World Bank: Concerted action needed by all parties for the PA to meet state-building goals

April 12, 2010

New report calls for continued lifting of economic restrictions by Israel, accelerated implementation of the Palestinian Authority’s reform agenda, and improved predictability of financial support by the donor community.

Jerusalem, April 12 2010 -- The World Bank published this morning its report to the meeting of the Ad Hoc Liaison Committee (AHLC) in Madrid Tuesday. The report examines progress on the economic framework necessary for successful implementation of the PA’s program towards the establishment of a state.

Key among the report’s findings is the assessment that the fiscal position of the PA remains precarious. Despite evidence of economic growth in the West Bank, its sustainability remains in question. In Gaza, the continued blockade has had a devastating humanitarian impact and severely damaged the territory’s private sector, driving much of what remains into the informal economy. This situation will worsen so long as the near total prevention of external trade continues, making economic reintegration more costly and difficult.

While the easing of access restrictions by Israel in the West Bank and the push by the PA on its reform agenda have had a positive impact, the lack of a strong response from the private sector -- much of which can be attributed to remaining restrictions on access to markets and private investment -- impedes the growth of domestic revenue. Therefore, although the 2010 budget projects a substantial reduction in the deficit, reliance on donor assistance remains high.

Emphasizing that strengthening the PA’s fiscal position is a critical component in the effort to build the foundations for a future Palestinian state, the Bank recommends that continued easing of the economic restrictions on the West Bank, and lifting the Gaza blockade, remain a top priority for the Government of Israel. Specifically, it urges unlocking of the economic potential of Area C in the West Bank and the liberalizing of economic linkages with East Jerusalem.

At the same time, the authors urge the PA to build on the progress achieved to date and accelerate a number of key reforms articulated in its state-building program: Reduction of net lending in electricity distribution and reform of the pension system and social safety net.

Given the decentralized nature of the West Bank and Gaza, the report underscores the central role of local government units, particularly municipalities, in service provision. With this in mind, particular emphasis is given to reforms aimed at ensuring municipal financial viability and special focus is given to the role of local government in reducing net lending in electricity distribution.

“The PA is well on the way to delivering on its promise to create a Palestinian state that can deliver services and economic prosperity to its population,” said Mariam Sherman, World Bank Country Director for West Bank and Gaza. “However, concerted action is required to create an enabling environment for sustainable private sector growth: Continued lifting of economic restrictions by Israel, accelerated implementation of the PA’s reform agenda, and improved predictability of financial support by the donor community.”

Ms. Shamshad Akhtar, World Bank Vice President for Middle East and North Africa, added that “all parties must bear in mind that economic integration of the West Bank and Gaza is critical to the viability of a Palestinian state in the medium and long-terms. The current political and security uncertainty, as well as the movement restrictions pose substantial impediments to the necessary integration of the Palestinian economy within the Middle East as well as globally. ”