliable transportation networks.12 Additionally, female entrepreneurship is low with only around one out of four employed women having their own business while rates are higher among men at approximately one of three.13 One of the major reasons for low female entrepreneurship is their lack of access to information about new business opportunities due to aforementioned norms and mobility constraints that prevent them from having direct access to public institutions and private workplaces where information is typically made available.14
18. Inflation continues to be subdued. Overall prices increased by 1.3 percent (year-on-year) in December 2019 and inflation averaged 1.6 percent during 2019 compared to 2018. The Israeli Shekel, which is the main currency in circulation in the Palestinian territories, has continued its appreciation and this had a deflationary effect on the prices of imported goods. In addition, the prices of food products (most of which are produced domestically or in Israel) remained stable in 2019.
19. Despite a widening trade deficit, the current account deficit is estimated to have narrowed in the first three quarters of 2019 by 10 percent to US$1.4 billion. The trade deficit in goods and services stood at US$4.9 billion in the first three quarters of 2019 – up by 4 percent compared to the same period of 2018 as a result of an increase in imports from Israel—the main trading partner. Exports continue to be constrained by the ongoing trade restrictions and have remained low and stagnant. Current transfers amounted to US$3.5 billion, up by 11 percent compared to the same period of 2018 as a result of an increase in both private and official transfers. Most notably, compensation of employees working abroad increased by 4 percent to US$1.9 billion as a result of the higher number of workers employed in Israel.
12 Hillis, Samira Ahmed; Alaref, Jumana Jamal Subhi; Takkenberg, Wouter Matthijs. 2018. Enhancing job opportunities for skilled women in the Palestinian territories (English). World Bank Group. Washington, D.C. 13 WDI 2019. 14 Hillis, Samira Ahmed; Constant, Samantha M.. 2018. Second Country Gender Action Plan (C-GAP II) for Palestinian Territories (FY2018-2021) (English). World Bank Group. Washington, D.C.
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Table 3: Palestinian territories: Balance of Payment Financing Requirements and Sources of Financing, 2016-2022
Est. Forecast
2016 2017 2018 2019 2020 2021 2022
Percent of GDP unless otherwise indicated Financing Requirements 12.8 7.8 10.5 9.9 9.7 9.2 8.7 Current Account Deficit 12.6 9.7 10.2 9.9 9.7 9.2 8.7 Net Errors and Omissions 0.2 -1.9 0.3 0.0 0.0 0.0 0.0 Financing Sources 12.8 7.8 10.5 9.9 9.7 9.2 8.7 Capital Account Balance 4.4 2.5 2.4 2.4 2.3 2.2 2.2 Net Foreign Direct Investment -2.2 -1.4 -1.4 -0.8 -0.8 -0.8 -0.7 Net Portfolio Investment -1.9 0.4 -1.6 -1.1 -1.1 -1.0 -1.0 Net All Other Flows 10.8 7.1 11.7 9.6 9.4 8.9 8.4 Change in reserve assets 1.7 -0.8 -0.6 -0.1 -0.1 -0.1 -0.1 External Financing Gap 0.0 0.0 0.0 0.0 0.0 0.0 0.0 GDP nominal (US$ million) 15,405 16,128 16,277 16,438 16,952 17,426 17,931
Source: PCBS for history and World Bank staff for projections.
20. Investment rates have remained low, with the bulk channeled into non-traded activities and structures that generate low productivity employment. Private investment levels, averaging about 15-16 percent of GDP in recent years, have been low as compared with rates of over 25 percent in fast growing middle-income economies. Foreign direct investment, at a mere 1 percent of GDP, is also very low in comparison to most fast-growing economies. Low investment has not only been a result of a decline in foreign savings but also due to very low domestic private savings. Also, much of the investment has been concentrated in low productivity activities where returns are less affected by political risk, mainly internal trade and real estate development - neither of which generate skill-intensive employment.
Table 4: Palestinian territories: Key Fiscal Indicators, 2016-2022 Est. Forecast
2016 2017 2018 2019 2020 2021 2022
Percent of GDP unless otherwise indicated Overall Balance -2.1 -3.2 -2.5 -4.4 -4.2 -4.1 -4.0 Primary Balance -1.6 -2.7 -2.1 -4.0 -3.8 -3.6 -3.5 Total Revenues and Grants 28.1 26.6 25.2 23.9 24.3 24.4 24.5
Source: MoF for history and World Bank staff for projections. Note: 2019 figures provided by the MoF have been adjusted to eliminate the effect of reporting changes introduced in 2019 and present the figures on a commitment basis.
Figure 2: Direct and Indirect Exposure of the Banking Sector to the PA (US$ million)
Source: Palestine Monetary Authority
21. Following a few years of stability in PA borrowing, exposure of the banking sector to the public sector registered an increase. With the local authorities not issuing treasury bonds, borrowing from local banks is a major source of public finance. In light of the growing fiscal challenges faced by the PA over the past decade, the banking sector’s credit exposure to the public sector has been a cause of unease. Reliance on bank financing grew steadily, raising concerns over credit concentration risk despite the applicable exposure limits set by the Palestine Monetary Authority (PMA) and the increased the risk weight for domestic public debt from 10 to 15 percent in 2019. Following a few years of stability in PA borrowing (around US$1.3-1.4 billion), exposure of the banking sector to the public sector registered an increase during 2019. With the recent standoff over clearance revenues in remission, a drop in the PA exposure to the banks has been registered as the exposure returned to US$1.6 billion by the end of 2019. It is important to note that the banking sector’s exposure to the PA is not limited to direct credit to the government. Borrowing by PA employees has been on the rise in recent years, at some point even surpassing direct PA loans for the first time since 2017. As of December 2019, borrowing by PA employees reached
600
800
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1,200
1,400
1,600
1,800
0%
5%
10%
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35%
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MIL
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PA Exposure % of Direct Credit (right axis) Direct PA Loans PA Employee Loans
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US$1.6 billion. When combined, PA and public employees account for US$3.2 billion, or 35 percent of total banking sector loans. While the exposure of non-bank financial institutions (NBFI) should also be monitored, stability risks stemming from NBFIs are minor given that 95 percent of total financial sector assets are held by banks.
2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
22. As a result of the fiscal shock that was witnessed during most of 2019, growth in the Palestinian territories is estimated to have been low. Following a weak outturn in 2018 when economic activity registered growth of 1.2 percent, growth in 2019 is estimated at 0.9 percent as a result of the clearance revenue standoff. It is important to keep in mind that this outturn is a result of the situation in Gaza improving and registering minimal positive growth following a steep recession in 2018 (-3.5 percent), while growth in the West Bank in 2019 is estimated to reach the lowest level over the last five years (1.1 percent), down from 2.3 percent in 2018.
23. Going forward, however, as some of the uncertainty around the clearance revenue standoff has been contained, growth was expected to recover very slowly. Under a baseline scenario which assumes a continuation of the restrictions on movement and access, persistence of the internal divide between the West Bank and Gaza and stagnating aid levels, the Palestinian economy is expected to slowly recover over the forecast horizon, with real GDP growth averaging about 2.5 percent (Table 2). Financial buffers, which were severely depleted during the clearance revenue standoff, are expected to be gradually rebuilt which will translate into a moderate recovery of consumption and investment. Nonetheless, growth is expected to be below potential (which is about 4 percent per year) and implies a minimal real per capita income growth and a rise in unemployment given the expected population growth.
24. There are significant downside risks and uncertainty around the outlook as the recent remission of the clearance revenue standoff is incomplete and further shocks could resurface again. While the bulk of revenues are being transferred, the underlying causes to the disruption are yet to be resolved as the withholdings by the
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GoI continue. A more comprehensive agreement needs to be reached with respect to the mechanism and nature of GoI deductions from clearance revenues. To that effect, a third general election in Israel in the span of one year indicates that the political context for reaching an agreement remains difficult. Furthermore, larger than expected declines in donor support or disruptions in the correspondent banking relationships remain longstanding risks.
25. While it is too early to assess the full impact of COVID-19, a likely scenario is that growth will move into negative territory for 2020 before resuming the modest medium-term trajectory discussed above. Initial impacts will be manifested through the economic effects of the necessary public health measures which have shut down the tourism, travel, retail and hospitality sectors. With the aggressive containment measures instituted by the PA, along with similar measures in Israel and Jordan, the duration of the crisis can be limited. Of course, a prolonged crisis would have growth effects previously only seen in the context of major outbreaks of violence. On the positive side, talks of a unified parliamentary election in the West Bank and Gaza could lead to efforts to reunify the polity of the two territories, potentially helping to alleviate some of the economic hardships and improve the outlook.
26. The fiscal position has worsened in 2019 resulting in growing domestic arrears. In 2019, revenues were 3 percent lower, while expenditure increased by 4 percent resulting in the PA’s financing needs (deficit before foreign assistance) increasing to US$1.3 billion for 2019, on a commitment basis.15 Foreign assistance was around US$600 million, resulting in a financing gap after aid (overall deficit) of around US$700 million, or 4.4 percent of GDP (Table 4). Around US$250 million of this amount was financed through borrowing from domestic banks, while honoring previous agreements with the PMA to restrict the direct exposure of the banking system to the PA. Qatar has also pledged US$250 million as an external loan to the PA that has been provided in monthly installments. Seven installments of US$25 million each were disbursed in 2019, totaling US$175 million. Given that no additional donor aid was identified, the PA was forced to fill most of the remainder of the gap with arrears to the private sector, public employees, Local Government Units, and the public pension fund, which totaled 2.3 percent of GDP in 2019.
27. The outlook for the fiscal position going forward is subject to significantly higher than usual uncertainty, exacerbated by COVID-19. The GoI withholding of some clearance revenues will continue in 2020 and is estimated to amount to NIS 650 million (US$180 million), about 5 percent of total revenues. While this represents a significant reduction in revenue, the PA is expected to continue accepting the remaining revenue transfers. This will bring about much needed predictability in public finances -- an improvement compared to 2019. This, in turn, should stabilize domestic revenues, which dropped by 11 percent in 2019 given the severe liquidity squeeze in the economy during the year. The improvement in domestic revenues, coupled with expenditures continuing to be constant as a percentage of GDP and similar levels of foreign assistance, are expected to lead to slight improvements in the deficit over the forecast period (Table 4). Over the coming months, the fiscal impact of COVID-19 will become clearer; as seen globally, fiscal deficits and financing needs can be expected to rise. Since these impacts arise from an exogenous shock and as spillovers from a necessary public health response, they do not of themselves affect the adequacy of the policy framework.
28. Risks to debt sustainability remain similar as a year ago but accentuated by the possibility of additional clearance revenue withholding.16 The large projected financing requirement (after the inclusion of donor grants) in the PA’s budget between 2019 and 2024 and weaker growth projections are the main drivers behind the risk to debt sustainability. The PA’s public debt stood at 37.9 percent of GDP as of December 2019. It consists of external debt (7.6 percent of GDP), borrowing from the domestic banking sector (9.5 percent of GDP), and
15 The overall expenditure figures for 2019 have been adjusted compared to those provided by the MoF in order to eliminate the effect of reporting changes introduced in 2019 and present the figures on a commitment basis, including the amount of grant assistance received. 16 Based on debt sustainability analysis (DSA) for market access countries (MAC DSA) conducted by the World Bank.
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domestic arrears (20.8 percent of GDP). Under a baseline scenario (that assumes current level of clearance revenue deductions by the GoI of about 1 percent of GDP), public debt is expected to reach 55.8 percent of GDP in 2024 – higher than the 40 percent limit permitted by the law on public debt but slightly lower than estimated 57 percent in the assessment one year ago. A fiscal shock in the form of higher deductions of clearance revenues by the GoI estimated at NIS 1.2 billion per year could push public debt to 60 percent of GDP by 2024.
