The provision of $1.4 million last year and $450 million this year has not slowed the decline, the bank said. It estimates that the Palestinian Authority (PA) requires a minimum of $1.62 billion a year in aid, 91 per cent of which goes to meet normal expenditures rather than investment. This means a great deal of more funding is needed if the Palestinian territories are to develop. To make matters worse, the economic slide threatens to undo the advances wrought by $10 billion in assistance.

The report marks two years since donors met in London and pledged billions of dollars to rehabilitate the Palestinian economy. But the donors did not deliver on their promises, the political situation deteriorated, and the Palestinian economy was transformed into a full-fledged external remittance and donor aid economy.

The 35-page document, set for presentation to donor states in New York on September 24, describes how economic development, launched after the PA was established in 1996, has been disrupted by intifada violence and Israeli military actions and political decisions. Economic decline has also been accelerated by the US, European and Israeli isolation and boycott of the PA and government after March 2006, when Hamas formed its first cabinet. The flow of aid to and contact with the West Bank were restored in July, when Palestinian President Mahmoud Abbas dismissed the Hamas-led government and installed Salam Fayyad as the interim premier.

Israel has resumed transfers to the Fayyad government of $50 million a month in tax and tariff revenues collected by the Jewish state on behalf of the PA. But the Gaza Strip remains closed and shunned. The report, which focuses on trends over the past two years, warns that conditions are particularly bad in Gaza, where unemployment is said to be 35 per cent and more than one-third of Palestinians live in dire poverty. The bank warns that unless the Strip, where 40 per cent of the Palestinian population dwells, is part of a comprehensive development programme, the PA will not be able to effect overall economic growth. The report refers to Gaza as a “quintessential part of the Palestinian territory, economy and identity”.

The bank says that the private sector in Gaza is in danger of collapse due to Israel’s economic siege, which obstructs the import of raw materials, equipment, and chemicals essential for development and the export of Gaza produce and manufactured goods.

Most of Gaza’s factories and workshops have closed, leading to layoffs affecting 30,000 labourers and exacerbating economic and social distress. The bank cites a steep drop in gross domestic product (GDP) as evidence of the decline. After Palestinians secured an average income of $1,612 in 1999, the year before the intifada, the per capita GDP plunged to $1,100 this year.

The bank stated, “More troubling than the negative growth rate is the changing composition of the economy”. Economic activity “is being increasingly driven by government and private consumption from remittances and donor aid, while investment has fallen to exceedingly low levels”.

“The pace of capital flight has reached an all-time high in the last two years, with almost no foreign direct investment,” the report says. Consequently, the public sector expanded by 60 per cent between 1999 and 2006 in order to provide jobs for wage earners from 1,68,000 families.

The bank sets out tasks for the PA, Israel and the donors. It says there can be no growth unless the PA imposes law and order, Israel carries out the terms of a 2005 agreement providing for free movement of people and goods in the West Bank and access to imports and markets for Gaza, and donors tie their commitment to provide aid to the PA’s implementation of reforms.

The bank is critical of the major donors, the European Union and the US. “Aid flow has been considerable, but remains fragmented and focused on bilateral arrangements with donors based on short-term political positions rather than a collective, longer-term view on broader economic and governance fundamentals. Thus, aid has not been governed by a longer-term Palestinian development agenda, nor has it been matched by parallel actions by the PA and the government of Israel to create an environment where funds translate into sustainable growth.”