By Luke Baker
JERUSALEM (Reuters) - Foreign support to the Palestinian Authority has fallen by nearly 50 percent in the past three years, leaving the budget under severe strain and the pensions system close to collapse, the World Bank said on Thursday.
While the Palestinian Authority, overseen by President Mahmoud Abbas, has done well to reduce the deficit over the past decade, cutting it by 15 percentage points to 10 percent of GDP, external financial support has fallen even faster.
In 2013, foreign donors -- mainly the European Union and the United States -- provided direct budget assistance worth nearly $1.3 billion. This year, that figure is expected to be less than $700 million, leaving a large financing gap.
"The Palestinian economic outlook is worrying with serious consequences on income, opportunity and well-being," said Marina Wes, World Bank country director for the West Bank and Gaza.
"Not only will it affect the Palestinian Authority's capacity to deliver services to its citizens, it may also lead to wider economic problems and instability."
Overall, the Palestinian economy is expected to grow at around 3.5 percent in the coming years. But the outlook is starkly different between the West Bank, where the Palestinian Authority is based, and Gaza, the blockaded coastal strip that has been run by the Islamist group Hamas since 2007.
Unemployment in Gaza stands at 42 percent and the territory is struggling to rebuild after a month-long war with Israel in 2014. Many international aid pledges have not been met.
By contrast, West Bank unemployment stands at 18 percent and the Palestinian Authority is doing a better job of managing spending and generating extra revenue from fees and taxes.
Yet the critical problem remains the financing gap. The Palestinian Authority is close to the borrowing limit from domestic banks set by the central bank and may have to resort to running into arrears with the pension fund and private suppliers to fill the gap, the World Bank said.
"The stock of arrears to the pension system is estimated at $1.6 billion -- and it threatens the viability of the overall pension system," it said in its latest monitoring report.
"Arrears to the private sector currently stand at $590 million, which heavily weighs on the private sector's ability to operate normally and is damaging for the economy."
The World Bank said the only way to avoid wider economic problems for the 4.8 million Palestinians living in the West Bank and Gaza was for foreign donors to reverse the fall in support.
It also called on the Israeli government, which collects many taxes and fees on the Palestinians' behalf, to explore ways of reducing the fiscal loss and reverting more of the revenue to the Palestinian Authority.
(Writing by Luke Baker; Editing by Dominic Evans)