IMF, UN Reports: Nascent Palestinian State May Falter Without Mideast Peace

State-building efforts could be undone by continued occupation, peace process stall, says Robert Seryy; IMF: Palestinian Authority may suffer blow from lack of donor money.

A shortfall in donor aid, tough Israeli trade restrictions and diplomatic paralysis are jeopardizing Palestinian efforts to build a viable economy and strong institutions, the International Monetary Fund and the United Nations said in separate reports yesterday.

The two reports, released just days before Palestinian leaders go to the UN to press their claim for statehood, said the Palestinian Authority had completed its goal of preparing the necessary bodies to run an independent state. But they both said economic and political dangers could undermine the state-building achievements of the past two years.

Mahmoud Abbas, Qatari prime minister - AP

"I am very worried about the disconnect between what the PA has achieved on the ground, and where the political process stands," said Robert Serry, the UN Special Coordinator for the Middle East Peace Process. "The reality is that there is only so much that can be done in conditions of prolonged occupation, unresolved final-status issues, no serious progress on a two-state solution and a continuing Palestinian divide," he added.

Palestinian President Mahmoud Abbas says he is going to the United Nations because direct peace negotiations with the Israelis have reached a dead end after collapsing last year in a row over Israeli settlement building in the West Bank.

Washington is opposed to the UN initiative, and some officials warn they will try to cut annual U.S. aid to the Palestinian Authority, which runs to some $450 million.

The PA is reliant on foreign aid to fill a deficit projected at $900 million this year.

The International Monetary Fund said the Palestinian economy was already suffering from a sharp drop in handouts, with disbursements in the first eight months of 2011 totaling $400 million, some $300 million less than expected.

"The recent aid shortfalls are posing serious risks to the PA's state-building capacity, especially given its still high aid dependence," the Washington-based IMF said.

The PA has blamed Arab states for failing to honor commitments and says this lack of funds has prevented it from paying salaries to its 150,000 employees on time and in full in two of the last three months.

The IMF said the general economic outlook had clouded, with growth in the West Bank coming in at just a 4 percent annual rate in the first half of 2011 from 8 percent for the whole of 2010.