Restrictions block Palestinian revival: World Bank

By Adam Entous

JERUSALEM (Reuters) - Plans to rein in Palestinian government spending and boost foreign aid will not be enough to revive the Palestinian economy if Israeli restrictions stay in place, the World Bank said on Thursday.

In a report to be presented at a donors conference in Paris, the bank said Israel's lifting of trade and travel restrictions could make the difference between continued economic stagnation and double-digit growth.

Israel has so far balked at removing its hundreds of checkpoints that crisscross the occupied West Bank, citing security concerns. Israel has tightened its military and economic cordon around the Gaza Strip since Hamas Islamists seized control of the territory in June.

Palestinian Prime Minister Salam Fayyad will ask donors at the December 17 conference to provide about $5.5 billion in aid over three years to strengthen the cash-strapped Palestinian Authority.

The aid, to be used for budgetary support and development, is meant to strengthen Western-backed President Mahmoud Abbas against Hamas and revive the Palestinian economy following the restart of formal peace talks with Israel.

"There is a great need," Fayyad said of the foreign funding. He met earlier with Israeli Defence Minister Ehud Barak and Middle East envoy Tony Blair about increased economic cooperation, and the former British leader said the two sides were "absolutely on the same track".

ECONOMIC SCENARIOS

The World Bank looked at several possible scenarios.

If Palestinian budget savings are realized and donors provide full funding but Israel refuses to remove trade and travel restrictions, the Palestinian economy would continue to contract by about 2 percent annually, the report said.

In contrast, if trade flows are restored, the bank said growth rates could accelerate to double-digit levels.

"Palestinian fiscal and security reforms taken alone will not reverse the economy's decline," the bank said.

"Achieving growth rates of 5 percent and higher will depend on the commitment of the international community to fill the total fiscal gap over the next three years, as well as on the revival in the private sector as a result of concrete steps by Israel to remove movement and access restrictions."

But even if growth is restored, the World Bank said the fiscal gap for recurring expenditures alone could still reach about $1.25 billion in 2010.

Plans by Fayyad to control spending will require trade-offs that may not be popular with the public.

The World Bank said Fayyad will freeze real wage increases and limit public sector employment to the current base, while allowing for up to 3,000 new hires annually for key services in the social sectors.