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Source: World Bank
12 September 2011

Palestinian Institution-building Achievements Challenged by Lack of Economic Growth

Jerusalem, September 12, 2011 -- The latest World Bank report on West Bank and Gaza affirms that the Palestinian Authority has made substantial progress in implementing its institution-building agenda but that a severe fiscal crisis threatens these important gains.

The Bank report, published every six months to inform the Ad Hoc Liaison Committee (AHLC), a forum of donors to the Palestinian Authority (PA), was released today ahead of the committee’s next meeting in New York on September 18. The report examines progress in institution building achieved through the PA’s two-year plan “Palestine: Ending the Occupation, Establishing the State”. It also examines this progress in light of the decline in economic growth and an acute fiscal crisis.

In previous reports to the AHLC, the World Bank warned that the positive economic growth experienced in the West Bank and Gaza in 2008-2011 was unsustainable and driven primarily by donor aid. The private sector was constrained primarily by Israeli restrictions on access to natural resources and markets while investors were deterred by the increased costs of business associated with the closure regime.

Under these conditions, lower-than-expected aid flows in the first half of 2011 had an immediate impact on the Palestinian economy. Real GDP growth, after steadily increasing in 2009-2010, was expected to reach 9% in 2011. That projection has now been revised to 7%.

Shortfalls in external financial support have also directly affected the PA budget and contributed significantly to the severe fiscal crisis currently faced by the PA. The report notes that despite its weak fiscal position, the PA has continued to implement its reform agenda. The authors warn, however, that “a protracted crisis risks jeopardizing the gains in institution-building made painstakingly over the past years.”

Ultimately, sustaining the PA’s reform momentum and maintaining its achievements in institution-building is dependent on the revival of the private sector,” said Mariam J. Sherman, World Bank Country Director for the West Bank and Gaza. “This would grow the tax base and gradually reduce dependence on external assistance. Until then, the PA remains vulnerable to reductions in aid flow, and this needs to be managed carefully.”

The implementation of the PA plan “Palestine: Ending the Occupation, Establishing the State” has just been completed and the Bank report affirms that there has been substantial progress. The authors write that in areas where government effectiveness matters most -- security and justice; revenue and expenditure management; economic development; and service delivery -- Palestinian public institutions compare favorably to other countries in the region and beyond.

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