Competitiveness assessment of the Palestinian economy: a long-run perspective

Abstract

The paper aims to determine the desired level of the current account balance (CAB) to gross domestic product (GDP) ratio that would stabilize the net foreign asset (NFA) position at a given benchmark value, as well as, to determine the required level of foreign aid and workers remittance that would improve Palestinians’ welfare, while maintaining a sustainable CAB. Two different approaches, the external sustainability and the macroeconomic balance approach, have been utilized to achieve these goals. Results indicate that stabilizing Palestinian Territory's (PT) NFAs will require a significant reduction in the share of its trade deficit in percentage of GDP, i.e. enhancing the competitiveness of Palestinian exports. This required adjustment will be even more pronounced if PT aims to reduce its dependence on foreign aid. In addition, the required adjustment cannot be managed through exchange rate and/or monetary policies, due to the absence of a national currency. The rebalance between domestic expenditures and domestic income generation can be achieved through policies aimed at increasing the potential output and/or reducing the share of domestic consumption in total GDP. Furthermore, results indicate that foreign aid and workers remittances must increase significantly in order to preserve the required consumption to GDP ratio.

Keywords:

• external sustainability
• macroeconomic balance
• net foreign assets
• current account balance

JEL Classification:

• C62
• E27
• F31
• F32

Acknowledgment

The authors are grateful to Abeer Abu-Zaiton for research assistance, and help on data issues.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 NFA is defined, in case of PT, as all assets minus all liabilities of Palestinian residence with the rest of the world (all nonresidents). It includes FDI, Portfolio investments, interbank deposits, deposits of PMA in JD, and official reserves in NIS and USD.

2 For more details refer to Appendix 2B.

3 Market share of Palestinian exports is measured as the ratio of Palestinian exports to total imports of Palestinian counterpart countries (Israel and Jordan)

4 Imports of Israel and Jordan include oil and gas, which might decrease the ratio.

5 This account consists of both acquisitions and disposal of non-produced, non-financial assets, which is zero in our balance of payments, and capital transfers, which represent all transfers for government and private sector to finance development projects.

6 Represents the market value of all assets at period (t) minus its market value in (t – 1), but net capital gain is not calculated in the BOP, thus it has been estimated as the residuals in Equation (1):

7 Net yield on NFA computed as net factor income from investment divided by NFA.

8 It is assumed that nominal GDP will grow by 8.6% during 2013 forth, depending on the sum of real GDP growth rate (5.85%) and inflation rate (2.78%) in 2012.

9 It is worth mentioning that net yield on NFA is not an actual data, and it is calculated as the ratio of net factor income from investment over NFA.

10 The stabilizing level of NFAs was assumed to cover 6 months of imports.

11 It is a value which equalize net exports from both sources (national accounts, and balance of payments), i.e. NE^NA = NE^BoP + adjustment factor (adj).

12 , where data of NE extracted from NA, though to use the BoP data we simply add an adjustment factor such that ne^NA = ne^BoP+ adj.

Thus,