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.