29. With continued reform efforts by the PA and anticipated inflows of donor aid, the macroeconomic policy framework is adequate. The banking sector has proven repeatedly its resilience to shocks, and exchange rate risks are minimized with the use of NIS, which is appropriate given that nearly 90 percent of Palestinian trade is with Israel. As long as external restrictions outside the control of the PA continue to restrain growth, coupled with internal divide between the West Bank and Gaza, there is no feasible alternative in the Palestinian territories to a macro-fiscal framework that relies on large amounts of donor aid to cover sizable financing gaps associated with modestly declining deficits over the medium term. In parallel, the PA will continue with reform efforts to boost revenues and curb public expenditure growth, but also taking into account politically and socially unbearable impacts on citizen welfare and social stability. This grant will contribute to the reduction in the PA’s fiscal deficit and is expected to leverage additional amounts of grant assistance through the Bank-administered PRDP Trust Fund, which will altogether significantly help fill the PA’s financing gap and improve debt sustainability prospects, along with the ongoing and planned reform efforts by the PA. Dialogue between the PA and development partners will be critical in designing and mobilizing effective support for dealing with COVID-19 impact on the fiscal situation and preserving macroeconomic stability.
2.3. IMF RELATIONS
30. West Bank and Gaza is not a member of the IMF and consequently there is no IMF program or Article IV surveillance. The IMF, however, has an office for West Bank and Gaza in Jerusalem. Since the 1993 Oslo Accords, the IMF has been providing technical services to the West Bank and Gaza, including policy advice in the macroeconomic, fiscal, and financial areas, as well as technical assistance, with a focus on tax administration, public expenditure management, banking supervision and regulation, and macroeconomic statistics. IMF staff has produced regular reports in advance of the Ad Hoc Liaison Committee (AHLC) donor meetings. The IMF staff’s last report to the Ad Hoc Liaison Committee was submitted in September 2018.17
3. GOVERNMENT PROGRAM
31. The NPA “Putting Citizens First” for 2017-2022 focuses on investing in human capital and on private sector development to achieve more sustainable growth and job creation. The NPA consists of three main pillars: 1) Path to Independence, which aims to achieve national unity by upholding democratic principles and broadening the Palestinian territories’ international participation and expanding bilateral relations, 2) Government reform, which focuses on establishing better public institutions to assure that the most vulnerable are targeted and protected, while providing better services to citizens and enhancing accountability and transparency of public institutions, and 3) Sustainable Development, which focuses on building and enhancing an environment for dynamic and inclusive private sector growth for better job opportunities. The NPA also focuses on institutionalizing gender mainstreaming and promoting gender equality and women empowerment through enforcing laws that abolish gender-based discrimination and punish violence against women.
32. Given that the mid-point of the 2017-2022 NPA is approaching, its sector strategies will have to be updated to reflect new priorities, realities and plans, according to the PA. The revised sector strategies are to be adopted
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by mid-2020 at the latest to allow enough time for the updated strategies to link up with the budget preparation process of 2021. One of the main changes to the sector strategies will be to reflect the “cluster” approach that the Prime Minister has recently launched, hoping to capitalize on the comparative strengths of each Palestinian region. With the cluster development approach, the Palestinian authorities aim to encourage investments in the sector of agriculture in the Jordan valley, tourism in the governorate of Bethlehem, and industry in Hebron and Nablus. This approach involves investment in basic infrastructure, supporting public-private partnerships, and the provision of government subsidies to businesses who make the designated regions/sectors a focus of their operation and investment. The part of the strategy that supports infrastructure investments is highly commendable, however providing additional subsidies is an issue that requires further consideration. Approaches will take into account the different needs and priorities of women and men in the key sectors mentioned, based on specific data and evidence.
4. PROPOSED OPERATION
4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION
33. The proposed operation has been designed to support the implementation of key policy and institutional reforms defined in the second and third pillars of the PA’s development strategy, NPA. The second pillar of the NPA - Government Reform - will be supported through the actions taken to improve PFM, procurement, health services while reducing the fiscal drain on the PA budget though reforms in the water sector. The third pillar - Sustainable Development - will be addressed through the actions aimed at supporting the private sector through financial sector reform.
34. The Program Development Objectives (PDO) of this operation are aligned with the key PA priorities and broader private sector development goals. The PDOs of the proposed operation are to: (i) strengthen commitment control in line ministries and improve overall public procurement practice, (ii) improve sector governance in water and health service provision, and (iii) strengthen the stability and integrity of the financial sector. Under the first objective, introducing commitment controls in line ministries and improving procurement practices through launching a single procurement portal and mandating the use of Standard Bidding Documents (SBDs) for all public procurement will help improve governance and fiscal integrity of the PA’s operations. Under the second objective, providing health services in specialties that do not currently exist in the Palestinian territories will help reduce the need for expensive and open-ended outside referrals, decreasing PA spending on this growing category of expenditure. Further, installing prepaid water meters will reduce non-payment by consumers which will improve the financial viability of the sector making it more attractive for private investment and will also reduce net lending (deductions made by the GoI from import taxes collected on behalf of the PA to offset utility bills owed by Palestinian LGUs to Israeli suppliers). Finally, under the third objective, strengthening the capital requirements and risk-based internal AML/CFT controls of financial institutions would significantly improve the stability and integrity of the financial sector, which is key for a well-functioning private sector, a sound business environment and transparency.
35. Lessons learned through previous DPGs, in particular, the need for strong government ownership and flexibility in a high volatile context, have been fully taken into account in the preparation of this DPG. Standalone, rather than programmatic budget support operations, have allowed adequate flexibility in the choice of prior actions from one operation to the next, which has proved advantageous within a highly volatile security and political context that often leads to reprioritization of reforms. At the same time, the programmatic nature of certain reforms has not been neglected. For instance, this operation supports recent progress in complex reform efforts in the areas of procurement, private sector development, public financial management and health, building on earlier stages of reforms that were supported through previous DPGs. This DPG is entirely based on the PA’s
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reform program to ensure full ownership in all areas of reform. Thus, while more ambitious actions in certain areas would be desirable, it would be very difficult to ensure ownership for those actions by the PA and the institutional capacity for the implementation of certain actions is limited. The choice of prior actions takes into consideration not only the PA’s reform priorities, but also its technical capacity, as well as the social and even security risks that might be triggered by pursuing certain reforms.
4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS
Pillar 1: Strengthen commitment control in line ministries and improve overall public procurement practice.
36. The operation supports the PA’s efforts in implementing a commitment control system in line ministries. Currently, a budget reservation (in most ministries) only occurs when an expense is being paid. Implementation of a commitment control system requires line ministries to ask for a budget allocation before an expense is contracted. This reform will be implemented through the Integrated Financial Management Information System (IFMIS) and the associated financial procedures. The reform supported by this operation builds on the Development Policy Grant VII18, which supported introducing a commitment recording system in a number of pilot line ministries, including transportation, interior, public works, and local government. The reform supported by the DPG VII made available information on all outstanding as well as newly incurred commitments, allowing for better planning and improving the transparency of public finances. The proposed DPG aims to build on the earlier effort by enforcing implementation of a commitment control system in all line ministries. Expenditures processed under the new commitment control system will initially include wages and transfers, which add up to 70 percent of the PA’s total spending. Including other categories of spending requires additional sectoral reforms. For example, one big ticket item that the MoF is excluding in the first year of implementation of the commitment control system is outside medical referrals. Additional reforms in the health sector are needed before this category of expenditure is covered by the commitment control system. Although the Ministry of Health (MoH) has already launched reforms in this area supported by the ongoing World Bank-funded project in the health sector, tangible results are not expected in 2020. Hence, the MoF has agreed that the remainder 30 percent of its spending will be covered by the commitment control system by the end of 2021.The new commitment control system would enable: (i) reserving budget allocations for specific purposes; (ii) making those allocations unavailable for any other purpose; and (iii) planning for future disbursements. The measure is expected to reduce the generation of arrears for expenditures outside the budget by ensuring that all commitments are within the budget. The reform will later be extended to cover all expenditures by introducing a link between the cash plan and the limits for commitment, which can be expected to further reduce the possibility of generating new arrears.
Prior Action 1: The Ministry of Finance has taken the necessary actions to implement a commitment control system in all line ministries to secure budget allocations prior to the signing of a contract with service providers, excluding outside medical referrals, as evidenced by: (i) issuance of official instruction No. 2019/1602 of September 8, 2019; (ii) issuance of instructions م of January 20, 2020 by MoF’s accountant general to the heads ع of financial and administrative units at line ministries informing said ministries that MoF has been developing the IFMIS to introduce a commitment control system and ensure that financial operations are recorded according to GFS.
Indicator: The share of expenditures processed under the new commitment control system.
Baseline: Zero percent of expenditures are processed under the new commitment control system as of December 2018.
18 Approved by the World Bank’s Board in February 2016.
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Target: 70 percent of expenditures are processed under the new commitment control system as of December 2020.
37. Building on work done through previous DPGs, this operation supports efforts by the PA to push forward public procurement reform. The Bank has been supporting reform efforts in this area aimed at improving the accountability, integrity, and transparency of the system, as well as preventing corruption and increasing opportunities for the private sector, for years now. Through DPG V19, the Bank has supported the establishment of the Higher Council for Public Procurement Policies, which is the entity in charge of the development of the procurement system, including policy setting, institution building, procurement documentation, guidelines and manuals, training and public awareness campaigns, as well as for oversight of all public procurement activity. Despite initial delays, the HCPPP has recently been provided with the necessary resources and has assumed its envisaged role. Through DPG VI20, the Bank supported the PA’s efforts in amending the Public Procurement Law and adopting its implementing regulation, consistent with international best practices. The law was enacted in April 2014 and entered into effect in July 2016, and it applies to all public procurement entities at the central and local levels of government. Also, the PPL is considered highly inclusive as it requests the provision of equal non-discriminatory opportunities and fair and equal treatment to all bidders and consultants, which also includes women.
38. This operation supports the PA’s efforts in operationalizing key additional aspects of the 2014 procurement law, including mandating the use of a single procurement portal where all procurement information (plans, notices, etc.) will be posted, and mandating the use of SBDs, including standard forms of contract for works, goods and consultants’ services, by all procuring entities.21 The single procurement portal is critical for promoting transparency and for making available necessary information on public procurement to the private sector, the government, and the public. It is the first step towards the adoption of an e-procurement system. The data generated from the portal will help HCPPP assess the performance of the procurement system against a set of indicators and to subsequently adjust procurement policies to achieve best value for money. The issuance and mandatory use of SBDs presents a number of advantages for a procurement system, namely: helping standardize and harmonize implementation of procurement proceedings; promoting transparency and predictability in public procurement proceedings, helping mitigate the effects of low levels of procurement capacity in the public sector; facilitating participation by small businesses; and facilitating oversight, and audit of procurement proceedings. The use of the single procurement portal and the SBDs has been supported by the World Bank through the ongoing Public Financial Management Improvement (PFMI) project and associated analytical work. The HCPPP has been delivering training to procurement officials from procuring entities at the central and local levels on the use of the portal. In addition, through the PFMI project, a training program22 on the use of the SBDs was prepared and will be delivered to 150 procurement officials from procuring entities at the central and local level. These reforms will require building the capacity and training of the procurement entities and this can only happen gradually. As a result, by the end of 2020, 50 percent of entities at the central level and 30 percent of municipalities are expected to be using the portal and the SBDs. The plan is to achieve universal coverage at the central level by the end of
19 Approved by the World Bank’s Board in May 2013. 20 Approved by the World Bank’s Board in May 2014. 21 The procurement prior action from DPG VI supporting amending the procurement law and adopting its regulation was expected to lead to results related to the use of a single procurement portal and SBDs. Those results, however, were not achieved within the timeline of DPG VI, and hence, are supported by this operation given their importance. 22 Training will be carried out in a way that takes into consideration female workload to ensure it does not require overtime or interfere with after work responsibilities.
