RAMALLAH, West Bank — Even as attempts to end the Israeli occupation have idled in recent years, Palestinians and their international backers have hailed the West Bank’s expanding economy as one critical step on the path to statehood. Now the Palestinian Authority is mired in financial crisis, and there is a growing sentiment here that economic development efforts intended to lay the groundwork for independence have backfired.
That feeling was bolstered this month as the International Monetary Fund and the World Bank warned that a growing deficit is imperiling the Palestinian Authority’s gains and faulted Israel for doing too little to facilitate business and trade. Donors pledged support at a meeting in Brussels last week, and U.S. lawmakers released $88.6 million in development aid that had been frozen since August. But concerns remain that foreign aid will continue to drop as the West focuses on its own economic woes and Arab neighbors grapple with political upheavals.
In the West Bank, where a construction boom has slowed and unemployment is high, discontent has centered on the Palestinian Authority leadership, including the technocrat prime minister, Salam Fayyad, who introduced tax increases and other austerity measures. Analysts say those steps have contributed to plunging approval ratings for Fayyad and President Mahmoud Abbas.
Anger over the measures has combined with long-standing criticism that Fayyad’s strategy of building institutions and improving law and order — widely viewed as successful — have not moved the Palestinians closer to statehood. A bid for recognition at the United Nations is stalled, plans to reconcile the two main Palestinian political factions appear frozen, peace talks with Israel have crumbled, and the Obama administration is not publicly pushing the issue.
Higher taxes and moves to rein in spending on civil servants — a 165,000-strong workforce that is the backbone of the Palestinian economy — seem like an affront, critics say.
“Most of the money is spent on security, and the security is not for the Palestinian people. It is for the world, especially Israel,” said Bassam Zakarneh, president of the Palestinian Authority workers union. “If they say we will cut your salary 50 percent to create a sovereign state, we agree.”
But that has not happened, and now some are calling for the Palestinian Authority — formed as an interim body more than 16 years ago — to be dismantled. Fayyad, an economist who in 2009 outlined a nation-building strategy based on economic development and good governance, said that would be a profound mistake.
“To bring about an end of the Israeli occupation, that was a key motivation,” Fayyad said in an interview. “The other part of it was obvious . . . namely the creation, emergence of a well-functioning state of Palestine. If that’s your objective, then you need to get ready for it.”
The economy, he acknowledged, does not look good. Growth in the West Bank slowed considerably in 2011, and the budget deficit grew to $1.1 billion, according to the IMF. A key problem was a $500 million shortfall in aid from the foreign donors who bankroll the Palestinian Authority, particularly Arab countries.
“The state of marginalization we are suffering from is unprecedented,” Fayyad said. “Everyone is preoccupied with other things.”
In addition to tax increases, the Palestinian Authority plans to cut spending on its biggest expense, the public payroll, by reducing recruitment and encouraging retirement, said government spokesman Ghassan Khatib.
But the World Bank report said the expansion of Palestinian business, a key source of tax revenue, depends on Israel, which controls 60 percent of the West Bank, as well as its boundaries and the ports through which imported goods enter. Israel made no “significant” easing of restrictions in 2011, the report said.
“What we see now from the private sector, I would say, is almost the maximum it can do,” said Sam Bahour, a Palestinian American business consultant who lives in Ramallah.
Israel counters that it helped the Palestinian economy last year through measures such as removing three West Bank checkpoints and approving more than 5,000 Israeli work permits for Palestinians. But Israeli officials say that the Palestinians have offered few concrete proposals for improvement and that only negotiations, not economic health, will lead to statehood.
“They have been rewarded simply by the fact that they have managed to improve their situation,” said Yigal Palmor, the Israeli foreign ministry spokesman.
With budget fears compromising confidence in the nation-building project, the question in Ramallah is what to do next. Few here believe the Palestinian Authority is on the brink of dismantling itself. Some say Abbas prefers to hope that President Obama, if reelected, will prioritize facilitating a two-state solution.
Aides to Abbas say he is also crafting a letter to Israeli Prime Minister Benjamin Netanyahu spelling out how, in his opinion, Israel has stymied the peace process.
“The letter is an early alarm system. The only message is this situation cannot continue,” said Mohammad Shtayyeh, president of the Palestinian Economic Council for Development and Reconstruction and a close aide to Abbas.
But it is unclear when, or whether, it will be delivered. Obama spoke to Abbas last week for the first time in six months and asked him to “refrain from provocative actions,” according to the White House.
The other option, Palestinian officials said, is to continue pressing their case internationally. At the request of the Palestinian Authority, the U.N. Human Rights Council recently agreed to deploy a fact-finding mission to probe the effects of Israeli settlements on Palestinians. Like the Palestinians’ statehood bid six months ago, Israel slammed the move as an effort to avoid negotiations, and Israeli officials have suggested they might take punitive action. That could include the withholding of tax revenue collected on the Palestinians’ behalf.
On the streets of Ramallah, the glow that surrounded that bid has faded. Ibrahim Herbawi, 41, said the past three years have been the worst of the 12 he has worked as a shopkeeper. The easy credit that accompanied a gush of aid dollars has turned to debt, meaning fewer customers buy the nail clippers, key chains and sparkly vases that cram his shelves.
Getting imported products through customs in Israel still takes weeks, and getting through the border crossing to reach his home in Jerusalem adds 90 minutes to his commute, he said.
Like many Palestinians, Herbawi’s livelihood is tied to the Palestinian Authority. His wife is a teacher. But he said he believes the body has lost sight of its mission and should dissolve.
“The Palestinian Authority is a decoy,” he said. “Israel or the Americans should pay the workers’ salaries.”