Restrictions block Palestinian revival: World Bank

By Adam Entous

- Increased foreign aid and Palestinian plans to rein in government spending will not be enough to revive their economy if Israeli-imposed trade and travel limits stay in place, the World Bank said on Thursday.

In a report to be presented at a donors conference in Paris, the international lending agency said Israel's lifting of movement restrictions was essential to restoring growth to the Israeli-occupied West Bank and Hamas-controlled Gaza Strip.

Israel has so far baulked at removing its hundreds of checkpoints that crisscross the West Bank, citing security concerns.

President Mahmoud Abbas's government will ask donors at the December 17 conference to provide $5.5 billion in aid over three years to strengthen the cash-strapped Palestinian Authority.

The aid, to be used for budgetary support and development, is meant to strengthen Abbas against Hamas and revive the Palestinian economy after the president launched formal peace talks with Israel.

The World Bank report looked at several possible scenarios.

Assuming Palestinian budget savings are realized and donors provide full funding but Israel refuses to remove trade and travel restrictions, the Palestinian economy would continue to contract by about 2 percent annually, the report said.

In contrast, if trade flows are restored, the bank said growth rates could accelerate to double-digit levels.

"Palestinian fiscal and security reforms taken alone will not reverse the economy's decline," the World Bank said.

"Achieving growth rates of 5 percent and higher will depend on the commitment of the international community to fill the total fiscal gap over the next three years, as well as on the revival in the private sector as a result of concrete steps by Israel to remove movement and access restrictions."

But even if growth is restored, the World Bank said the fiscal gap for recurring expenditures alone could still reach about $1.25 billion in 2010.

The bank said $59 million from its own resources would finance projects in the West Bank and Gaza in 2008 and it planned to ask its board for at least $50 million more.

Plans by Prime Minister Salam Fayyad to control spending will require trade-offs that may not be popular with the public.

The World Bank said the Palestinian Authority will freeze real wage increases and limit public sector employment to the current base, while allowing for up to 3,000 new hires annually for key services in the social sectors.

The World Bank said efforts by Fayyad to restrain the wage bill were "considerable" but still "insufficient to bring the civil service in line with actual requirements".

Abbas and Israeli Prime Minister Ehud Olmert have launched talks aimed at reaching an agreement next year on creating a Palestinian state.

Hamas routed Abbas's forces in the Gaza Strip in June, prompting him to sack the Hamas-led government and appoint Fayyad to lead an administration in the West Bank.

Western economic sanctions remain in place against the Hamas administration in Gaza, and Israel has largely closed the main border crossings in and out of the coastal strip to all but humanitarian supplies.

The World Bank pinned any recovery on restoring growth in Gaza, which represents about 40 percent of the population, calling it "an essential part" of the economy.