This PEFA assessment is intended to enhance the effectiveness of West Bank and Gaza’s (WB&G) PFM systems and aid the Palestinian Authority (PA) to consolidate its ongoing and planned reforms. More specifically, the assessment provides a diagnostic analysis that can be used as the basis for dialogue on PFM reforms that will inform future updates and design work on the PFM reform strategy and subsequent action plans. It should be noted that while the PA has responsibility for both the WB&G, since 2007 its role in Gaza has been compromised by the presence of the de facto authority - Hamas.

Assessment coverage and timing
The assessment has undertaken an independent review of the quality and performance of PFM systems in WB&G for the financial years 2015, 2016 and 2017, and of the medium-term budget for 2018-21. It was managed by the World Bank and conducted during the period October 2018 to June 2019.

Impact of PFM Systems on the three main budgetary outcomes

Aggregate fiscal discipline
Fiscal discipline in WB&G is very reasonable, especially in the context within which the government has to operate, and most elements of WB&G’s public financial management system contribute to this outcome. On the expenditure side, aggregate estimates are reasonable (PI-1, good ‘B’) but there are large differences between the original estimates and the actual expenditure composition (PI-2.1 and PI-2.2), and the actual expenditure is distorted due to expenditure arrears, which have been increasing in recent years (PI-22). In terms of revenue, estimates are not accurate (PI-3, rated ‘C’), mainly due to promised donor grant commitments not materialising, but also due to limited forward estimates of the monthly transfer of ‘clearance revenues’ (collected by the Government of Israel (GoI) on goods and services destined for WB&G). The PA is heavily dependent on donor resources and fluctuations in the donor flows for unpredictable reasons has been a constant challenge for fiscal management. The clearance revenues constitute about two thirds of the PA’s budgetary revenue, and the flows have also been unpredictable. However, the accounting arrangements – by necessity – are sound (PI-20).
A PEFA assessment also recognizes broader issues that may affect fiscal discipline. For example, the monitoring of financial risks is weak (PI-10). Similarly, in part because the donors are often taking a leading role in public investment, the management of both public investments and public assets has not been strong (both PI-11 and 12 are rated ‘D+’). The budget documents have a very limited medium-term perspective, but medium-term projections do inform the internal process. In view of the uncertain fiscal environment, the presentation of medium-term projections in the documents would be valuable (PI-16, rated ‘D’).

Strategic allocation of resources
Two of the PEFA indicators related to “policy-based fiscal strategy and budgeting” (PI-14, PI-15). receive low ratings as the budget does not follow the policy priorities set out in the ‘National Policy Agenda 2017 to 2022’, with its 21 sector strategies. This is the fourth in a series of development plans prepared by the PA since 2008, but the objectives and priority reforms are not costed or directly linked to the budget process. The failure to present in the budget documents the internal work on medium term projections is also affecting the score for these indicators. In addition, the technical aspects of the budget preparation process (PI-17) are no more than adequate, and the absence of a functioning legislature impacts the overall rating of this indicator, and also affects PI-18 (‘D+’). Other indicators related to resource allocation are evaluated as satisfactory or better: for example, budget classification is fully compliant with international standards (PI-4, rated ‘A’), the PA’s budget documentation (PI-5), is good, assessed as ‘B’. In addition, in-year budget execution reports comparable with the originally approved budget are published monthly and include an analysis of the variance between actuals and estimates for both revenue and expenditure. In addition, these reports cover expenditure at both commitment and payments stages, with no significant data accuracy concerns (PI-28, rated ‘B+’).

Efficient service delivery
For aspects related to efficiency in the use of resources, the public financial management system is reasonable, as shown by the indicator of predictability of resource allocation in the year (PI-21, rated ‘C+’); financial relationships between agencies are partially transparent (PI-7, ‘C’) as many services are decentralized to the districts to serve local residents; and the score of the ‘performance information’ indicator is good (PI-8, score ‘B’). In addition, while the mechanisms to minimize the risk of losses, such as payroll controls (PI-23, ‘D+’) and procurement (PI-24, ‘D+’) are weak, they are at least partially mitigated by the system of internal control in operation (PI-25, ‘B’) and are monitored by a reasonable internal audit function (PI-26, ‘C+’): in addition, accounting control mechanisms are good (PI-27, ‘B+’). However, as noted earlier, there are concerns about weaknesses in the way both public investments and public assets are managed: both indicators are evaluated as weak (PIs-11 and 12, ‘D+’). Finally, the monitoring mechanisms in place show mixed results. As there has been no functioning legislature in place in the three-year assessment period, PI-31 could not be rated. However, the SAACB has full legal, financial and administrative independence, as well as unrestricted access to records, documentation and information. External audits of most expenditures and revenues were conducted during the last three fiscal years using ISSAIs, although there remains a considerable delay and backlog. SAACB reports were published within one year but submitted to the MoFP for comment within nine months of receipt. There are formal and timely responses to audit reports and 80% of recommendations are implemented by public entities (PI-30). In summary, the public financial management system of WB&G is operating at a satisfactory – though in several areas basic – level, with several areas for future improvement.