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2021 and for municipalities by the end of 2022.23 These targets are also aligned with the European Union’s Result-Oriented Framework through which they provide conditional budget support.
39. These reforms are not only key for creating a modern and transparent public procurement system, they also build on previous DPGs’ efforts to support the private sector for which the public procurement market represents a huge business opportunity and they also support the gender agenda. Governments are an important source of business for the private sector, which in turn, is an important source of jobs for citizens. Creating accountable and transparent public procurement systems improves the regulatory regime for private suppliers and enhances their confidence in the public sector. This, in turn, encourages greater private sector investment and job creation. With strong public systems, the PA would also be better equipped to crowd in private investors in sectors such as infrastructure, water or energy -- the core of the World Bank Group’s Maximizing Finance for Development approach. Further, prior actions supported by the operation will lead to advances in procurement systems through the modernization of institutional frameworks, which can create opportunities for female led SMEs to learn about business opportunities and access public markets. Specifically, mandating public entities to publish their procurement plans, procurement opportunities and contract award notices on the single portal procurement website level the playing field for female-led businesses, making it much easier for them to access procurement tenders. According to data provided by the HCPPP, on an annual basis, 3 female-owned businesses participate in the public bidding process. Easier access to data on public bids through the portal will help increase this number. This is in line with the PA’s NPA which also focuses on gender mainstreaming.
Prior Action 2: The Cabinet has instructed public entities to publish their procurement plans, procurement opportunities and contract award notices on the single portal procurement website which can be accessed on www.shiraa.gov.ps, as evidenced by the issuance of the Cabinet Secretariat’s instruction 1553/2019 of June 20, 2019.
Indicator 1: Share of public entities that publish their procurement plans, procurement opportunities and contract award notices on the single portal procurement website.
Baseline: Share as of December 2018: Zero entities at the central level and zero municipalities.
Target: Share by 31 December 2020: 50 percent of entities at the central level and 30 percent of municipalities.
Indicator 2: Annual number of female-owned businesses participating in public bids at the central level of government.
Baseline: 3 female owned businesses in 2018.24
Target: 6 female-owned businesses in 2020.25
Prior Action 3: The Cabinet has instructed all public entities at the central and local levels to use Standard Bidding Docs for the procurement of works, goods and consultants’ services, as evidenced by the issuance of the Cabinet decision No. 35/07 of December 16, 2019.
23 The targets do not include Gaza given the current internal divide. 24 Baseline is based on anecdotal evidence. On average, total number of applicants to bids at the central level of government per year is 500. Sex-disaggregated information on business applicants will be collected by the Higher Council for Public Procurement Policies. 25 Given FCV context and that female-led business applicants to public bids have been nominal, constituting only 0.006 percent of total applicants at the central level during prior years, the proposed target supports an increase in a practical way.
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Indicator: Share of public entities at the central and local levels of government using the Standard Bidding Documents in their procurement.
Baseline: Share as of December 2018: Zero entities at the central level and zero municipalities.
Target: Share by 31 December 2020: 50 percent of entities at the central level and 30 percent of municipalities.
Pillar 2: Improve sector governance in water and health service provision.
40. The Palestinian health system suffers from critical challenges, and reform efforts in this sector have been supported by several DPGs in recent years. Uncertain foreign aid flows, the increasing costs of outside medical referrals (OMRs), and lack of adequate planning when responding to the growing needs of the population to address the burden of non-communicable diseases (NCDs) are together straining the fiscal position of the health sector. The Bank has supported the PA’s efforts to control the speed of growth of expenditures in the sector, mostly through improving the process of purchasing specialized services from outside the Ministry of Health networks, i.e. outside medical referrals. Initially, the focus through DPG V26 was on the standardization of administrative and clinical procedures and centralizing the referral process under the General Directorate for Health Insurance to apply clear and stringent criteria determining the eligibility for OMRs. Efforts then progressed through the subsequent two DPGs27 to focus on reforming the contractual agreements for medical referrals, with both Israeli and local medical facilities. The last DPG28 further built on these efforts through implementing training and capacity building on the use of a National Price Reference List tool.
41. This DPG focuses on issues related to improving the MoH’s capacity in long-term planning to design appropriate human resources policies and address gaps in the health sector– a weakness diagnosed by the most recent Public Expenditure Review (PER). The PER showed that the Palestinian health workforce has been expanding but not at the same rate across different categories and not according to the needs in the sector. For example, the number of physicians increased from 17.4 in 2009 to 21.5 per 10,000 population in 2018. Over the same period, the number of nurses and midwives increased, at a higher rate compared to physicians, from 16.4 to 25.9. The number of dentists rose from 4.6 to 7.1, and the number of pharmacists from 7.6 to 11.2 per 10,000 population. In aggregate, the availability of health workers in the Palestinian territories surpasses many countries with similar income levels. However, the composition of the MoH health workforce is characterized by a shortage in specialized health care which ultimately leads to OMRs, despite the availability of a pool of physicians that could be trained through residencies organized by universities and licensed by local medical boards.
42. Specifically, the DPG prior action supports the PA’s efforts in introducing human resource policies that are transparent and evidence-based, rather than influenced by anecdotal narratives or lobbying by directors of hospitals or other interest groups, resulting in improved sector governance. Lack of transparency in human resource planning in the health sector is common among low- and middle-income countries, particularly due to the absence of hard data that governments could access to make informed decisions.29 As a result, human resources decisions in these countries are often driven by tight controls of various interest groups rather than the needs of the population, which keeps demand higher than supply and pushes up prices of specialized care. The prior action supports the use of the results of the mapping exercise that was carried out by the Palestinian National
26 Approved by the World Bank’s Board in May 2013. 27 DPG VII which was approved by the World Bank’s Board in February 2016, and the following DPG entitled “Fiscal Stability and Business Environment” approved by the Board in December 2017. 28 “Strengthening Fiscal Resilience and Business Environment” approved by the World Bank’s Board in February 2019. 29 Sriram V, Bennett S. “Strengthening medical specialization policy in low-income and middle-income countries.” BMJ Global Health 2020; Meara, et al. “Global Surgery 2030: evidence and solutions for achieving health, welfare, and economic development”. The Lancet, Vol 386 August 8, 2015.
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Institute of Public Health in close coordination with the MoH, to develop an observatory of human resources, in designing human resources policies. Developing the observatory is considered the largest and most comprehensive systematic effort conducted by a public health sector agency and the government to map the current availability of all medical staff in the Palestinian territories. The database collected by the observatory on human resources is based on a comprehensive survey. It allows the PA to identify gaps in both the public and private sectors and craft appropriate policies to bridge such gaps in medical specialties through engagement with other stakeholders in charge of medical post-graduate education, and medical boards licensing. A policy that uses evidence to plan human resources in the medical sector is considered an international good practice in the governance of a notoriously difficult issue, even for OECD countries.30 Information produced by the Palestinian observatory will be periodically updated and published online, contributing to better transparency.
43. From now on, human resource policies related to post-graduate specialized care in the health sector will be based on hard data that analyze supply and demand trends in addition to the medium to long-term needs of the population. The observatory has identified a lack of local skills in four highly specialized medical services, including oncology (0.4 physician per 100,000 population), hematology (0.1 physician per 100,000 population), pathology (0.2 physician per 100,000 population), and neurology (1 physician per 100,000 population). These four areas account for the largest share of the medical referral cases posing a significant fiscal burden on the PA. As a result, the MoH plans to train local specialists to cover the human resource gap in these four areas. It has been working closely with various stakeholders to institute “residency programs” that offer on-the-job training with certified specialists in these four areas in the public hospitals of the MoH. The stakeholders include the Palestinian Medical Council, which is in charge of setting up and providing accreditation for post-graduate training for medical staff through these residency programs. Residency programs have different durations depending on the specialty. It is expected that this reform action will result in at least one enrollment by a local specialist in each of the four residency programs in local hospitals by the end of 2020.
44. The proposed DPG prior action complements the ongoing Health System Resiliency Strengthening Project (HSRSP). The HSRSP aims to introduce more strategic purchasing of outside medical referrals. To do that, the project invests in needed equipment in cases where human resources are already available. In parallel, it seeks to fill human resource gaps as those also contribute to outside medical referrals. More importantly, the HSRSP aims to develop the institutional capacity within the MoH to conduct evidence-based decision-making and maximize the technical and allocative efficiency of its resources. The proposed DPG will thus leverage the support the project is currently providing to the MoH in this area to guide human resource policies and optimize the use of local resources to meet the ever more complex healthcare needs of the population.
Prior Action 4: The MoH has instructed the General Director of its Education in Health department to ensure that all human resource planning and policies related to post-graduate medical training in the sector, including the establishment of medical residencies, are based solely on periodic data generated by the human resources observatory, as evidenced by Directive No. 32/110/201/20 of February 4, 2020.
Indicator: Certified local medical residencies are established by the Palestine Medical Council in the fields identified by the observatory of human resources as critical gaps, including oncology, hematology, pathology, and neurology.
30 OECD Health Policy Studies. “The Looming Crisis in the Health Workforce: How can OECD countries respond?” OECD 2008. OECD Health. “Health Workforce Policies in OECD Countries: Right Jobs, Right Skills, Right Places”. OECD. March 2016; Tomblin Murphy et al. “Simulating future supply of and requirements for human resources for health in high-income OECD countries.” Human Resources for Health (2016) 14:77.
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Baseline: Zero local residencies in the fields of oncology, hematology, pathology and neurology in local hospitals in December 2018.
Target: A minimum of one local enrollment in each of the four residencies in the fields of oncology, hematology, pathology and neurology in local hospitals by December 2020.
45. Establishing financially viable and creditworthy utility sectors, such as water, as well as improving payment discipline are essential for providing better services and attracting private investments supporting the Mobilizing Finance for Development (MFD) approach. The water sector is currently not financially viable due to the following reasons: (i) services are not priced at full cost recovery level; (ii) inefficient and non-transparent operational performance; (iii) non-payment by some consumers; and (iv) non-payment by service providers, mostly LGUs, due to the diversion of water revenues into municipal expenditures. In the absence of financial viability, service providers have little room for improving service delivery and no prospect of mobilizing public or private investment. The issue of diversion of funds by LGUs was addressed by the Palestinian Water Authority (PWA) in the context of a previous DPG31 by mandating LGUs to open a separate bank account to deposit funds collected from household water bills to pay the West Bank Water Department. Despite these efforts, more needs to be done as greater water sector viability could only be achieved through a more efficient and reliable provision of services (which are within the PA control) and increased supply which depends on cooperation with Israel and across the region. The Palestinian Water Authority intends to design a National Service Provider Improvement Program (NSPIP) to improve the operational and financial performance of service providers.
