Aid 'key' to Palestinian economy

Poverty could increase sharply, the World Bank warns

The Palestinian economy faces dire consequences if foreign aid is witheld from the new Hamas-led administration, the World Bank has warned.

A reduction in financial support by the US, EU, UN and Russia could trigger a sharp rise in unemployment and send personal incomes plummeting, it said.

James Wolfensohn, the Middle East special envoy, has said the Palestinian Authority faces "financial collapse".

The EU and US are threatening to cut aid unless Hamas renounces violence.

Public services

Palestinians rely on more than $1bn in foreign aid every year to pay salaries and fund essential public services.

This support is in serious doubt following militant group Hamas' victory in January's parliamentary elections.

Hamas, which does not recognise Israel, says it will turn to Iran and other Islamic nations for money once it forms a new administration, should Europe and the US withdraw funding.

However, Israel has also threatened to withhold tax revenues worth $50m a month from the new administration.

In a new report, the World Bank said a collapse in external support could result in a meltdown of the Palestinian economy.

Worst-case scenario

In a worst-case scenario, it warned, personal incomes in the West Bank and Gaza could fall 30%, while unemployment could almost double to 47% by 2008.

The number of Palestinians living in poverty could rise substantially, with an estimated 74% of people forced below the poverty line by 2008.

The World Bank based its assumptions on a fall in international support for the Palestinian Authority's budget from $350m last year to $100m in 2008.

While the amount of humanitarian assistance available is expected to rise between now and 2008, development aid could fall from $450m to $100m, the Bank warned.

One in four Palestinians are paid directly by the Palestinian Authority.

About 140,000 workers were paid late last month and the Authority has said it may not be able to meet its payroll costs next month.

James Wolfensohn, the former World Bank president who is now a special Middle East envoy, has said the administration has a monthly budget shortfall of $130m.

The World Bank has given the Palestinian Authority an additional $42m to support essential services, pending the formation of a new administration.