The International Monetary Fund said Wednesday that Israel's tight restrictions hinder the growth of the Palestinian private sector, holding back the Palestinian economy.

In a report following a mission to the West Bank and Gaza, the IMF said it expected growth in the Palestinian economy to slow this year to about 4.25 percent, with little progress expected in cutting unemployment from the current 24 percent.

The report said the Palestinians need to build the private sector in an economy dominated by spending by the authorities, mainly the Palestinian Authority, heavily dependent on foreign aid to surmount a chronic deficit.

"Persistent Israeli controls and obstacles on internal movement, exports, and imports in the West Bank, as well as the virtual closure of Gaza, thwart the private sector," the Fund said.

"The PA needs the continued support of the international community and cooperation of Israel, guided by the common objective of a more vibrant and robust Palestinian economy," it said.

"Indeed, there is no substitute for a far-reaching relaxation of Israeli restrictions needed to unshackle the private sector and thereby boost growth and employment."

It also said that spending by the Palestinian Authority was too heavily weighted in wages and pensions, and not enough in "much-needed investment in education and public infrastructure," an impediment to private-sector growth.

It forecast a 2013 deficit for the Palestinian Authority of $1.7 billion, which is not fully covered by existing donor commitments.

"This gap would likely be covered by further arrears accumulation and domestic bank borrowing, which has already reached prudential limits," the IMF warned.