46. This operation focuses on internal efforts to improve governance in the sector through strengthening the role of the regulator in making the financial and operational performance of the service providers transparent (including debt transparency). The PA passed a Water Law in 2014 as part of reform efforts to improve transparency, performance, and quality of services. Based on the law, the Water Sector Regulatory Council (WSRC) was established as the body in charge of monitoring the performance of service providers including production, transportation, distribution, consumption, and waste water management. Performance monitoring of service providers is required to underpin the NSPIP. The regulator’s role includes monitoring: i) debt accumulated by water service providers in the form of unpaid electricity bills and unpaid bulk water bills, and ii) debt accumulated by customers to service providers. Despite its mandate, the operation of the WSRC remains limited, partly due to insufficient budget allocations. To strengthen the WSRC, in 2019, the President signed amendments to the 2014 Water Law specifying WSRC’s funding base to enable it to carry out its regulatory role and further specify its role in performance monitoring of service providers. As a result, it is expected that the WSRC will be able to expand its monitoring activities by the end of 2020, to cover a larger number of service providers serving a higher share of the population. These presidential amendments will, amongst other things, enhance overall transparency in the sector.
Prior Action 5: The Recipient’s President has taken the necessary steps to strengthen the role of the WSRC in performance monitoring of service providers, as evidenced by the issuance of Presidential Decree No. 2135 of September 10, 2019.
Indicator: Publication of a performance report for water service providers.
Baseline: Performance report for 2018 published in 2019 covering 89 service providers serving 82 percent of the population.
31 Fiscal Stability and Business Environment DPG approved by the World Bank’s Board in December 2017.
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Target: Performance report for 2019 published in 2020 covering 115 service providers serving 90 percent of the population.
47. In addition, the DPG supports the PA’s efforts to reduce non-payment for water services amongst consumers. In 2018, the Palestinian Cabinet adopted a decree instructing the PWA to encourage LGUs to install prepaid meters to reduce non-payments amongst consumers, as this is considered a main challenge towards the financial viability of the sector. To convince LGUs to join the prepaid meter program, as part of the Memorandum of Understanding (MoU) signed between each of them and the PWA, it is agreed that the stock of debt owed by the LGUs to the PWA will be reduced by the same amount it costs to install the prepaid meters. To date, 15 LGUs joined the prepaid meters program, improving collection rates and hence, their financial performance. The PWA states that MoUs with additional LGUs are in the pipeline. Given the internal divide, this reform is only being implemented in the West Bank. Notably, this builds on the latest DPG (9th) that was approved by the Bank’s Board in February 2019 and which supported restructuring of the debt of at least 90 LGUs for unpaid water bills owed to the MoF.
Prior Action 6: The Cabinet has instructed PWA to reduce the stock of debt owed by service providers that have installed prepaid meters for households under their constituency in the same amount paid to install the prepaid meters, as evidenced by: (i) Cabinet Decree No. 17/215/17 of August 7, 2018; and (ii) fifteen (15) Memoranda of Understanding signed between PWA and 15 service providers.
Indicator: Average collection rate amongst consumers served by the 15 service providers that have signed MoUs with the PWA to install prepaid meters.
Baseline: 52 percent in December 2018.
Target: 85 percent by December 2020.
Pillar 3: Strengthen the stability and integrity of the financial sector.
48. The PMA and Financial Follow-up Unit32 have been taking steps towards upgrading the Palestinian anti-money laundering and combating financing of terrorism (AML/CFT) system to be more in line with international practices. In the context of increasingly volatile cross-border correspondent banking relationships, the authorities have been making steady progress towards upgrading integrity standards across the financial sector. In 2018, the local authorities conducted their first self-assessment with the aim of enhancing the ability of relevant AML/CFT stakeholders towards identifying, assessing, understanding, and mitigating the money laundering and terrorism financing risks they face. This exercise was coordinated by the Financial Follow-up Unit and the PMA, with participation from the Ministries of Finance, Justice, Interior, and Foreign Affairs, the Public Prosecutor’s Office, Customs Services, and other relevant stakeholders. The assessment was officially endorsed by the Palestinian Cabinet in October 2018, followed by the adoption of the national AML/CFT strategy by the Cabinet in November 2018. In November 2019, the PMA’s Inspection and Supervision Department issued instructions (15/2019), setting requirements for banks to maintain adequate policies and procedures to prevent the abuse of financial services. This DPG prior action represents a key milestone towards the implementation of the national strategy, along with other reforms implemented across both financial and real sectors of the economy. The target for this DPG is on-site inspections of 50 percent of banks due to the inspection cycle of the PMA, with the understanding that a full inspection cycle will cover the remaining banks. Other improvements on AML/CFT internal controls that are currently under implementation include reforms to governance and reporting procedures. This represents a step
32 This corresponds to the Palestinian Financial Intelligence Unit.
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towards the commitment to and implementation of the Financial Action Task Force AML/CFT standard conditions of the West Bank and Gaza membership of the Middle East and North Africa Financial Action Task Force (MENA-FATF). MENA-FATF’s first mutual evaluation of West Bank and Gaza is planned in 2020.
Prior Action 7: The PMA has instructed banks operating in West Bank and Gaza to adopt strengthened AML/CFT internal controls, in accordance with the AML/CFT strategy adopted by the Palestinian Cabinet on November 2018, as evidenced by (i) Cabinet decision No. 16/229/17 dated November 22, 2018 adopting the national strategy for AML/CFT; (ii) PMA Circular No. 74/2019 to all banks operating in the Recipient’s territories dated March 26, 2019; and (iii) Cabinet decision dated November 22, 2018 establishing a national committee to supervise the implementation of the national AML/CFT strategy.
Indicator: PMA conducting on-site inspections of banks’ AML/CFT internal controls, that systematically incorporate an AML/CFT risk-based approach.
Baseline: PMA AML/CFT supervision manual does not systematically incorporate a risk-based approach. December 2018.
Target: PMA conducted on-site inspections of 50 percent of banks covering banks’ compliance with risk-based AML/CFT requirements. December 2020
49. Against a backdrop of volatile economic performance and fiscal challenges, the PMA proactively conducts its supervisory and regulatory functions to maintain the stability of the banking sector. It continues to introduce policy reforms for the financial sector that aim to balance growth and stability. Direct gross credit provided by the local banking system is estimated at about US$9 billion, out of which US$3 billion represents loans to the Palestinian Authority and to civil servants. Other credit facilities are distributed across construction, trade finance, consumer loans, and other economic activities. The overall credit-to-deposit ratio currently stands at 70 percent. On the heels of the latest fiscal crisis, and with an increase in non-performing loans (NPLs) (from 2.5 percent to 3.5 percent)33 the PMA is undertaking reforms to raise the minimum regulatory capital requirements of banks operating in the West Bank and Gaza, in order to enhance the banking sector’s ability to absorb shocks from economic stress. This reform also carries a risk mitigation element since it enables supervisory intervention at earlier stages if a bank’s capital adequacy ratio34 drops to a level close to or below the new minimum. This action, a positive step given the local context, will only bear the expected outcomes if it is complemented by improvements in risk recognition on the asset side. Based on the latest PMA data on regulatory capital (received on December 19, 2019), 12 of the 14 banks are currently in compliance with the new regulatory capital requirement, and plans are in place for the remaining two banks to meet this requirement. With a recent decision to suspend regulatory forbearance in light of the resumption of PA salaries35, the PMA indicated that it will closely follow the evolution of NPLs and classified loans and unpack asset quality risks. The authorities are notably advised by the IMF to strengthen the regulatory regime applicable to non-performing assets and forborne exposures and they have taken such commitment in the context of the Letter of Development Policy (Annex 2). The IMF is also providing technical assistance to the PMA on these issues.
33 According to the PMA, the rise in classified and non-performing loans is limited to PA employees whose salaries experienced severe disruptions in 2019. Since the remission of the recent fiscal crisis, the PMA reports a gradual decline in NPLs which will be monitored closely and will benefit from an IMF technical assistance mission. 34 Total capital ratio. 35 The recent fiscal stress resulting from the standoff between the PA and the GoI over the transfer of clearance revenue transfers has significantly eased since September 2019 when the PA resumed accepting these transfers. With the resumption of salary transfers and payments to private suppliers, the PMA suspended the regulatory forbearance.
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Prior Action 8: The PMA has taken the necessary steps to raise the minimum regulatory capital requirements for all banks licensed by the PMA to carry on banking business in West Bank and Gaza under the strengthened definition of capital, as evidenced by PMA’s instructions No. 8 and 9 of December 11, 2018, concerning the application of capital adequacy requirements for banks licensed by the PMA.
Indicator: Increased minimum capital adequacy requirement for each bank, including capital conservation buffer (on a solo and consolidated levels).
Baseline: Minimum capital adequacy requirement for each bank of 12 percent (on a solo and consolidated levels) December 2018.
Target: Each bank complies with minimum capital adequacy requirement of 13 percent on a solo and consolidated levels (or is implementing time-bound corrective actions). December 2020.
50. The Palestinian financial sector includes a range of banking institutions (governed by the Palestine Monetary Authority) and non-banking institutions (governed by the Palestine Capital Markets Authority), providing a growing range of Islamic financial instruments. Three licensed Islamic banks offer a range of products including Murabaha, Ijara, and Mudaraba. A range of non-bank Islamic financial institutions offer Ijara (leasing), Takaful (insurance), and microcredit. To standardize the application of sharia-compliant instruments across all financial institutions, the PMA and Palestine Capital Markets Authority (PCMA) reestablished, with an expanded mandate, the Central Sharia Supervisory Authority (CSSA) to include all institutions providing Islamic financial products. The CSSA will assess the compliance of new market entrants and products with Islamic finance standards. It will also make a gradual review of existing products and institutions to assess the compliance with Islamic financial standards. Based on CSSA decisions, the relevant regulators will take action as needed by issuing instructions or circulars. In doing so, the regulators ensure industry-wide consistency across new and incumbent products, hence ensuring trust and maintaining a level playing field across financial institutions operating in the same market, both of which are critical for maximizing financial inclusion, since - for a segment of the population - engaging in conventional banking is incompatible with religious beliefs.
Prior Action 9: The PMA and the PCMA have jointly reestablished the central sharia supervisory board to cover a wide segment of the financial sector, including both bank and non-bank Islamic financial institutions, as evidenced by: (i) PMA’s Board Decision No. 67/21, of June 30, 2019 approving the establishment of the central sharia supervisory authority; (ii) PCMA’s Board decision No. 29/2019 of May 12, 2019 approving the establishment of the central sharia supervisory board; and (iii) an Memorandum of Understanding signed between PMA and PCMA dated August 27, 2018, regulating the relationship between the two institutions.
Indicator: Islamic financial instruments reviewed and amended by regulator actions based on CSSA decisions.
Baseline: No regulations issued based on decisions by the CSSA. December 2018
Target: At least two financial instruments amended through regulator actions based on the decisions of the CSSA. December 2020
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Table 6: DPF Prior Actions and Analytical Underpinnings
Prior Actions Analytical Underpinnings
Pillar 1: Strengthen commitment control in line ministries and improve overall public procurement practice
Prior action #1: The Ministry of Finance has taken the necessary actions to implement a commitment control system in all line ministries to secure budget allocations prior to the signing of a contract with service providers, excluding outside medical referrals, as evidenced by: (i) issuance of official instruction No. 2019/1602 of September 8, 2019; (ii) issuance of instructions م ,of January 20 ع 2020 by MoF’s accountant general to the heads of financial and administrative units at line ministries informing said ministries that MoF has been developing the IFMIS to introduce a commitment control system and ensure that financial operations are recorded according to GFS.
“Public Financial Management Improvement ASA”, World Bank (ongoing, expected to be finalized in 2022). Key Findings: A commitment control system would enable the reservation of budget allocations for specific purposes and make those allocations unavailable for any other purpose which would control commitments to the available budget.
