Bloomberg News

Palestinian Fiscal Crisis Hurts State-Building, World Bank Says

March 14, 2012

The Palestinian Authority’s fiscal crisis threatens to jeopardize its efforts to build governmental institutions needed for an independent state, the World Bank said.

The Palestinian Authority is expected to have a 2012 budget deficit of about $1.1 billion, according to a report published today by the World Bank. Thus far it has been able to identify only about $610 million in external aid to cover the shortfall. The deficit is the result of a decline in donor funds, slowing economic growth in 2011 and Israeli restrictions that hinder development and trade, the bank said.

“Sustainable economic growth and an end to the fiscal crisis will require unleashing the Palestinian private sector’s potential,” the World Bank said. “This in turn necessitates a lifting of Israeli restrictions on access to land, water, a range of raw materials, and export materials.”

Negotiations on a final peace agreement between Israel and the Palestinian Authority, which is headed by President Mahmoud Abbas, broke off in September 2010 in a dispute over Jewish settlements in the West Bank. With talks stalled, Abbas and Palestinian Prime Minister Salam Fayyad have focused on diplomatic efforts and the creation of governing institutions toward the goal of establishing a Palestinian state.

Economic growth in the West Bank in the first three- quarters of 2011 was 5.8 percent, down from 7.5 percent in the same period of 2010, the World Bank said. Growth for 2012 is projected to drop to 5 percent.

Smuggled Goods

Growth in the Gaza Strip accelerated to 25.8 percent in the first three quarters of 2011 due to an easing of import restrictions by Israel and an increase in goods smuggled into Gaza through tunnels beneath the Egyptian border. Gaza is controlled by the Hamas Islamic movement, which split from the Palestinian Authority in 2007 after a conflict with forces loyal to Abbas.

The slowdown in West Bank growth was due to declining aid from foreign donors, economic uncertainty caused by the Palestinian Authority’s fiscal problems and insufficient easing of Israeli restrictions on trade, land development and movement, the World Bank said.

The report said measures the Palestinian Authority should take to encourage economic growth include an overhaul of laws covering business activities, new regulations to encourage competition, and an expansion of land registration in the West Bank.

It also said that a “functioning link” is needed between Gaza and the West Bank to create a “larger effective internal market.” The Israeli government has said that security restrictions on movement in the West Bank have been eased in recent years, including the removal of dozens of road blocks and checkpoints.

To contact the reporter on this story: Calev Ben-David in Jerusalem at cbendavid@bloomberg.net

To contact the editor responsible for this story: Louis Meixler at lmeixler@bloomberg.net


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