Palestinian economy looks bleak

The Palestinian economy has become weaker and more dependent on foreign aid as the private sector has atrophied because of political violence and Israeli restrictions on the movement of goods and people, the World Bank said Tuesday.

The report, which focuses on trends during the last two years, says conditions are especially severe in the Gaza Strip, where unemployment rose to almost 35% last year and more than one-third of residents were living in severe poverty.

The bank said overall gross domestic product, a key gauge of economic health, had dropped by nearly one-third since 1999, the year before the outbreak of the Palestinian uprising. Per-capita GDP was $1,129 last year, compared with $1,612 in 1999, the bank said.

The report says foreign assistance to the Palestinians reached a record $1.4 billion in 2006, but that went mostly for day-to-day government costs, such as salaries, rather than development projects that could yield long-term economic benefit. The number of Palestinian public employees grew to 168,000, a 60% jump from seven years earlier.

The bank predicted that the Palestinian Authority would need $1.6 billion yearly to cover its mounting budget deficit.

“More troubling than the negative growth rate is the changing composition of the economy,” the report says. Economic activity “is being increasingly driven by government and private consumption from remittances and donor aid, while investment has fallen to exceedingly low levels.”

Years of violence between Israel and the Palestinians had already damaged the Palestinian economy, but money grew tighter last year after the militant Islamic group Hamas won parliamentary elections. Israel cut off about $50 million in monthly transfers of tax and customs revenues, and the United States and European Union stopped direct aid because they consider Hamas a terrorist group.

Aid eventually was funneled around Hamas to Palestinian Authority President Mahmoud Abbas of the Fatah movement.

The bank report warns that the private sector risks collapse in Gaza, where Israel’s closing of border crossings has halted the flow of exports and the delivery of raw materials.

The main cargo crossing at Karni was closed on and off after Israel withdrew from the Gaza Strip in September 2005. Since June, when Hamas routed Fatah forces and seized control of the coastal enclave, Israel has kept the area closed off, citing fears of attack by militants there. Limited supplies of humanitarian goods have been passed through two other crossings into Gaza.

Israel has renewed tax transfers to Abbas’ government, which still controls the West Bank, and the West has resumed aid.

Most of Gaza’s factories have shut down, leading to layoffs expected to affect an estimated 30,000 industrial workers and aggravating dismal economic conditions, the bank report says.

Economic erosion threatens to undo the benefits gained from $10 billion in previous aid, it says. The bank urged Israel to loosen travel restrictions in the West Bank, where checkpoints and roadblocks hinder economic activity.

The report says that any program to resuscitate the Palestinian economy must include Gaza, which it calls a “quintessential part of the Palestinian territory, economy and identity.”

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ellingwood@latimes.com