Middle East

Palestinian economic growth unsustainable - World Bank

Palestinian man smokes a sheesha in Ramallah (4 July 2012)
Image caption The World Bank said economic sustainability could not be based on foreign aid

The World Bank has said the recent economic growth in the Palestinian Territories is unsustainable because of its heavy reliance on foreign aid.

The Palestinian Authority had begun establishing institutions for a future state, but the economy was not strong enough to support it, a report warned.

It was critical to increase trade and spur private sector growth, it added.

The PA said last month it was facing a funding crisis, with debts of $1.5bn (£968m) and a cash shortfall of $500m.

The admission that civil servants would not be paid in July led some Palestinians to demand the dismantling of the PA, which was established under the 1994 Oslo Accords.

The World Bank said donor countries had propped up the Palestinian economy by giving the PA billions of dollars in aid, helping it achieve a 7.7% increase in GDP between 2007 and 2011.

But the report said the growth had only occurred in government services, real estate and other non-tradable sectors. The manufacturing and agriculture sectors had shrunk, and aid levels had begun to fall because of the global economic downturn, it noted.

"The Palestinian Authority has made steady progress in many years towards establishing the institutions required by a future state but the economy is currently not strong enough to support such a state," said the author of the report, economist John Nasir.

"Economic sustainability cannot be based on foreign aid so it is critical for the PA to increase trade and spur private sector growth," he added.

The report also said the security restrictions imposed by the Israeli government continued to stymie investment, but there was little that could be done about them until there was a peace agreement. Direct talks have been suspended since September 2010.

"However, there are a number of areas where the PA can focus its attention to not only improve current performance, but to lay the groundwork for a future state," it said.

"A future Palestinian state should seek to emulate Asian countries that have managed to sustain high levels of economic growth by adopting an outward orientation and integrating into world supply chains."