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Publication | 2022

Economic Monitoring Report to the Ad Hoc Liaison Committee - September 2022

The Palestinian economy started its rebound from the COVID-19 shock in 2021 and continued to recover in the first quarter (Q1) of 2022, albeit at a slower rate. Addressing fiscal policy challenges remains a critical priority for the Palestinian Authority (PA) in 2022. The financial sector is also continuing to recover from the negative impacts of the COVID-19 pandemic, but sustained fiscal challenges heighten stability risk. Cooperation toward the goal of sustainable fiscal policy and economic development is all the more important to mitigate the impacts of rising food and fuel prices accelerated by the war in Ukraine. Even modest inflation could reduce households’ ability to meet basic needs because Palestinian purchasing power is already low, an outcome of the Paris Protocol on Economic Relations. The main body of the report is organized in two chapters and one supporting annex. Chapter I focuses on recent economic developments in the real, fiscal, and banking sectors while providing a near-term outlook that highlights critical challenges facing the Palestinian economy, in particular, the required fiscal reform. Chapter II examines the exposure of Palestinian households to food price shocks triggered or accelerated by the war in Ukraine. It reviews household vulnerability based on consumption patterns, assesses the magnitude of price increases in the first half of 2022, and simulates variation in the effective inflation experienced by households with different baseline levels of welfare. It clearly finds that the effects of price increases on households are regressive, as poor households are impacted more than wealthier households, and offers recommendations to mitigate the damage of this and future episodes of rapid food inflation.