World - West Bank Economy Slows as Aid Drops and Statehood Jitters Grow

West Bank Economy Slows as Aid Drops and Statehood Jitters Grow
David Rosenberg

West Bank, Palestinian Territory

Economic growth in the Palestinian West Bank has sharply decelerated this year as foreign aid dried up and business people and consumers held back on spending ahead of concerns about the effects of the Palestinian independence drive, economists said.

The World Bank said in a report released Monday that the West Bank's economy grew by just a 4 percent annual rate in the first half of this year, half its 2010 pace. Even as the Israeli economy next door boomed, exports from the West Bank were flat while the region's high level of unemployment failed to budge and remained above 15 percent in the second quarter.

The World Bank principally blamed a sharp drop in foreign aid to the ruling Palestinian Authority (PA) this year for slowing economic growth. But Samir Abdullah, director-general of the Palestine Economic Policy Research Institute said nervousness ahead of the PA's plans to bring Palestinian statehood to a United Nations vote later this month has also weighed on the economy

"The government can barely pay salaries and has had to borrow from banks," he told The Media Line. "The other factor is the issue of September. It created ambiguity of what will happen afterwards …. The private sector is very hesitant to go with major investments. People are saving what they have and not taking courageous steps, like buying new cars."

The Palestinian economy, led by the West Bank, has enjoyed brisk economic growth as foreign assistance has poured into the pro-West PA since 2007. The aid enabled the PA to create public sector jobs and spurred a building boom even as Israeli restrictions of the movement of people and goods deterred trade and investment.

But growth has been nipped in the bud this year. The Palestinian Central Bureau of Statistics is due to publish second-quarter national accounts Sept. 20, but in the meantime it has reported bearish figures for the key sectors of construction and tourism. New building licenses rose year-on-year in the second quarter, but fell 3.7 percent from the first quarter of 2011. Meanwhile, overnight stays in hotels dropped 6 percent in the second quarter from the same time in 2010.

The World Bank said that only 1.2 billion shekels ($324 million) of the projected 2.7 billion shekels in overseas assistance was delivered in the first half of the year, which caused the PA to delay salaries and borrow from local banks to the tune of $1.1 billion as of June. While Western donors have kept to their commitments, economists said Arab League countries had disbursed only a fraction of what they promised.

But Abdullah said concerns about the fallout of the Palestinian statehood vote have also been a factor. While he discounted Israeli concerns that the vote, slated for Sept. 20, would spur violent protests against Israeli rule in a so-called "Third Intifada," he said Palestinians are worried about Israeli measures.

The report will be presented at a Sept. 18 meeting of donor nations, which is scheduled to be held in New York days before the UN vote.

Backed by the U.S., Israeli Prime Minster Binyamin Netanyahu has come out strongly against the statehood drive, insisting that a Palestinian state can only be created through negotiations with Israel. However, he has reportedly rejected proposals by more hawkish members of his cabinet to take countermeasures.

Nevertheless, Abdullah said Palestinians remain concerned. He added that Netanyahu may seek a confrontation with Palestinians to distract Israeli voters from domestic social and economic grievances. Over the summer, tent cities mushroomed across Israel, accompanied by massive protests, demanding social justice. Meanwhile, Israel faces diplomatic crises with Turkey and Egypt.

"Nobody is talking abut a third intifada but there is threat from Israeli side to escalate the closure regime and to carry out measures that make it more difficult for people here and effect the economy," Abdullah said. "All these economic and social demands could be suppressed by an escalation of confrontations. It could release itself from internal and outside pressure."

Naser Abdelkarim, a professor of financial economics at Birzeit University, said the economy will only turn around if the statehood vote doesn't cause the U.S. and Israel to impose sanctions on the PA by withholding aid or tax transfers and convince other donors to do the same.

"The whole economic situation in the Palestinian territories depends heavily on political developments between now and October," Abdelkarim told The Media Line. "It depends on whether the U.S. accepts - or at least doesn't strongly oppose [the statehood bid] - with the acts of pressure and punishment."

Ironically, the Gaza Strip - which is ruled by the Palestinian Islamic movement Hamas and subject to a blockade by Israel - enjoyed breakneck growth in the first half of the year. Driven by a revived construction sector and an easing of Israel's siege, GDP jumped 28 percent in the first half, albeit from a very low base, the World Bank said.

As a result, the Washington, DC, based lender said overall growth for the Palestinian-ruled West Bank and Gaza together was a strong 10 percent in the first half of the year.

Gaza's strong performance will enable growth to remain high for all of 2011, but the limping West Bank economy caused the World Bank to lower its projected Palestinian growth rate to 7 percent from a previous estimate of 9 percent.

The World Bank signaled that the declining aid and slower growth is jeopardizing the two-year-old program under PA Prime Minister Salam Fayyad to improve government and public services in the West Bank. "A protracted crisis risks jeopardizing the gains in institution-building made painstakingly over the past years," the report said.