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How do real interest rates affect financial fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. A bank's optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank creditors. Changes in the interest rate affect the price and amount of borrowing, both of which influence bank fragility in opposite directions. Thus, the marginal impact of changes to the interest rate on bank fragility depends on the level of the interest rate. Finally, we derive testable implications that may guide future empirical work.

After a steady improvement in the fiscal position over the past decade, the standoff over clearance revenues has severely constrained the PA budget, leading to a significant expansion in expenditure arrears. Going forward, however, uncertainty about a resolution for the clearance revenue standoff will weigh on the economy. Over the last two decades, the Palestinian economy has been driven by large inflows of transfers as other sources of growth have been long-hindered by the ongoing Israeli restrictions on movement and access. Under a baseline scenario which assumes a continuation of the Israeli restrictions, persistence of the internal divide between the West Bank and Gaza and a decline in aid levels, the Palestinian economy is expected to slip into a recession in 2020 and 2021, even if additional, one-off transfers from clearance revenues are made. As financial buffers are depleted, the reduced revenues will require sizable cuts in public spending, which in turn would translate in reduced consumption and investment. The decline in growth implies a sizable decline in real per capita income and a rise in poverty. The Palestinian financial sector continues to face substantial risks against the backdrop of the fiscal crisis. The negative impact of the deepening fiscal crisis on the quality of loan portfolios across the banking sector has started to materialize as both non-performing loans and classified loans have been on an upward trajectory. With the severe liquidity shortage facing the PA, it has resorted to domestic banks to finance its needs raising the sector’s exposure to the PA for the first time in a number of years. Banks are also rescheduling outstanding loans held by PA employees who are receiving a reduced salary, compounding the destabilizing effect on the sector. However, the fact that the PA is simultaneously building up an asset in the form of tax revenues not received from the GoI ameliorates the situation as the increased exposure may be seen as a temporary trend. Another cause of concern is a possible disruption in Correspondent Banking Relationships (CBRs) between Palestinian banks and their Israeli counterparts due to de-risking by Israeli banks. The immunity and indemnity package given by the GoI to banks with CBRs are set to expire in May 2020 and February 2021, respectively, when a longer term and more sustainable intervention is expected to be in place. While resolving the fiscal crisis is an immediate priority there remains a broader reform agenda to improve the economy and Palestinian living standards.

This report highlights recent economic updates in Bangladesh as of April 2015. Economic growth in Bangladesh was gaining momentum in the first half of FY15. Capacity utilization improved and investments were showing some signs of recovery. This growth was also job-friendly. The 12-monthly-moving average inflation decelerated from 7.6 percent in February 2014 to 6.8 percent in February 2015. The resilience of the Bangladesh economy continues to be tested by faltering political stability, weak global markets, and structural constraints. These are inhibiting the economy s income growth as well as progress on shared prosperity. Despite the emergence of a $1.3 billion deficit in the current account in the first seven months of FY15, the surplus in the overall balance of payments has been sustained, leading to continued accumulation of official foreign exchange reserves to prevent nominal exchange rate appreciation. Reserves are at a comfortable level at over 6 months of imports of goods and services. Fiscal policy has remained consistent with macroeconomic stability. Tax revenue growth has been weaker than targeted while expenditure have also been short due as usual to an implementation shortfall. The projected recovery in global growth, particularly in the United States and the Euro Zone, and continued softness in international commodity prices, bode well for Bangladesh. The country will need to restore political stability and implement faster structural reforms to capitalize on these opportunities. The potential GDP growth rate is on a declining path due to declining labor force growth and stagnant productivity growth, as well as the rate of capital accumulation. Raising the low Female Labor Force Participation (FLFP) rate offers on opportunity to boost the economy s potential growth rate. Moving forward, the biggest challenge remains ensuring durable political stability. This is a precondition for accelerated, inclusive, and sustainable growth.

