unctad.org | Limited economic policy space
Limited economic policy space
 
 
Palestinian development efforts are severely constrained by the limited policy-making space available to the Palestinian Authority under the terms of the 1994 Protocol on Economic Relations between Israel and the Palestinian Liberation Organization, also known as the Paris Protocol.
 
In line with this protocol, the Palestinian Authority adopted the tariff structure of the more sophisticated and advanced Israeli economy, with minor exceptions. The Palestinian Authority applies the Israeli value added tax (VAT) rate with the option to increase or decrease it by 2 per cent on a limited number of goods. Israel collects tariffs and VAT revenues on Palestinian imports on behalf of the Palestinian Authority. Moreover, the Palestinian Authority does not have the option to issue a national currency.
 
As such, Palestinian policymakers lack instruments for monetary, exchange rate and trade policies, and do not have a complete set of fiscal policy instruments. Furthermore, the Palestinian Authority retains only limited control over tax and budgetary management, since the largest part of public revenue (imports and sales tax) is determined by Israeli rates that are not tuned to the Palestinian economy´s needs. Furthermore, the clearance of this revenue, which is collected by Israel on behalf of the Palestinian Authority, is subject to Israeli political decisions.
 
In a sense, the economic policy space available to the Palestinian Authority is practically reduced to a one-sided fiscal policy (expenditure allocation), which is far less than that enjoyed by regional or municipal governments in many countries.
 

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