Prior action #2: The Cabinet has instructed public entities to publish their procurement plans, procurement opportunities and contract award notices on the single portal procurement website which can be accessed on www.shiraa.gov.ps, as evidenced by the issuance of the Cabinet Secretariat’s instruction 1553/2019 of June 20, 2019.
“Enabling Implementation of Procurement Reform in MENA Countries ASA”, World Bank (2015). “Modernizing Public Procurement in the Palestinian Authority ASA”, World Bank (ongoing, expected to be finalized in 2022). Key findings: The Public Procurement Law (PPL) No. 8 of 2014 mandates the dissemination of information on public procurement, through a single portal procurement. The portal serves as a gateway to all relevant procurement information (procurement plans, bidding opportunities, award decisions, complaints and resolutions by the dispute review unit, etc.). It will generate data necessary for HCPPP to monitor the performance of the public procurement system and to adjust procurement policies to achieve best value for money.
Prior action #3: The Cabinet has instructed all public entities at the central and local levels to use Standard Bidding Docs for the procurement of works, goods and consultants’ services, as evidenced by the issuance of the Cabinet decision No. 35/07 10 e6e reb oce fo9
“Enabling Implementation of Procurement Reform in MENA Countries ASA”, World Bank (2015). “Modernizing Public Procurement in the Palestinian Authority ASA”, World Bank (ongoing, expected to be finalized in 2022). Key findings: The PPL mandates the issuance of SBDs for use throughout the procurement system. The issuance and mandatory use of SBDs (including standard forms of contract) presents a number of advantages for a procurement system including: helping to standardize and harmonize implementation of procurement proceedings; promoting transparency and
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predictability in public procurement proceedings, helping to mitigate the effects of low levels of procurement capacity in the public sector; facilitating participation by small businesses; facilitating oversight, regularity control, and audit of procurement proceedings.
Pillar 2: Improve sector governance in water and health service provision
Prior action #4: The MoH has instructed the General Director of its Education in Health department to ensure that all human resource planning and policies related to post-graduate medical training in the sector, including the establishment of medical residencies, are based solely on periodic data generated by the human resources observatory, as evidenced by Directive No. 32/110/201/20 of February 4, 2020.
“West Bank and Gaza, Public Expenditure Review of the Palestinian Authority ASA”, World Bank (September 2016). Key findings: The fragmented institutional framework of the Ministry of Health and the absence of a well-defined and managed human resource development strategy hinder the overall development of MoH human resources. Overall, the composition of the MoH health workforce is characterized by imbalances in skill mix, with the administrative staff accounting for the majority. “National Human Resources for Health Observatory; Mapping the Palestinian Health Workforce”, the World Health Organization; the Ministry of Health; the Palestinian National Institute for Public Health (July 2019). Key findings: the growing population of the Palestinian territories require a more strategic Human Resources for Health (HRH) availability with greater specializations that can meet the demographic and epidemiological shifts. The report highlights the potential shortages in medical specialties such as family medicine; neonatology; pathology; neurology; pediatric and vascular surgery.
Prior action #5: The Recipient’s President has taken the necessary steps to strengthen the role of the WSRC in performance monitoring of service providers, as evidenced by the issuance of Presidential Decree No. 2135 of September 10, 2019.
“Toward Water Security for Palestinians: West Bank and Gaza WASH Poverty Diagnostic ASA”, World Bank (May 2017). Key findings: Increasing the viability and sustainability of the water sector requires the establishment and corporation of water utilities with an ability to operate on a full cost recovery basis, make a timely payment to the bulk water supplier, and provide efficient and equitable water and wastewater services.
Prior action #6: The Cabinet has instructed PWA to reduce the stock of debt owed by service providers that have installed prepaid meters for households under their constituency in the same amount paid to install the prepaid meters, as evidenced by: (i) Cabinet Decree No. 17/215/17 of August 7, 2018; and (ii) fifteen (15) Memoranda of Understanding signed between PWA and 15 service providers.
Pillar 3: Strengthen the stability and integrity of the financial sector
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Prior action #7: The PMA has instructed banks operating in West Bank and Gaza to adopt strengthened AML/CFT internal controls, in accordance with the AML/CFT strategy adopted by the Palestinian Cabinet on November 2018, as evidenced by (i) Cabinet decision No. 16/229/17 dated November 22, 2018 adopting the national strategy for AML/CFT; (ii) PMA Circular No. 74/2019 to all banks operating in the Recipient’s territories dated March 26, 2019; and (iii) Cabinet decision dated November 22, 2018 establishing a national committee to supervise the implementation of the national AML/CFT strategy.
Assessment in preparation of the National AML/CFT Strategy 2019-2022, issued by the Palestinian Financial Follow-up Unit. World Bank technical assistance on AML/CFT reforms and analytical work through the Financial Sector Review ASA (ongoing) Key findings: The strategy developed by the authorities is based on the key findings of their first ML/FT National Risk Assessment, a self-assessment, which determined risk and threat levels across the economy, and produced an action plan to mitigate the identified integrity risks. PA #7 is informed by the ongoing technical assistance/ASA and supports the implementation of the actions identified as strategy priorities.
Prior action #8: The PMA has taken the necessary steps to raise the minimum regulatory capital requirements for all banks licensed by the PMA to carry on banking business in West Bank and Gaza under the strengthened definition of capital, as evidenced by PMA’s instructions No. 8 and 9 of December 11, 2018, concerning the application of capital adequacy requirements for banks licensed by the PMA.
“Making Basel III Work for Emerging Markets and Developing Economies”, Center for Global Development (2019). Key findings: While Basel III is designed as minimum standards for internationally active banks, many emerging market and development countries are in the process of adopting and adapting them. Implementation is aimed at strengthening the quality and quantity of capital and thereby promoting a sound and properly functioning banking system that is able to support economic growth on a sustainable basis. The PMA sees the adoption as in the long interest of the economy, despite some short-term challenges, particularly related to capital raising in the current environment. “Evaluation of the effects of financial regulatory reforms on small and medium-sized enterprise (SME) financing”, Financial Stability Board (2019). Key findings: This evaluation examines the effects of the post-crisis G20 reforms on the financing of SMEs. The most relevant reforms `implemented to date are the initial Basel III capital and liquidity requirements agreed in 2010. The evaluation finds no material and persistent negative effects on SME financing in general, although there is some differentiation across jurisdictions; the more stringent risk-based capital requirements slowed the pace and, in some jurisdictions, tightened the conditions of SME lending at those banks that were least capitalized ex ante relative to other banks. These effects are not homogeneous across jurisdictions and they are generally found to be temporary. The evaluation also provides some evidence for a reallocation of bank lending towards more creditworthy firms after the introduction of reforms, but this effect is not specific to SMEs. Any potential costs found in this evaluation, which appear limited and transitory, should be framed against the wider financial stability benefits of the G20 reforms estimated in ex ante impact assessments. These studies generally found significant net overall benefits in terms of reducing the
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likelihood and severity (lost output) of financial crises.
Prior action #9: The PMA and the PCMA have jointly reestablished the central sharia supervisory board to cover a wide segment of the financial sector, including both bank and non-bank Islamic financial institutions, as evidenced by: (i) PMA’s Board Decision No. 67/21, of June 30, 2019 approving the establishment of the central sharia supervisory authority; (ii) PCMA’s Board decision No. 29/2019 of May 12, 2019 approving the establishment of the central sharia supervisory board; and (iii) an Memorandum of Understanding signed between PMA and PCMA dated August 27, 2018, regulating the relationship between the two institutions.
“National Shariah Boards: Global Applications and the Case of Turkey”, Afro- Eurasian Studies Journal (2014). Key findings: With the Islamic finance industry rapidly growing globally, Sharia regulatory structures differ across countries. The range of possible options includes a centrally managed sharia compliance body, or a market based mixed approach. The analysis proposes that the adoption of a central sharia advisory board ensures Islamic financial operations are fully in line with Shariah principles, which is critical to bring trust to the financial system.
CLIMATE CO-BENEFITS
51. The Palestinian territories suffer from a water shortage which is likely to persist. According to the Water Resources Status Summary Report36, 90 percent of water from the Gaza aquifer has nitrate concentrations exceeding the 50mg/l World Health Organization (WHO) limit. This situation is not expected to improve in the near term and may further deteriorate. The water shortage in the West Bank is relatively less severe than in Gaza, but it comes with a set of unique challenges, such as the agribusiness sector growing water-intensive crops for export, the prevalence of unsustainable water use practices, and groundwater pollution. The shortage of water and substandard water quality disproportionally affect disadvantaged segments of the population living below the poverty line, since their ability to secure alternative sources of water is limited.
52. New research37 predicts a decrease in seasonal precipitation in the north and central Mediterranean climate parts of the area, with reductions reaching about 40 percent, and increases of the same percentage in the most southern arid parts (but not the area close to Gaza) during winter and spring. This change in precipitation patterns is likely explained by a decrease in cyclone occurrences. The same research also predicts shorter winters and longer summers, under increased greenhouse gas concentrations.
53. The forecasted climate change is expected to have a negative effect on the population and economy of the West Bank and Gaza. Rapid population growth alone is sufficient to result in further deterioration of the water crisis. Furthermore, increased agricultural activity due to the population growth will result in greater groundwater pollution. Lack of water and substandard water quality will have further negative impacts on human health (e.g., anemia in children and pregnant women). This may potentially create epidemiological hazards due to decreased hygiene standards, and the associated costs of healthcare provision will further marginalize the poor. The
36 http://www.pwa.ps/userfiles/server/ز مرك المي20%ال ر/االع اري ق ر/ت قري وضع20%ت ي20%ال ائ م ي20%ال اع20%ف ط ه20%ق pdf.غز37 “High-resolution projection of climate change and extremity of Israel using COSMO-CLM” International Journal of Climatology.
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population of the West Bank and Gaza is young and both pregnant women and infants will be especially vulnerable to the effects of climate change.
54. This DPG will contribute to addressing the anticipated negative effects of climate change on the population of the West Bank and Gaza. The DPG support reforms that will help the population adapt to climate change, while mitigating potential contributions to climate change via better evidence-based resource management, and capacity building.
55. The focus on water sector governance under pillar 2 will contribute to addressing climate vulnerabilities. The installation of prepaid water meters will improve average payment collection rate and will have a positive effect both on resource efficiency and the sustainability of the Palestine Water Authority. This measure will also encourage the development of behavioral norms such as payment for services provided (i.e., water supply). Given the severe limitation of water as a natural resource in the West Bank and Gaza, it is critical to make sure that the Palestinian Water Authority maintains its financial sustainability as well as its capacity to invest in developing the necessary infrastructure. This is a direct climate change adaptation measure.
56. The focus on stability under pillar 3 will contribute to addressing climate vulnerabilities by making the economy more resilient, and capable of withstanding macroeconomic shocks and unfavorable events. Predicted climate change and water shortages carry a clear and direct impact on several sectors of the economy, including agriculture, the energy sector, and beyond. Strengthening the resilience of the pillars of economy before the deterioration of environmental conditions (and anticipated economic impacts), is an adaptation measure.
4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY
57. The proposed operation is aligned with the strategic objectives set forth by the World Bank Group, aiming towards ending extreme poverty and promoting shared prosperity in a sustainable manner. Against a backdrop of economic challenges and instability, the West Bank and Gaza has made considerable progress towards eradicating extreme poverty. The emphasis of this operation is contributing to the promotion of a sustainable and robust shared prosperity. The strengthening of commitment controls at line ministries, along with improving public procurement practice, will promote more strategic financial planning and will create the fiscal space needed for productive investments. Improvements in governance in health and water service delivery means a more effective and lasting ability to serve citizens. Financial sector reforms supported by this operation, focusing on the stability and integrity of the financial system, will contribute to the private sector’s resilience within the current economic reality.
