Financier of last resort

State building is governance writ large. Seen from without, the accomplishments of a nascent state stand in harsh juxtaposition to the fine-tuning of politically and economically stable governments. One is a stone mason and the other a builder, confident the foundations will support his project.

The Palestinian National Authority (PNA) is working in stone. Its achievements are the foundations on which a future state will be built. Over the past three years, it has initiated a series of reforms in public financial management, including the creation of a single Treasury Account, an internal audit function, and the timely distribution of public financial information. Strengthening local government has led to a degree of decentralisation unique in the region. This movement towards reform, however, is burdened by security issues and an economic instability that threaten to shatter these foundations.

The Palestinian National Authority is part of the MENA-OECD programme, notably contributing to work on civil service development, integrity and regulation. Over the next two years, there will be a drive to bolster the institutional capacity of the PNA, with the MENA-OECD programme providing advice in light of current reform and development plans.

It will be a tough challenge, and although the difficulties the PNA face are not always very different in kind from those confronting several other MENA countries, they are arguably more intense.

Whereas private sector investment had been rising before the crisis in the MENA region generally, insecurity has resulted in a dangerous contraction of the private sector in the PNA. Reversing this is a priority. The current political situation has also led to high unemployment and reduced labour mobility in the region. Tax revenues have been hit too, and since most businesses are small and family-owned, they are unable to obtain credit and are forced to turn to the state. Public expenditure has kept the economy ticking, providing public sector jobs when no other were to be had, but in doing so, the Palestinian National Authority has overstretched itself.

Over the last two years, almost all public investment has been used to meet operating costs and pay back salaries. In 2007, unpaid salaries amounted to over a billion US dollars. Wage inflation bled funds destined for non-salary expenditures. In the electricity sector, for example, net lending was used to cover the enormous number of unpaid bills by consumers. Between 2006 and 2007, net lending escalated to the rate of some $50 million per month.

Public expenditure in the PNA claims a huge slice of GDP: nearly 50% in 2005. High unemployment, aggravated by a booming population (75% of Palestinians are under the age of 30, higher than the MENA region's already very young average), is forcing more and more people to turn to a fiscally parched state. In the Palestinian Reform and Development Plan 2008-2010, the state was lamentably referred to as the "financier of last resort".

The Palestinian National Authority has lightened the load somewhat by reducing its bloated public sector. Removal from the payroll of all employees not legally appointed caused a sharp reduction of the wage bill. In 2008, the PNA appointed an accountant general to supervise treasury, cash and debt management, and decentralised its budget system, allowing for greater accountability. Along with security, prosperity and better quality of life, good governance is counted as one of its four goals. Throw aside any one of these cornerstones, and the state may founder. LT


Palestinian Reform and Development Plan 2008-2010 "Building a Palestinian State: Towards Peace and Prosperity", presented at the International Donors' Conference for the Palestinian State, Paris, December 2007

© OECD Observer, No. 275, November 2009

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