Economic Slowdown Endangers State-building Efforts

The aid-dependent Palestinian economy faces a deepening crisis unless foreign support grows and Israel eases restrictions on its trade, the World Bank said.

Budgetary problems, a drop in international aid and an economic slowdown in the West Bank are hampering the Palestinian Authority's efforts to build the institutions of an independent state, the World Bank said in a report released yesterday.

The aid-dependent Palestinian economy faces a deepening crisis unless foreign support grows and Israel eases restrictions on its trade, the World Bank said.

Palestinians Ramallah - Reuters - March 15, 2011

The Western-backed PA is relying on foreign aid to cover a 2012 budget deficit projected to reach $1.1 billion, but most donor countries have not fulfilled their pledges. This year, the PA is slated to receive economic aid from donor countries to the tune of $600 million, down from $1 billion last year and $1.8 billion in 2008.

The World Bank released the biannual report ahead of a meeting on Palestinian aid in Brussels next week. The PA has received just over half the funds it needs.

Gross domestic product in the West Bank grew 5.8% during the first three quarters of 2011, compared with 7.5% during the same period in 2010. The bank predicted a further drop in growth, to 5%, this year. According to the data, the slowdown began in 2008.

Meanwhile, the report noted 25.8% growth in Gaza's economy during the first three quarters, compared with 16.8% in 2010. The report attributed the unusually high growth to a real-estate boom, Israel's lifting of certain restrictions on the movement of goods in and out of Gaza, the booming informal economy based on the smuggling of goods through tunnels, and international aid money. It noted, however, that the outlook for continued growth in Gaza was uncertain and that the economic situation for most Gazans remained negative.

The drop in aid, combined with the economic slowdown and Israeli restrictions on the Palestinian economy, have led to budgetary shortfalls expected to reach $1.1 billion in 2012, the report says. The bank also notes that the PA's budgetary problems could become more severe if aid from donor countries declines further.

The report acknowledged the PA's efforts to deal with its budget shortfalls, including through increased tax collection and spending cuts. But it added that the number of people employed by the PA continued to expand, with nearly 90,000 people employed by the public sector in the West Bank, and 65,000 in Gaza.

The Gazan economy is still rebounding from a very low base, with the average Gazan remaining "worse off than he was in the late nineties."

Mariam Sherman, the World Bank's director for the West Bank and Gaza Strip, called on donor countries to meet their pledges to help stabilize the Palestinian economy in the short term.

The report said a slowdown in growth in the West Bank, where the Palestinians have limited self-autonomy, "can be attributed to falling donor support combined with the uncertainty caused by the Palestinian Authority's fiscal crisis, as well as lack of significant new easing of Israeli restrictions."

To help fill the gap, Palestinian Prime Minister Salam Fayyad approved a hike in income tax rates last month to increase revenues, but the World Bank said the economy was still likely to worsen in 2012. Fayyad, appointed by Palestinian President Mahmoud Abbas in 2007, is credited with revitalizing the West Bank economy.

"There is a lot of energy and resourcefulness in the Palestinian private sector, which is the longer-term path out of crisis mode towards sustainable growth," Sherman said.

The report pointed to growth potential in private-sector areas including construction, agriculture, housing and tourism.

Much of the aid comes from the United States, the European Union and Arab nations, and allows the Palestinian authorities to pay the salaries of public workers. Adding to its problems, the United States, which is trying to restart Israeli-Palestinian peace talks, cut off funding last year when Abbas defied calls from U.S. President Barack Obama and made a unilateral bid for statehood recognition at the United Nations. Palestinian officials say more than $150 million of U.S. aid is frozen.