The western-backed Palestinian Authority is heading for an “acute fiscal crisis” brought about by lower economic growth and a drop in aid money, according to a report by the World Bank to be released on Monday.

The bank’s findings offer a sobering economic counterpoint to the current Palestinian campaign at the UN, which is expected to vote on a resolution backing the Palestinian claim for statehood later this month.

The report applauds the progress made by the Palestinian government towards creating the basis for statehood. It argues that in areas such as security, justice, economic development and service delivery the “Palestinian public institutions compare favourably with other countries in the region”.

However, the bank warns that the recent achievements are now at risk due to the weakening economy and deteriorating public finances. “Economic growth in [the West Bank and Gaza Strip] has slowed down in 2011, and together with the shortfall in external funding, this has led to a fiscal crisis for the Palestinian Authority,” the World Bank says.

It predicts that the Palestinian economy will grow by 7 per cent his year, down from 9 per cent in 2010. The slowdown has been particularly marked in the West Bank, where growth was only 4 per cent in the first half of 2011, compared with 8 per cent in the same period of 2010. The Gaza Strip performed better, but from a much lower base.

The Palestinian Authority, headed by Mahmoud Abbas, is in control of the West Bank, while the Gaza Strip, the second Palestinian territory, is ruled by the Islamist Hamas group.

Weakening economic growth aside, the PA is also suffering from a stark shortfall in donor money: “The 2011 budget called for external budget support of $967m based on assumptions of strong growth … In the first half of the year the PA only received $293m,” the report says.

The budget crisis has already forced the authority to drastically increase its reliance on bank loans. In early July, it was also forced to cancel the payment of wages of public sector workers.

As in past reports, the World Bank points to Israeli restrictions on the free movement of people and goods as a key reason for Palestinian economic weakness.

“Ultimately, in order for the Palestinian Authority to sustain the reform momentum and its achievements in institution-building, remaining Israeli restrictions must be lifted,” the Bank says.

Get alerts on Arab-Israel conflict when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article