Israeli restrictions and closures coupled with the worsening fiscal situation of the Palestinian Authority is causing "lasting damage" to the competitiveness of the Palestinian economy, the World Bank warns.

In a report issued on Tuesday ahead of a meeting of global donors in Brussels on March 19, the World Bank explored the long-term damage to the economy as a result of the worsening financial crisis facing the Ramallah-based government and the absence of peace talks, which have been stalled since late September 2010.

And it warned that the fiscal stress "could worsen in 2013."

"While urgent attention to the short-term financing shortfalls is essential, it is important to recognise that the continued existence of a system of closures and restrictions is creating lasting damage to economic competitiveness in the Palestinian Territories," the report said.

"The longer the current, restrictive situation persists, the more costly and time-consuming it will be to restore the productive capacity of the Palestinian economy," it concluded.

The Palestinian Authority welcomed the report, saying the only way to avert the threat to the economy would be to secure "an end to Israel's occupation."

"Israel's continued military occupation, its system of restrictions and controls, the settlement regime and full control over Area C is an assault on Palestinian national rights to statehood and economic potential," spokeswoman Nour Odeh said in a statement.

She said the current crisis sparked by Israel's withholding of tax monies it collects on behalf of the PA had already "devastated short and long term effects" and that the crisis meant Palestinian state-building achievements were under threat.

"At the core, the only durable and real solution is an end to Israel's occupation."

Following robust GDP growth in recent years, economic activity significantly slowed in 2012, the World Bank found.

"This slowdown reflects in part the absence of further easing of Israeli restrictions, the withdrawal of fiscal stimulus due to a persistent shortfall in donor aid, and uncertainty created by the PA's fiscal challenges," it said.

Financing shortfalls

The study showed the economy was in danger of losing its capacity to compete in a global market, with its ability to export goods and services having "substantially deteriorated" since the late 1990s.

A key aspect has been the decline of both the agriculture and manufacturing sectors with the share of exports in the Palestinian economy dropping from around 10 percent in 1996 to around seven percent in 2011, one of the lowest figures in the world.

Since the mid 1990s, the manufacturing sector has largely stagnated and over the same period, the productivity of the agricultural sector has roughly halved meaning the economy relies largely on food imports to meet its own needs.

A high level of unemployment is also having a negative impact on the long-term competitiveness of the economy, the report's authors say.

"With low labour force participation and high rates and duration of unemployment, many Palestinians of working age do not have the opportunity to develop on-the-job skills," the report's authors wrote.

The quality of infrastructure in key sectors like water and transport is deteriorating and causing damage to the future viability of the economy, with the impact most severe in Gaza where "significant resources are required" to bring it up to a desirable level.

It suggested $870m was needed for Gaza's water and wastewater sector, $430m for municipal services, $200m for the electricity sector and $1 bn for the road sector.

"Continued financial support by the donor community and reform efforts by the PA are therefore essential to manage the financing shortfalls of today," the authors wrote, while stressing the need of real private sector-led growth.