Palestinian state-building drive threatened: U.N., IMF

JERUSALEM (Reuters) - A shortfall in donor aid, tough Israeli trade restrictions and diplomatic paralysis are jeopardizing Palestinian efforts to build a viable economy and strong institutions, the IMF and United Nations said in separate reports on Wednesday.

Released just days before Palestinian leaders go to the United Nations to press their claim for statehood, the two reports said the Palestinian Authority had completed its goal of preparing the necessary bodies to run an independent state.

But they both said dangers lay ahead in the economic and political spheres that could undermine the state-building achievements of the past two years.

"I am very worried about the disconnect between what the PA has achieved on the ground, and where the political process stands," said Robert Serry, the U.N. Special Coordinator for the Middle East Peace Process.

"The reality is that there is only so much that can be done in conditions of prolonged occupation, unresolved final status issues, no serious progress on a two state solution and a continuing Palestinian divide," he added.

Palestinian President Mahmoud Abbas says he is going to the United Nations because direct peace negotiations with the Israelis have reached a dead end after collapsing last year in a row over Israeli settlement building in the West Bank.

Israel has condemned the unilateral quest for statehood recognition, and ministers have warned of possible retaliation, including withholding funds, if the Palestinians press on.

Washington is also opposed to the U.N. initiative and some officials warn they will try to cut annual U.S. aid to the Palestinian Authority (PA), which runs to some $450 million.

ECONOMIC WORRIES

The PA, which exercises limited self government in parts of the Israeli-occupied West Bank, is reliant on foreign aid to fill a deficit projected at $900 million this year.

The International Monetary Fund said the Palestinian economy was already suffering from a sharp drop in handouts, with disbursements in the first 8 months of 2011 totaling $400 million, some $300 million less than expected.

"The recent aid shortfalls are posing serious risks to the PA's state-building capacity, especially given its still high aid dependence," the Washington-based IMF said.

The PA has blamed Arab states for failing to honor past commitments and says this lack of funds has prevented it from paying salaries to its 150,000 employees on time and in full in two of the last three months.

The IMF said the general economic outlook had clouded, with growth in the West Bank coming in at just a 4 percent annual rate in the first half of 2011 from 8 percent for the whole of 2010.

Growth in Gaza surged to 28 percent in the same period, from 15 percent in 2010. But the IMF said this strength was catch-up after Israel eased its blockade on the Hamas-ruled enclave in mid-2010, and output remains lower today than it was in 2005.

Unemployment in Gaza stood at 28 percent, down from 37 percent in 2010. It was steady in the West Bank at 16 percent.

"To maintain the growth momentum, rebalance the composition of output and accelerate the state-building process, it is essential for the government of Israel to phase out all economic restrictions as soon as possible," the IMF said.

The United Nations highlighted the problems of Israeli restrictions, which include various import and export controls, limitations on the movement of Palestinians within the West Bank and a near total ban on Gazans from entering Israel.

"We saw good steps in this regard during 2009 and 2010, but we haven't seen bolder steps since then. If the weight of the occupation is not being lifted, all the achievements to date will be increasingly difficult to sustain," Serry said.

(Editing by Peter Graff)