The Palestinian economy cannot sustain statehood while it continues to rely heavily on donor funds and its private sector fails to thrive, the World Bank said in a report it published Wednesday.

“No matter what steps the Palestinian Authority takes, it is unlikely to reach fiscal sustainability until there is a political settlement [peace deal] that allows the private sector to experience rapid and sustained growth,” the bank said.

The report blamed the problem on the absence of a final-status agreement, which would allow for a two-state solution.

But Israeli restrictions on movement and access make the situation worse, it said, as such restrictions limit the Palestinian private sector’s ability to develop sustainable businesses.

The report also chastised the PA for not taking enough steps to educate a skilled work force, for failing to maximize its land holdings and for not developing legislation to protect trade.

The PA has made considerable progress in building the institutions it needs for a future state, but it has not been able to develop a sustainable economic base, the report said, adding that economic growth has been donor-driven.

“The situation is unsustainable, and aid levels have already begun to fall,” the World Bank said.

A future Palestinian state can only be economically viable with a strong private sector that generates jobs for the growing population, the report stated.

The Palestinian economy in the West Bank is “skewed toward the public sector and non-tradables,” it added.

According to the report, industry, agriculture, tourism and some other services have declined, while donor-funded sectors such as public administration, education, health and electricity have grown from 20 percent of GDP in 1994 to more than 27% in 2010.

Real growth reached 5.4% in 2007, rising to 7.4% by 2009 and 9.8% in 2010, the report said, adding that most of that growth was in the West Bank.

The growth, it noted, provided a deceptive picture because much of it was driven by large donor transfers, which have begun to decline.

In 2007, the international community gave the Palestinians $3.4 billion in donor funds, more than double the donor-funding level in 2002, the report said.

“Such high levels of aid are not sustainable and since 2008 aid has decreased,” it stated.

In 2010, donors gave the PA $1.1b.

“But even this large amount did not cover the full recurrent deficit, forcing the PA to borrow from the local banking sector” to pay the $1.6b. needed for salaries, the report said.

This leaves the PA with few resources for development, and pushes it further into dependence on donor financing, it said.

By 2010, it continued, the PA was in debt to local banks for $840 million.

According to the report, the situation is so problematic that even after a Palestinian state is established, the Palestinian tax base won’t be able to support its government.

In order to develop a future state, the PA must increase its trade and choose a trade policy so it can foster the private sector.

One of the questions it must answer is whether it should have a customs union with Israel, a free trade agreement or a non-discriminatory trade policy. It must also create legislation to protect trade, the report said.

In addition, the PA must take steps to increase the work force, according to the World Bank, which noted that the West Bank and Gaza have some of the highest unemployment rates in the world.

To help fix this situation, it must improve its education system, so that it provides businesses with highly skilled employees, the report said.

“A future Palestinian state will be small and resource poor,” it predicted. “The education system is not providing its graduates with the type of skills required by a modern economy.”

The World Bank also called on the PA to expand land registration in the West Bank.

Land suitable for development is scarce, the report noted. Available land is difficult to access because ownership is fragmented and only a small portion of it is registered and titled, the report said. It pointed out that only 30% of Palestinian private land was properly registered.

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