Despite an unfavourable global economy, economic growth in Bangladesh is projected at close to 6 percent in fiscal 2013 (FY13). Adverse external demand and domestic supply constraints continue to be a drag on growth. Shortfalls in exports and investments due to a possible protracted crisis in the euro area and internal supply constraints may underpin the moderation of growth. Investment targets of the medium term budget framework 2013 to 2017 face major obstacles in shortage of electricity and gas supplies, and poorly functioning roads and ports. One positive prospect on the investment front is the increase in foreign direct investment in FY12, which surpassed the US$ 1 billion for the second time in Bangladesh's history. Fiscal policy is back on track. Fiscal performance in FY12 was favourable, notwithstanding increasing subsidies. The overall budget deficit in FY12 is estimated at 4.5 percent of Gross Domestic Product (GDP). Domestic financing of the deficit declined to 3.2 percent of GDP, from 3.5 percent in FY11. Lower government borrowing from the banking system in the second half of FY12 was a welcome reversal from worrying trends in the first half of the year. The FY13 budget deficit target 5 percent of GDP is modest, though higher than the estimated 4.5 percent of FY12, and is likely to be undershot primarily because of a shortfall in the implementation of the ambitious Tk 550 billion annual development programs, by now a familiar pattern. However, the financing of the deficit may be a challenge with a projected US$2.2 billion net external financing need, substantially more than the $1.4 billion of the revised FY12 budget. The rest of the deficit is projected to be financed from domestic sources, with a still heavy 69 percent reliance on bank borrowing. Bangladesh's economic outlook is subject to several near-term risks. Possible intensification of the euro area crisis may deepen Bangladesh's export slump of the last six months; escalation of global food prices may reverse the recent decline in food inflation; global oil price shock will place the balance of payments under pressure again and shrink fiscal space; banks are susceptible to credit and market risk and the global economic vulnerabilities; and increased political instability and labour unrest may depress investments further.

Gross Domestic Product (GDP) growth has moderated from 6.7 percent in FY11 to 6.3 percent in FY12 due to unfavorable external economics and internal supply constraints. Monetary policy remained accommodative for most of 2011 but gradual tightening is occurring. With the high fiscal deficit and domestic borrowing by Government, monetary policy is now bearing the brunt of macroeconomic policy adjustment. The balance of payments (BoP) is on a deteriorating track, with reserves falling to below three months of imports and export growth turning negative in March 2012. A coordinated policy response is required to ease macroeconomic pressures and improve growth prospects. Key actions include the need to create fiscal space, contain government borrowing to mitigate the risk of crowding out of credit to the private sector, better regulate the capital market, and stimulate investment and job growth in the export sector. Unlike in 2008, Bangladesh has insufficient policy space to avert the negative impact of a global slowdown through fiscal stimulus packages and monetary easing.

This report begins by documenting the Palestinian Authority's (PA's) ongoing fiscal crisis that threatens its ability to provide basic services to the population. In 2011, the PA required about US$1.5 billion dollars in budget support, of which US$200 million to cover development expenses not funded directly by donors. However, it only received about US$814 million in budget support and US$169 million in development financing, for a total of US$983 million. Ultimately, the PA can only hope to achieve fiscal sustainability through a combination of sustained private sector growth and continued internal reforms. Robust private sector growth is necessary for the PA to generate the revenues needed to sustain service delivery. Yet the private sector remains stifled as a result of Israeli restrictions on access to natural resources and markets. The West Bank has experienced a slowdown in economic growth in 2011, combined with double-digit growth in Gaza. The recovery in Gaza can be attributed to a combination of aid inflows and easing of restrictions on entry of goods from Israel-though it is important to keep in mind that the average Gaza today is worse off than s/he was back in the late nineties. The recent growth in Gaza is also driven largely by a boom in the construction sector, and Gaza infrastructure exhibits such gaps and disrepair that major investments are necessary and would generate important employment as well as future growth. The slowdown in growth in the West Bank, on the other hand, is the result of falling donor support, uncertainty caused by the PA's fiscal crisis, and lack of significant new easing of restrictions by the Government of Israel (GoI).