58. The proposed operation contributes to the World Bank Group’s enlarged MENA strategy, primarily the pillars of renewing the social contract and MFD-enabled recovery in the context of the West Bank and Gaza. Actions supported by this operation aim to promote sustainability and transparency of public finance and service delivery. The prior action supporting procurement reforms by establishing a single procurement portal and requiring all government agencies to publish their procurement opportunities and contract award notices will contribute to citizen trust and public-private collaboration. Prior actions supporting improved governance in the water and health sectors further contribute to the pillar of renewing the social contract by facilitating inclusive and accountable service delivery. Efforts to strengthen the PA’s fiscal position through strengthening commitment controls within line ministries are critical for strengthening resilience to external shocks. Furthermore, prior actions supporting financial sector stability and integrity reforms support both the private sector resilience in the face of external shocks, as well as contribute to building an MFD-enabled environment to leverage long-term and alternative financing. Reforms supported by this DPG build on the previous operations that have cumulatively achieved key results contributing to the World Bank Group’s enlarged MENA strategy (see Box 1).
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59. This operation contributes to the implementation of the World Bank Group’s Assistance Strategy for the West Bank and Gaza (FY18-21). With a strong financial sector reform program, the proposed operation directly contributes to the first pillar of the Assistance Strategy (setting the conditions for increased private sector investments and job creation). In addition, this DPG will help strengthen the ability of public institutions in delivering citizen-centered service delivery (prior actions 3, 4, 5) as well as increase transparency of public finances (prior actions 1 and 2).
60. The operation is directly linked to several World Bank-financed projects. The operation, for instance, complements the Public Financial Management Improvement project and the Health System Resiliency Strengthening project. The PFMI project aims to enhance expenditure controls, financial accountability, and procurement management of the PA. It focuses on improving expenditure management and control, including activities in relation to line ministries’ commitment control system and cash planning. The project supports modernizing public procurement by accelerating the implementation of the procurement law through: (i) institutionally strengthening the procurement policy and oversight body (HCPPP) and operationalizing the complaints mechanism, (ii) introduction of necessary implementation tools (single procurement portal, Standard Bidding Documents, etc.), and (iii) capacity building of the procurement workforce. The proposed DPG also complements the ongoing Health System Resiliency Strengthening Project that aims to introduce more strategic purchasing of outside medical referrals through investing in equipment in some cases, while also seeking to fill human resource gaps in areas where a shortage of local specialists exists. The health project also supports the development of an evidence-based decision-making process that would maximize the technical and allocative efficiency of the MoH’s resources. Pillar 3 of the proposed DPG focuses on strengthening the integrity and stability of the financial sector, building on current and previous financial sector advisory services and analytics (ASAs), including technical assistance on AML/CFT reforms and analytical work through the Financial Sector Review ASA. The resulting improvements vis-à-vis financial sector performance will also complement other “access to finance” interventions, with a focus on youth and female economic empowerment (e.g., through Finance for Jobs project, Innovative Private Sector Development project, the Microfinance Strategy ASA, and other projects under preparation).
61. The proposed DPG also contributes indirectly to the second and third pillars of the World Bank Group’s Gender Strategy (FY16-23) by removing constraints for more and better jobs and removing barriers to women’s ownership and control of assets. By improving procurement systems and striving toward e-procurement, the reforms supported by the proposed DPG create opportunities for female-led businesses as it promotes transparency and levels the playing field between male- and female-led enterprises to access business opportunities, ultimately bridging gaps in terms of information constraints and financial exclusion. Prospects for job creation are being explored across the Bank-supported operations in the West Bank and Gaza. The Gender Action Plan for the West Bank and Gaza (FY18-20) assesses how operations are addressing gender and outlines concrete steps for moving the agenda forward to increase female labor force participation rates and level the economic playing field between women and men.
62. The proposed operation will also leverage budget support by other development partners. The World Bank-administered PRDP Trust Fund provides a key mechanism for donor coordination in support of implementing the PA’s reform plans. Progress of the PA’s reform agenda is monitored against priority policy and institutional actions jointly identified by the PA and the Bank for support through development policy grants. Upon assurance of satisfactory progress, the PRDP Trust Fund disburses on a quarterly basis. To date, overall disbursements have reached over US$1.568 billion. Financial sector reforms supported under this operation also benefited from the Agence Française de Développement (AFD) funding of a Financial Sector Review ASA, which informed pillar 3.
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4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS
63. The proposed operation supports the PA’s National Policy Agenda, which was shaped through a consultative process involving various stakeholders. At various development stages, formal consultations were held with representatives from the private sector and the civil society, with feedback reflected in the NPA. Furthermore, major donors to the PA were consulted during the strategy preparation process and had an opportunity to comment on the draft NPA. As stated in the NPA, the consultations will continue throughout its implementation to maintain a constant feedback loop in regard to the decisions taken.
64. The preparation of the proposed operation, including reform measures to be supported, was informed by PA and Bank consultations with a wide range of stakeholders. As previously stated, development partners supporting the PRDP Trust Fund continue to rely on the operation’s policy and results matrix as the criteria to evaluate the PA’s performance – in implementing the NPA. The Bank maintains a feedback mechanism, through consultations with the PRDP Trust Fund donors, to ensure that reforms supported by this DPG incorporate donor feedback prior to finalizing the matrix. The Bank has also coordinated with the IMF, particularly on reforms supported under the financial sector pillar of the operation. Further, the Bank has consulted with the European Union (EU) to ensure that reform areas supported by the DPG are aligned with the EU’s Results-Oriented Framework (ROF), through which conditional budget support is provided to the PA. During the consultations for this operation, donor partners confirmed their support of the reform areas and prior actions supported by the DPG. Furthermore, and equally important, the PA also holds parallel consultations with donors on measures supported by this operation. This two-pronged approach has proven to be an efficient and effective way to leverage donor budget support on key structural reform agenda.
65. More broadly, a more formal aid coordination mechanism in the Palestinian territories was set up following a decision made at the December 14, 2005 meeting in London of the Ad Hoc Liaison Committee. This mechanism aims to improve the effectiveness of aid coordination efforts and structures by providing sustained technical assistance and financial support - based on national priorities to the Palestinian people - in line with the OECD-DAC Paris Declaration on Aid Effectiveness.38 This mechanism was reviewed and updated in 2018, with the objectives of streamlining the sector working group structures to improve efficiency and enhance engagement between the PA, development partners and civil society.
5. OTHER DESIGN AND APPRAISAL ISSUES
5.1. POVERTY AND SOCIAL IMPACT
66. The overall poverty and social impact of the prior actions supported by this operation is expected to be largely positive or neutral.
67. The poverty and social impact of reforms under pillar 1 is likely be neutral. The efforts under pillar 1 to strengthen commitment controls in line ministries and improve overall public procurement practices are administrative measures that aim to improve public financial management in the PA and thereby increase
38 The AHLC is chaired by Norway and brings together in a meeting on a semi-annual basis several donors, as well as the PA and the Government of Israel. The Bank acts as Secretariat to the AHLC, submitting a report prior to every meeting that provides an update on recent economic and fiscal trends, as well as on broader economic and institutional developments in the Palestinian territories. The Bank’s report has often helped to set the agenda and frame the discussion at the AHLC meeting.
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transparency and reliability of public accounts. None of these measures are expected to have negative poverty and social impacts.
68. The poverty and social impact of reforms supported under pillar 2 are expected to be neutral or positive. Under this pillar, efforts to improve governance in the health sector and establish medical residencies in fields that are not currently available are expected, over time, to have a positive poverty and social impact as the Palestinian population will gain some access to medical staff specializing in fields currently not offered by the health system in the West Bank and Gaza. Now, the population seeking such medical services must travel abroad or to Israel, often at great financial cost to themselves and the medical system. Measures in the water sector enhance sustainability of service providers and seek to revive the regulatory framework for the sector with the aim of improving its overall performance, hence are not expected to have a negative poverty and social impact. Even though the introduction of prepaid water meters will result in higher bill collections, analysis conducted by the team has shown that in terms of its impact on poverty, no statistically significant changes are expected and hence, no tangible social impact. This is because, according to the Palestine Expenditure and Consumption Survey (PECS), spending on water is extremely low as a share of overall household spending. In fact, it is around 2.5 percent in the poorest quintile in the West Bank where the reform will be implemented. Also, in the West Bank, the poverty rate is much lower (14 percent) compared to Gaza (53 percent).
69. The prior actions supported under pillar 3 related to strengthening the stability and integrity of the financial sector are expected to have largely positive or neutral poverty and social impacts. Measures that improve anti-money laundering and combating of financing of terrorism and raising capital adequacy of the banking sector will increase its resilience and in turn improve its ability to support private sector activity and job creation. These measures are expected to have positive poverty and social impacts.
5.2. ENVIRONMENTAL, FORESTS, AND OTHER NATURAL RESOURCE ASPECTS
70. The Palestinian environmental regulatory framework is modern and comprehensive, covering environmental protection, conservation of natural resources, and preservation of biodiversity. The Palestinian Environmental Law addresses various environmental issues, including Environmental Impact Assessment (EIA) and auditing, permitting of development projects, monitoring of environmental compliance, and enforcement. The Palestinian Environmental Assessment Policy represents three sequential stages in investment project lifecycle. The environment review process and approval include application for Environmental Assessment (EA); Initial Environmental Evaluation (IEE); and Environmental Impact Assessment. The Environmental Quality Authority (EQA) established by a President’s decree in 2002 provides guidance on the preparation of the EA reports and determines whether an IEE or an EIA is required. An EIA is required for projects that are likely to have significant environmental impacts, and it specifies measures for mitigation and monitoring. EQA is responsible for ensuring that development processes are undertaken in an orderly manner, projects’ developers have capacity to implement the environmental management plans and monitor compliance.
71. Stakeholder consultation is mandatory for EIA. The proponent at the minimum, must meet with the principal stakeholders to inform them about the proposed project and to solicit their views. The methods and results of the consultations must be documented.
72. Furthermore, the NPA 2017-2022 policy interventions are aimed at environmental sustainability and adaptation to climate change, via: (i) reducing pollution and greenhouse emissions, (ii) expanding wastewater management, treatment, and reuse, (iii) increasing energy efficiency and expanding renewable energy resources, and (iv) conserving biodiversity and expanding green spaces. In the past few years, the PA has taken major steps for the construction and operation of modern wastewater treatment plants in Gaza and the West Bank, expanding
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power supply including renewables, mainly PV solar energy, as well as modern solid waste management systems and landfills. The PA has also taken major steps to address the increased demand on water resources and supply, including new agreements on water supply from Israel, digging new water wells (those must get approvals by the Israeli-Palestinian Joint Water Committee), wastewater reuse, and sea water desalination. Yet, the PA will continue to face a challenge on the front of scarce water resources.
73. Reforms supported by this operation are unlikely to have a significant negative environmental impact. The prior actions supported under pillars 1 and 2 aim to improve PFM and procurement practices and improve governance in the water and health sectors and are not expected to have any negative environmental impacts. Prior actions covered by pillar 3 support reforms in the financial sector through improving the resilience, stability and integrity of the sector and those are also not expected to have any negative environmental impact.
