Palestinians' deepening financial crisis 'threatening Oslo Accords'

World Bank urges donors to act urgently and calls on Israel to remove trade barriers in the West Bank

The Palestinian economy is in a deepening crisis because of a shortfall in donor funding and Israeli obstacles to Palestinian investment in the most fertile parts of the occupied West Bank, the World Bank warned yesterday.

The stark depiction of the Palestinians' economic woes is likely to revive fears in the West of further unrest in the Occupied Territories amid a stagnating peace process and a week of protests against the Palestinian Authority in the West Bank.

Demonstrations have rattled the Palestinian leadership, prompting one senior official to threaten scrapping the Oslo Accords, a 1993 interim agreement intended as the basis of a two-state solution, and which included accompanying agreements detrimental to the Palestinian economy.

Such a move would have far-reaching repercussions, placing financial and security responsibility for the West Bank on Israel's shoulders. Since the end of the second intifada, the Authority has played a critical role in restoring calm, even as Israel entrenches its occupation of the West Bank, which it captured during the 1967 Six-Day War.

The Authority is facing a £250m budget deficit this year, the World Bank said, money needed for the timely payment of 150,000 civil servants' salaries, already delayed several times this year. It urged international donors to fulfil pledges to support the Palestinian economy, but warned that unless Israel eased its physical and economic control over the West Bank, any recovery would be temporary.

"Donors do need to act urgently in the face of a serious fiscal crisis facing the Palestinian Authority in the short term," said Mariam Sherman, World Bank country director for the West Bank and Gaza. "But even with this financial support, sustainable economic growth cannot be achieved without a removal of the barriers preventing private sector development," she added.

In a separate report, the International Monetary Fund said that economic growth in the West Bank and Gaza was likely to fall to 6.2 per cent this year from 9.9 per cent last year, with unemployment expected to reach 20 per cent.

Under the Oslo Accords, Israel controls 60 per cent of the West Bank, classified as Area C. Jewish settlements, viewed as illegal by the international community, have rapidly expanded in the past two decades, and now control some of the most fertile land in the West Bank.

Palestinian investment is almost totally barred in Area C, even though Palestinians could reap substantial revenues if they were permitted to develop it, the bank said. Israeli industrial settlements in the West Bank are said to produce £185m worth of goods for export to Europe.

Oslo, which allowed a measure of Palestinian self-governance, was only ever intended as an interim measure to pave the way to a final status agreement. Instead, negotiations have dragged on for nearly 20 years, and with the rise of a right-wing government in Israel, the peace process has been pushed almost entirely off the agenda in recent months.

Saeb Erekat, the Palestinians' chief negotiator, said this week that the Palestinian leadership was considering cancelling the Oslo Accords, according to the Israeli newspaper Haaretz, in light of what he claimed were Israel's efforts to sabotage any efforts to restart peace talks.

Officials, however, appeared to backtrack on that yesterday, suggesting that the Palestine Liberation Organisation was unlikely to cancel the agreements at any time in the near future, but that there were discussions about revisiting the terms.

"If there is any party that has done everything to undermine Oslo, it has been Israel," a Palestinian adviser said. "There is no indication that Israel has any political will to [restart peace talks]." But the leadership is nevertheless under growing domestic pressure to take a stance on the Accords, with protesters last week calling for cancellation of the 1994 Paris Protocol, which prevents the Palestinians from freely trading with the rest of the world.

The Palestinians reluctantly agreed to the terms after Israel promised to allow workers to enter Israel, but those numbers have dropped to a trickle.

Protesters have directed most of their anger at the Western-backed Prime Minister, Salaam Fayyad, demanding his resignation. Mr Fayyad has attempted to defuse tensions by undoing some of the government's austerity measures, and cancelling an increase in fuel prices. Israel, mindful of the risks of an economic collapse, advanced £40m in tax revenues that it collects on behalf of the Authority.

Indeed, Israel has rebutted suggestions that it is responsible for the Palestinians' economic woes, suggesting that the Authority had mismanaged its own budget, pushing it further into debt. It also pointed out that it had twice advanced the tax revenues it collects on behalf of the Palestinians to enable it to pay salaries.