Real gross domestic product (GDP) grew at 6.7 percent in FY11, continuing the upward trend in growth after declining during FY06-09. This strong performance can be repeated in FY12 if exports continue to grow and if garment exports benefit from the agreement reached during the recent India-Bangladesh Summit, remittances continue to recover, and if investment is boosted by improved infrastructure services particularly power. Risks in the global economy can affect Bangladesh in several ways. The standard and poor (S&P) downgrade of US debt as well as the debt problems in the Euro Zone are affecting the international markets and renewing fears of another global slowdown. This time around, limited fiscal and monetary space in developed countries increases the chances of a protracted slowdown. If this slowdown occurs, it can affect Bangladesh's balance of payments through its impact on exports and remittances, put pressure on the exchange rate, increase economic uncertainty, and, in turn, weaken investment and growth. Domestic policies will also affect Bangladesh's economic prospects. A slow pace of reforms in the investment climate can affect domestic and foreign investment, as can inadequacies in energy supply and the poor quality of roads. The reversal of trade reforms as well as weakening of the financial sector can also affect export growth and investment. Expansionary macroeconomic policies could increase risks on the current account and make inflation management more difficult. Unlike in 2008, Bangladesh has insufficient policy space to cushion the impact of a second global slowdown through fiscal stimulus. packages and monetary easing. Rapid growth in subsidies, sustained high rate of growth of credit to the private sector as well as recourse to monetary financing of the fiscal deficit have led to the erosion of the fiscal and monetary policy space. Much improved fiscal and monetary discipline combined with stronger efforts to address the energy and infrastructure deficits will be critical for sustaining growth performance. Maintaining the long-established tradition of sound macroeconomic management will also be important.

Since the last Ad Hoc Liaison Committee (AHLC) meeting, the PA has continued to strengthen its institutions, delivering public services and promoting reforms that many existing states struggle with. The quality of its public financial management (PFM) has further improved. Education and health in the West Bank and Gaza (WB&G) are highly developed, comparing favorably to the performance of countries in the region as well as globally. Ultimately, sustainable economic growth in WB&G can only be underpinned by a vibrant private sector. The latter will not rebound significantly while Israeli restrictions on access to natural resources and markets remain in place, and as long as investors are deterred by the increased cost of business associated with the closure regime. Education and health indicators for WB&G are impressive and reflect extensive coverage of the population, but a focus on improving the quality of these services remains warranted. Similarly, education investments take time to mature. While the PA is already implementing an education sector plan that highlights the importance of improving the quality of education, the relevance of graduates' skills remains an area requiring further attention. This report will therefore reflect on recent growth trends but also on the future trade regime and employability of the WB&G labor force.

On August 25, 2009, the 13th Government of the Palestinian Authority (PA) presented a program entitled "Palestine: ending the occupation, establishing the state" (hereafter referred to as the program) outlining several national goals, including the achievement of 'economic independence and national prosperity'. The program accords high priority to the development of the public institutions of the PA in order to achieve the stated national goals. It acknowledges that maintaining an efficient and effective public sector that provides citizens with high quality services and value for money is a constant challenge. No amount of well-functioning institutions, will, however, lead to economic growth in the absence of access to markets, whether within the West Bank and Gaza, in Israel, or in the rest of the world. In this regard, the recent developments in easing of movement and access restrictions by the Government of Israel (GoI) represent a welcome first step. The GoI has taken steps to ease movement restrictions in the West Bank and to allow greater access to West Bank markets for Arab citizens of Israel. In the first half of 2009, the political stalemate in Gaza continued and the economy stagnated. The West Bank economy is showing signs of new growth, so that it is possible that for the first time in years, West Bank and Gaza (WB&G) may have positive per capita Gross Domestic Product (GDP) growth in 2009.

This paper uses firm-level data from the Business Environment and Enterprise Performance Surveys to study the process of convergence of transition countries with developed market economies. The study focuses on competition and market structure, finance and the structure of lending to firms, and how firms respond to the economic environment by restructuring. The authors find substantial evidence of convergence in a number of dimensions. The pattern of growth at the country, sector, and firm levels shows rapid growth of the new private sector and of the micro and small-firm sectors, with the size distribution of firms moving toward the pattern observed in the surveys of developed market economies. In finance, increasing reliance on retained earnings in transition countries reflects a maturation of the sector as new firms come to rely less on informal and family sources of finance. The authors find evidence of an inverse-U pattern, with the peak of restructuring activity taking place in 2002, the middle of the period analyzed. Throughout, the regional patterns suggest greater convergence in the transition countries that joined the European Union in 2004 than in the other, lower-income transition economies.