5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS
Fiduciary
74. The fiduciary risk related to the proposed DPG is considered high. The PFM system is strained by the continued accumulation of arrears as a result of a large financing gap and limited ability to raise financing in an optimal manner, which manifests itself in weak budget execution. Moreover, there has been a delay in the issuance of financial statements, but the backlog is being slowly cleared. Specifically, the 2014 and 2015 audited reports were issued in November 2019. The 2016 and 2017 financial statements were finalized by the MoF and submitted to the State Audit and Administrative Control Bureau (SAACB) for audit in November 2019. The audited financial statements are expected to be up to date in 2020. PFM deficiencies in some sectors (e.g., education, health, local governments) impact budget implementation and service delivery. Implementation of some provisions of the Public Procurement Law has been delayed due to initial delays in operationalizing the HCPPP and providing it with the necessary human and financial resources. However, momentum has strengthened in 2019 as key aspects of the law including mandating the use of a single procurement portal and standard bidding documents have been operationalized, and these efforts are supported by the DPG. The following issues remain to be addressed: the mechanism for administrative review of bidder complaints is not yet operational, an effective procurement monitoring and reporting system on public procurement is not yet in place, and the capacity of the procurement workforce requires strengthening. These are being supported by the Bank-funded Public Financial Management Improvement project.
75. The latest Public Expenditure and Financial Accountability (PEFA) assessment finalized in 2020 concluded that, despite some weaknesses, the PFM system of the West Bank and Gaza is operating at a satisfactory level. Fiscal discipline is seen as reasonable, especially in the context within which the PA has to operate. On the expenditure side, aggregate estimates are reasonable, even though there are at times large differences between the original estimates and the actual expenditure composition. One of the weaknesses identified by the PEFA is about the budget not following the policy priorities set out in the NPA 2017-2022. Technical aspects of the budget preparation process work well, although the absence of a functioning legislature impacts the overall rating of this indicator. Other indicators related to resource allocation are evaluated as satisfactory or better. For aspects related to resource use efficiency, the public financial management system is reasonable; financial relationships between agencies are transparent and the score of the ‘performance information’ indicator is good. In addition, the mechanisms to minimize the risk of losses, such as payroll controls, procurement, and internal control all appear to be working at a satisfactory level, although the public asset management indicator is evaluated as weak. The internal audit function appears reasonable and is supported by sound accounting control mechanisms. SAACB has full legal, financial and administrative independence, as well as unrestricted access to records, documentation and information. External audits of most expenditures and revenues were conducted during the last three fiscal
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years using the International Standards of Supreme Audit Institutions (ISSAIs). According to the PEFA secretariat, compared to other countries in the MENA region, the West Bank and Gaza PFM system has improved the most over recent years (Figure 1).
76. The Bank-funded PFMI Project, effective since July 2018, is addressing some of the risks in the PFM system by: (i) improving budget expenditure management and control, (ii) improving financial accountability of the PFM system, and (iii) modernizing public procurement. A multi-donor trust fund alongside the project provides complementary assistance centrally and in municipalities, supporting analytical work and citizen engagement (CE). The project aims at strengthening the downstream cycle of the PFM system with emphasis on effective implementation, building on the previous technical assistance while broadening it to other line ministries (education, health and local governments). Specific areas of support will be the commitment control system, which builds on work in an earlier DPG (DPG VII) where the system was piloted at the Ministries of Education, Interior, Public Works and Housing, and Transportation. The project is supporting the modernization of financial control, intergovernmental fiscal transfers, and improvement of payroll management. With respect to improving financial accountability, work has started on the implementation of the main recommendations related to the lack of accuracy and timeliness in the final account preparation process which is crucial for the accountability of the PFM system.
Flow of Funds and Auditing Requirements
77. No IMF Safeguard Assessment is available for the West Bank and Gaza since there is no full-fledged Central Bank. The PMA is an independent public institution. In the absence of a national currency it has no monetary policy role but is responsible for formulating and implementing banking policies and safeguarding the banking sector. The PMA performs several central banking duties such as prudential and integrity supervision over banks, money changers, and microfinance institutions, organizing the payment services, and spreading financial awareness. In 2014, the PMA adopted a Corporate Governance Guide for banks to ensure that banks implement sound corporate governance practices and therefore maintain public trust and confidence in the Palestinian banking sector.39 The guide has been set at a high standard, consistent with the international best practices. The guide is based on the principles of Basel Committee on Banking Supervision's paper on enhancing corporate governance for banking organizations that introduced principles for sound corporate governance practices for banks.
78. As with previous DPGs, the DPG proceeds will be deposited in a single tranche to a US dollar dedicated account that forms part of the PA’s official foreign exchange reserves. The dedicated account will be held at the Bank of Palestine (Ramallah), which is part of the MoF single treasury account and where previous DPG proceeds had been deposited. Then, an equivalent amount in local currency will be credited to the single treasury account of the PA to finance budgeted expenditures. The conversion will be based on the prevailing exchange rate on the date that the funds are credited to the Treasury Account.
79. The Bank of Palestine (BoP) financial statements for the year ended December 31, 2018 were audited by Ernst and Young. No key issues were identified in the management letter. The financial statements for the year ended December 31, 2018 are published on the BoP’s website40.
80. The MoF will confirm to the World Bank, within 15 days of disbursement, the receipt of the grant funds and that the grant proceeds have been credited to the Central Treasury Account at the BoP to finance national
39 The guide can be accessed here: http://www.pma.ps/Media/PressReleases/TabId/343/ArtMID/957/ArticleID/492/PMA-Issues-Guide-to-Corporate-Governance-for-Bank-Rules-and-Best-Practices.aspx 40 https://bop.ps/files/ir/annual_report_18_en.pdf.
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budget expenditures, including the date and number of the Treasury Account in which the funds have been deposited as well as the exchange rate applied. If any portion of the grant is used to finance ineligible expenditures as defined in the Grant Agreement, the Bank shall require the PA to refund the ineligible amount and the amount will be canceled from the grant.
Figure 3: Flow of funds diagram
External Auditing of the Grant Deposit Account
81. The PA will hire an independent external auditor acceptable to the Bank to perform an audit of the deposit account. The audit will be conducted in accordance with International Standards on Auditing and with the terms of reference acceptable to the Bank. The audit report will be approved by the MoF before it is submitted to the Bank. The audit report will be submitted to the Bank within six months of the release of the single tranche payment. The audited financial statements for the previous DPG financing releases to the designated account were delayed, but eventually received. Past delays were due to the MoF changing its contracting procedures, which resulted in delays across the board, including contracting the auditors. Ever since the new contracting procedures have been in place, no further delays were witnessed. Notably, the audit opinions received for the previous DPG were unmodified confirming the acceptable presentation of the DPG financial statements, compliance with the legal agreement, the proper use of the dedicated account, and the use of the MoF accounting system to record the financial transactions. The auditor will be required to:
(i) Validate the transfer and deposit transactions into the dedicated account relating to the DPG funds;
(ii) Verify that no funds are kept in or paid into the dedicated account other than those disbursed by the Bank for this operation;
(iii) Confirm that all payments out of the dedicated account were not made for any excluded expenditures as defined in the Grant Agreement; and
(iv) Ensure that the MoF follows adequate disbursement procedures as per PA standards, including accuracy of the exchange rate prevailing at the date of conversion from the US dollar to the NIS, and deposit to the Central Treasury Account used to finance budget expenditures within one week of the receipt of funds in the dedicated account.
5.4. MONITORING, EVALUATION AND ACCOUNTABILITY
82. The design of the M&E approach adopted under this DPG builds upon lessons learned from the earlier operations. The proposed results framework was discussed and agreed to with the authorities and developed in consultation with other development partners. In line with previous operations, the results framework was designed to account for progress achieved under both the DPG and the implementation of the PRDP Trust Fund, which is a major source for donor funding to the budget, aligned to the NPA (see paragraph 60). Since both the DPG and the PRDP Trust Fund support the implementation of selected key objectives of the PA’s strategy and aim
Grant proceeds to US$ Dedicated Account
MoF Central Treasury Account
Expenditure on eligible budget activities
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to provide stable and predictable financial support to the PA budget, a shared results framework for both has provided additional leverage to reform implementation. The indicators used are direct measures of development objectives, the data is collected by the statistics agency, finance and line ministries, and the monetary authority, and enjoys full ownership of the authorities.
83. The monitoring arrangements have been institutionalized in the Palestinian Ministry of Finance. Based on the inputs from line ministries and other agencies, the PA prepares quarterly reports on a regular basis to monitor the performance under both the DPG and the PRDP Trust Fund. The same arrangement is utilized to monitor progress against the PA’s medium-term program. These reports are published on the website of the MoF. The monitoring arrangements developed in the context of DPGs and PRDP Trust Fund have not only been used for the purposes of those operations, but there is evidence that these arrangements have contributed to building stronger institutional arrangements for monitoring PA’s broader reform efforts.41
84. The PA publishes its yearly budget online where it is easily accessible for the public. Given that the legislative council has not been operational for more than a decade, the budget is adopted by the Cabinet and then approved by the President. As a result of the fiscal crisis driven by the clearance revenue stand-off in 2019, the PA did not publish a regular budget for 2019 as it operated under an emergency budget which is 1/12 per month of the published 2018 budget. The Palestinian budget for 2020 went through two discussions at the Cabinet. It was signed by the President and then published on April 9, 2020.
85. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.”
86. Anti-Corruption Overview. The absence of a legislative council since 2007 has undermined checks and balances within the institutional and political systems. An anti-corruption law and the Palestinian Anti-Corruption Commission have been in place since 2010 but subsequent surveys of the public raised doubts about the credibility of the commission’s efforts to enhance accountability. There are certain challenges in the anti-corruption area, including the lack of access to information legislation, which affects transparency and citizen engagement.
87. The appointment of a new President of the PACC in 2019 was welcomed by civil society and suggests that the PA intend to take a more proactive approach to investigating and prosecuting corruption going forward. An early initiative has been the drafting of a new strategy - The National Cross-Sectoral Strategy to Bolster Integrity and Combat Corruption (2020-2022) – which was adopted in December 2019. The PACC followed an inclusive approach in drafting the strategy. It held discussions with stakeholders and invited inputs from civil society organizations, which were used to inform the strategy. A national team to implement the plan was established by a presidential decree. Some reforms have already been undertaken in the judicial system where a committee was formed to implement reforms. The new reform plan will address several areas, including implementing a bylaw
41 Based on the findings of the Implementation Completion and Results Report for the PRDP Trust Fund produced in July 2019.
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on disclosure of conflicts of interest, making the asset declaration system electronic, building a system within the PACC to monitor and measure indicators of corruption, as well as building the capacity of the PACC itself. The conflict of interest bylaw has already been adopted.
6. SUMMARY OF RISKS AND MITIGATION
88. The overall risk of this operation is high. Areas of concern include risks related to political and governance, macroeconomic, and fiduciary.
89. The political and security risks are high, as the situation in the Palestinian territories remains fragile. Israel has had three general elections within the span of one year, creating high political uncertainty. On the Palestinian side, official statements indicate that parliamentary and presidential elections may be held in 2020 as well, adding to the uncertainty and tensions from the internal divide. If the security situation relapses, the economic decline may have a negative impact on the PA’s reform appetite and may create an environment that is not conducive for reforms which may hamper the achievement of the PDO. The international donor community is also closely monitoring the economic activity in the West Bank and Gaza and is supporting the PA with grants and technical assistance. The authorities’ strong commitment to the continued implementation of structural reforms despite the highly difficult economic environment and fiscal pressures will provide a basis for boosting private sector confidence and support of development partners. All of these measures mitigate the risk to achievement of the PDO.
