In a report to be delivered next week, the World Bank says that while Prime Minister Salam Fayyad has made substantial progress in building strong state institutions, “the onset of an acute fiscal crisis, accompanied by declining economic growth,” may undermine those achievements.
The International Monetary Fund will report next week that economic growth in the West Bank, which had been positive for the past three years, slowed from 8 percent in 2010 to 4 percent in the first half of 2011.
Oussama Kanaan, who led a recent mission to the Palestinian areas for the I.M.F., said in an interview that unless foreign donors, especially Arab countries, met their commitments to the Palestinian Authority, and unless Israel further eased restrictions on Palestinian movement, the economic slowdown would continue.
But Mr. Kanaan, the I.M.F.’s mission chief for the West Bank and Gaza, said that the growing institutional maturity of the Palestinian Authority made it better able to handle its fiscal crisis.
“As we stated last April,” he continued, “we believe that given the Palestinian Authority’s solid track record, it is able to conduct the sound economic policies expected of a future well-functioning Palestinian state.”
The World Bank study said that in areas where government effectiveness matters most — security, justice, economic development and service delivery — “Palestinian public institutions compare favorably to other countries in the region and beyond.”
But, it added, as it has in earlier reports, that growth driven primarily by donor aid rather than a significant private sector creates momentum that is unsustainable. The private sector is “stifled by Israeli restrictions on access to natural resources and markets,” it said.
When less aid than expected flowed into the Palestinian Authority in the first half of this year, there was an immediate impact. In July, the Palestinian Authority could not pay full salaries to its employees, and while it did so in August, it fell further behind in its other transfers. Prime Minister Fayyad has expressed keen concern over meeting his budget obligations in the coming months.
The donors who have withheld promised aid are especially from the Arab world. Last year Arab states gave the Palestinian Authority $280 million, compared with about $110 million so far this year.
There is also growing concern that American aid to the Palestinian Authority, some $450 million a year, could end after the Palestinians go to the United Nations. Congressional Republicans have threatened to end the aid if the Palestinians choose the United Nations path over direct negotiations with Israel.
Both the World Bank report and one coming from the International Monetary Fund offer data on the West Bank, run by the Palestinian Authority, and Gaza, run by Hamas. Taken together, growth in the first half of 2011 was 7 percent.
The Gaza economy has improved markedly because it had been at an anemic level during the Israeli siege of the past few years. Growth in Gaza in the first half of 2011, the World Bank reports, was an exceptionally high 28 percent. Much of that came from the suddenly robust construction sector, which had been inactive for several years. Gross domestic product is still below what it was in 2005, before the Hamas takeover and Israeli siege.
Mr. Kanaan said that sustaining Gaza’s recovery would require lifting the ban on exports to Israel and trade with the West Bank, imposed by Israel.
After Hamas took over Gaza in 2007, Israel imposed a siege to try to pressure Hamas, a militant group opposed to Israel’s existence. Israel banned nearly all movement in and out of people and goods except those of a humanitarian nature.
Israel substantially eased the blockade last year after a storm of international criticism over the killing by Israeli commandos of nine activists who were trying to break the siege. Now nearly all consumer goods are allowed in and small amounts of exports are permitted.
In the West Bank, Israel imposed scores of checkpoints during the Palestinian uprising that began in late 2000, heavily restricting movement of goods and people. Those too have been eased significantly, but Israeli security considerations still severely hamper economic activity and foreign investment.
Unemployment in Gaza, high by any standards, has fallen to 25.6 percent from 39.3 percent, the World Bank found. It noted, however, that Gaza had very low labor force participation, meaning that many do not even look for work and are not counted in the data.
Unemployment in the West Bank stood unchanged at 15 percent in the first half of this year.
The International Monetary Fund projects that if Israeli restrictions in the West Bank and Gaza remain in place, real growth for both territories would hover at around 4 percent and unemployment at roughly 20 percent. It called on Israel to lift those restrictions.
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