The Palestinian Authority faces a fiscal crisis that could threaten its existence, in large part because it keeps expanding the public payroll despite sharply reduced revenues, the World Bank said in a report.
The Palestinian economy declined further last year from an already low level, and the per capita GDP dropped by at least 8 percent, the report said.
The decline coincides with an international boycott of the Islamic militant Hamas, which came to power a year ago. Since then, foreign aid has been redirected to moderate Palestinian President Mahmoud Abbas or disbursed as direct salary or welfare payments to Palestinians.
The overall level of aid has declined, from about US$1 billion in 2005 to more than US$700 million last year. Most development programs have been cut, and the bulk of the money now goes to budget support.
About 25 percent of the Palestinian labor force is unemployed, the report said. In Gaza, the rate is even higher, 36 percent, up from 29 percent the year before.
Hamas and Abbas' Fatah movement are trying to put together a coalition government, based on a power-sharing agreement reached last month. However, it's unlikely the international community would end its boycott, because the new government's program is expected to fall short of three conditions of acceptance, including recognition of Israel.
The World Bank said donors must keep aid levels high, to sustain the Palestinian economy in the short term.
The bank said the current method of assistance, by circumventing the Palestinian government, has undermined a key element of fiscal reform, the single Treasury account established several years ago.
The report recommended that, "when circumstances allow," donors should stop sending money to Abbas and instead deal again with the Palestinian Authority. The bank suggested, though, that a change in funding would have to wait. "There are hopes that this slide [in reforms] may be reversed if a broader political compromise is obtained and donor funding resumes through normal channels," the report said.
Abbas' office disbursed hundreds of millions of dollars in redirected foreign aid last year. A top Abbas aide, Rafiq Husseini, said earlier this week that the president's office is eager to revert to the old system of a single account as soon as possible.
The World Bank warned that the Palestinian government must start reducing its out-of-control payroll or face collapse.
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