90. The macroeconomic risk is high. The liquidity crunch that resulted from the clearance revenues standoff and which extended over more than 6 months in 2019 had an impact on consumption and investment patterns and negatively impacted economic activity resulting in very low growth in 2019. Even though the fiscal stress has gradually eased given that the PA has started accepting these revenue transfers again, risks remain high for two reasons. First, additional deductions planned by the GoI for 2020 will further stress the PA’s already tight fiscal position and signal that the underlying causes of the standoff are yet to be resolved. Second, fiscal demands remain very high as the PA continues to clear its payment arrears that were accumulated during the height of the crisis, which could distract the PA from reform implementation. Further, recent disputes between the PA and the GoI over trade (such as the just-resolved agricultural trade dispute) may pose additional risks to the outcome. Also, if donor financing further declines, it could result in larger than expected financing gaps and a large drop in public consumption as well. The proposed DPG sends a strong signal to donors that the World Bank places great importance on progress in implementing the PA’s development plan. Moreover, the operation will leverage around US$25 million in additional resources through the PRDP Trust Fund, which the Bank administers. This will mitigate the risk of reduced donor assistance on the PA’s finances. Business environment reforms supported by recent operations would encourage additional private investment and eventually lead to better economic outcomes. A simple design of this operation and strong PA ownership of the reform program supported by this operation, which contributes to fiscal consolidation and reduced reliance on donor assistance over the medium term, are also mitigating factors for the risks to achievement of the PDO.
91. The fiduciary risk is also high, as discussed in Section 5.3 above. The PFM system suffers from significant weaknesses which materialized in weak budget execution and the continued accumulation of arrears, delays in the production of the audited annual accounts mainly due to the lack of timely preparation of the financial statements by the MoF. These weaknesses may all stand in the way of the PA’s ability to achieve results supported by the operation and the overall PDO. To help mitigate these risks, the Bank and other donors have been providing technical assistance to the MoF over recent years, aiming at strengthening the accountability of the PFM system. The Bank has been providing capacity building and training to help the PA meet international accounting standards (IPSAS) and to accelerate the preparation of financial statements. The PA has been implementing a new PFM
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strategy (2017-2022) with the emphasis on expenditure management and control, accounting reporting and procurement. The Bank is supporting the implementation of the strategy through the ongoing PFMI project. The project will particularly assist the PA to improve the accuracy and timeliness in the final account preparation process, which is crucial for the accountability and transparency of the PFM system, and to accelerate the implementation of the procurement law. Furthermore, the flow of funds and audit requirements for this operation (outlined in Section 5.3) serve as an additional mitigating measure.
Table 5: Summary Risk Ratings
Risk Categories Rating
1. Political and Governance High
2. Macroeconomic High
3. Sector Strategies and Policies Moderate
4. Technical Design of Project or Program Moderate
5. Institutional Capacity for Implementation and Sustainability Moderate
6. Fiduciary High
7. Environment and Social Low
8. Stakeholders Moderate
9. Other
Overall High
.
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ANNEX 1: POLICY AND RESULTS MATRIX
Prior actions Results Indicators
Indicator Baseline Target
Pillar 1: Strengthen commitment control in line ministries and improve overall public procurement practice.
Prior Action #1. The Ministry of Finance has taken the necessary actions to implement a commitment control system in all line ministries to secure budget allocations prior to the signing of a contract with service providers, excluding outside medical referrals, as evidenced by: (i) issuance of official instruction No. 2019/1602 of September 8, 2019; (ii) issuance of instructions م of ع January 20, 2020 by MoF’s accountant general to the heads of financial and administrative units at line ministries informing said ministries that MoF has been developing the IFMIS to introduce a commitment control system and ensure that financial operations are recorded according to GFS.
The share of expenditures processed under the new commitment control system.
Zero percent of expenditures are processed under the new commitment control system. December 2018
70 percent of expenditures are processed under the new commitment control system. December 2020
Prior Action #2. The Cabinet has instructed public entities to publish their procurement plans, procurement opportunities and contract award notices on the single portal procurement website which can be accessed on www.shiraa.gov.ps, as evidenced by the
Share of public entities that publish their procurement plans, procurement opportunities and contract award notices on the single portal procurement website.
Share as of December 2018: zero entities at the central level and zero municipalities.
Share as of December 2020: 50 percent of entities at the central level and 30 percent of municipalities.
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Prior actions Results Indicators
issuance of the Cabinet Secretariat’s instruction 1553/2019 of June 20, 2019.
Annual number of female owned businesses participating in public bids.
Three female-owned businesses in 2018.
Six female-owned businesses in 2020.
Prior Action #3. The Cabinet has instructed all public entities at the central and local levels to use Standard Bidding Documents for the procurement of works, goods and consultants’ services, as evidenced by the issuance of the Cabinet decision No. 35/07 of December 16, 2019
Share of public entities at the central and local levels of government using the Standard Bidding Documents in their procurement.
Share as of December 2018: zero entities at the central level and zero municipalities.
Share as of December 2020: 50 percent of entities at the central level and 30 percent of municipalities.
Pillar 2: Improve sector governance in water and health service provision
Prior Action #4. The MoH has instructed the General Director of its Education in Health department to ensure that all human resource planning and policies related to post-graduate medical training in the sector, including the establishment of medical residencies, are based solely on periodic data generated by the human resources observatory, as evidenced by Directive No. 32/110/201/20 of February 4, 2020.
Certified local medical residencies are established by the Palestine Medical Council in the fields identified by the observatory of human resources as critical gaps including oncology, hematology, pathology and neurology.
Zero local residencies in the fields of oncology, hematology, pathology and neurology in local hospitals in December 2018.
A minimum of one local enrollment in each of the four residencies in the fields of oncology, hematology, pathology and neurology in local hospitals by December 2020.
Prior Action #5. The Recipient’s President has
Publication of a performance
Performance report for 2018
Performance report for 2019
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Prior actions Results Indicators
taken the necessary steps to strengthen the role of the WSRC in performance monitoring of service providers, as evidenced by the issuance of Presidential Decree No. 2135 of September 10, 2019.
report for water service providers.
published in 2019 covering 89 service providers serving 82 percent of the population.
December 2018
published in 2020 covering 115 service providers serving 90 percent of the population.
December 2020
Prior Action #6. The Cabinet has instructed PWA to reduce the stock of debt owed by service providers that have installed prepaid meters for households under their constituency in the same amount paid to install the prepaid meters, as evidenced by: (i) Cabinet Decree No. 17/215/17 of August 7, 2018; and (ii) fifteen (15) Memoranda of Understanding signed between PWA and 15 service providers.
Average collection rate amongst consumers served by the 15 service providers that have signed MoUs with the PWA to install prepaid meters.
52 percent
December 2018
85 percent
December 2020
Pillar 3: Strengthen the stability and integrity of the financial sector
Prior Action #7. The PMA has instructed banks operating in West Bank and Gaza to adopt strengthened AML/CFT internal controls, in accordance with the AML/CFT strategy adopted by the Palestinian Cabinet on November 2018, as evidenced by (i) Cabinet decision No. 16/229/17 dated November 22, 2018 adopting the national strategy for AML/CFT; (ii) PMA Circular No. 74/2019 to all
PMA conducting on-site inspections of banks’ AML/CFT internal controls, that systematically incorporate an AML/CFT risk-based approach.
PMA AML/CFT supervision manual does not systematically incorporate a risk-based approach.
December 2018
PMA conducted on-site inspections of 50 percent of banks covering banks’ compliance with risk-based AML/CFT requirements.
December 2020
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Prior actions Results Indicators
banks operating in the Recipient’s territories dated March 26, 2019; and (iii) Cabinet decision dated November 22, 2018 establishing a national committee to supervise the implementation of the national AML/CFT strategy.
Prior Action #8. The PMA has taken the necessary steps to raise the minimum regulatory capital requirements for all banks licensed by the PMA to carry on banking business in West Bank and Gaza under the strengthened definition of capital, as evidenced by PMA’s instructions No. 8 and 9 of December 11, 2018, concerning the application of capital adequacy requirements for banks licensed by the PMA.
Increased minimum capital adequacy requirement for each bank, including capital conservation buffer (on a solo and consolidated levels).
Minimum capital adequacy requirement for each bank of 12 percent (on a solo and consolidated levels).
December 2018
Each bank complies with minimum capital adequacy requirement of 13 percent on a solo and consolidated levels (or is implementing time-bound corrective actions).
December 2020
Prior Action #9. The PMA and the PCMA have jointly reestablished the central sharia supervisory board to cover a wide segment of the financial sector, including both bank and non-bank Islamic financial institutions, as evidenced by: (i) PMA’s Board Decision No. 67/21, of June 30, 2019 approving the establishment of the central sharia supervisory authority; (ii) PCMA’s Board decision No. 29/2019 of May 12, 2019 approving the
Islamic financial instruments reviewed and amended by regulator actions based on CSSA decisions.
No regulations issued based on decisions by the CSSA.
December 2018
At least two financial instruments amended through regulator actions based on the decisions of the CSSA.
December 2020
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Prior actions Results Indicators
establishment of the central sharia supervisory board; and (iii) an Memorandum of Understanding signed between PMA and PCMA dated August 27, 2018, regulating the relationship between the two institutions.
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ANNEX 2: LETTER OF DEVELOPMENT POLICY
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ANNEX 3: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE
Prior Actions Significant positive or negative
environment effects
Significant poverty, social or distributional effects positive or
negative
Pillar 1: Strengthen commitment control in line ministries and improve overall public procurement practice
Prior action #1 Neutral. The reform covers administrative measures that do not impact the environment.
Neutral. The reform covers administrative measures that are not expected to have a social or poverty impact.
Prior action #2 Neutral. The reform covers administrative measures that do not impact the environment.
Neutral. The reform covers administrative measures that are not expected to have a social or poverty impact.
Prior action #3 Neutral. The reform covers administrative measures that do not impact the environment.
Neutral. The reform covers administrative measures that are not expected to have a social or poverty impact.
Pillar 2: Improve sector governance in water and health service provision
Prior action #4
Neutral. The reform will improve service delivery in the health system in the long run and does not have an impact on the environment.
Positive. The reform is expected to provide more comprehensive domestic health services which would have a positive poverty and social impact.
Prior action #5
Neutral. The reform focuses on improving transparency in the water sector and is not expected to have an impact on the environment.
Neutral. The reform focuses on improving transparency in the water sector and is not expected to have a social and poverty impact.
Prior action #6
Neutral. The reform aims to improve collection rates for water bills and is not expected to have an impact on the environment.
Neutral. Analysis has shown that the reform will have no statistically significant changes related to poverty, and hence social impact, given that spending on water is extremely low as a share of overall household spending.
Pillar 3: Strengthen the stability and integrity of the financial sector
Prior action #7 Neutral. The reform focuses on measures in the financial sector and is not expected to impact the
Positive. The reform contributes to enhancing the resilience of the financial sector improving its ability to
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environment. support the private sector and hence job creation. This is expected to ultimately have a positive social and poverty impact.
Prior action #8
Neutral. The reform focuses on measures in the financial sector and is not expected to impact the environment.
Positive. The reform contributes to enhancing the resilience of the financial sector improving its ability to support the private sector and hence job creation. This is expected to ultimately have a positive social and poverty impact.
Prior action #9
Neutral. The reform focuses on measures in the financial sector and is not expected to impact the environment.
Neutral. The reform focuses on unifying Islamic financing tools which should have a neutral poverty and social impact.
