Palestine: World Bank says restrictions continue to undermine Palestinian economic viability

Source: World Bank Group

Press Release No:2011/092/MENA

WASHINGTON, September 16, 2010 – Economic growth in the West Bank and Gaza is likely to reach 8% this year but largely thanks to external financial aid while the critical private sector investment needed to drive sustainable growth remains hampered by restrictions on movement of people and goods.

The World Bank Board today approved an additional $40 million grant for budget support to the Palestinian Authority (PA). The development institution also delivered a stark warning about the sustainability of growth in West Bank and Gaza in its latest report to the Ad Hoc Liaison Committee (AHLC) donor meeting.

The report, released ahead of the AHLC meeting scheduled for September 21 in New York, emphasizes the need for strong institutions and private sector-led growth to underpin any future Palestinian state. The report also applauds the efforts of the Palestinian Authority in institution-building and delivery of public services. Starkly missing, however, says the report, is the sustainable economic growth required for the PA to reduce its donor dependence.

"We commend the Palestinian Authority for recent results under its reform agenda," said Shamshad Akhtar, Vice President of the Middle East and North Africa Region. "These include increased efficiency of the social safety net system that is now one of the most advanced in the region, improved fiscal standing through greater revenue collections and a decrease in recurrent expenditures and an improved security situation in the West Bank."

The West Bank and Gaza economy continued to grow in the first half of 2010 and is likely to reach 8% this year. But external financial aid is its primary driver. Private investment, particularly in the productive sectors, has yet to increase significantly. This is attributed to important Israeli restrictions still in place: (a) exports from Gaza remain prohibited; (b) access to the majority of the West Bank's land and water is severely curtailed; (c) East Jerusalem – a lucrative market – is beyond reach; (d) the ability of investors to enter into Israel and the West Bank and Gaza is unpredictable; and, (e) many critical raw materials to the productive sectors are classified as "dual-use" (civilian and military) and their import entails the navigation of complex procedures, generating delays and significantly increasing costs.

"Action can, and should be taken to remove the remaining obstacles to Palestinian private sector development," said Mariam Sherman, World Bank Country Director for the West Bank and Gaza. "Our analysis highlights important areas holding back private investment and we hope our work in this report can provide some momentum to address these challenging – but surmountable – issues. Without this, economic growth will not be sustainable growth, the PA will remain donor dependent and its institutions, no matter how robust, will be unable to underpin a viable state."

The $40 million grant approved today will bring to $120 million the World Bank's budget support to the Palestinian Reform and Development plan which focuses on building the fundamental blocks of the future state.

"This new grant will specifically support areas critical to a stable financial environment," said John Nasir, Lead Economist for the West Bank and Gaza Country Office. "This includes the government's fiscal position and its transparency and accountability."

The PA is making steady progress in implementing its reform including controlling the growth of the public payroll, reducing electricity subsidies and improving public financial management, said Nasir. The World Bank is committed to supporting the PA's reform agenda but its ultimate success depended upon the PA carrying out promised reforms, the Government of Israel relaxing closures to allow private sector growth, and the international donor community providing full support for the PA's recurrent budget.