The Palestinian Authority in the West Bank faces a $400 million budget shortfall and risks "social upheaval," the World Bank and the International Monetary Fund warned on Wednesday.
The two financial institutions, in reports published ahead of a meeting of international donors in New York next Monday, urged new funding for the Ramallah-based government, which is struggling with a deep financial crisis.
In recent weeks, demonstrators have brought West Bank cities to a standstill over the spiralling cost of living, and particularly steep petrol costs.
The demonstrations forced prime minister Salam Fayyad to slash VAT and fuel prices.
The World Bank report warns of "a time of deepening fiscal crisis for the Palestinian Authority," noting that the situation is likely to "worsen by the end of 2012."
Both institutions said the government faces a current budget gap of $400 million "if donor pledges are met," noting that promised funds, particularly from regional neighbours, have often not been forthcoming.
"If no additional donor funding is identified," the World Bank says, "the PA may be forced to finance the gap through accumulating additional arrears to the pension system and cutting some of its basic spending such as wages, which could have severe social impacts."
The IMF noted that growth has slowed and unemployment risen in both the West Bank and the Gaza Strip.
In the West Bank, growth fell to five percent from nine percent in 2011 and the first quarter of 2012, while unemployment jumped to 19 percent in the first half of 2012, up from 16 percent in the same period a year earlier.
In Gaza, the IMF report said, growth slowed to six percent in the first quarter of 2012 even as unemployment climbed to 30 percent from 28 percent over the same period last year.
"Looking ahead, with persisting restrictions, financing difficulties with aid shortfalls, and stalemate in the peace process, there is a high risk of a continued economic slowdown, a rise in unemployment, and social upheaval," the report said.
Both institutions pointed to continued Israeli restrictions on Palestinian activity in Area C of the West Bank, which covers some 60 percent of the West Bank where Israel maintains full administrative and military control.
To "reverse the downward trend in economic growth," the private Palestinian sector "needs access to land in Area C," the World Bank report says.
"However, restrictions put in place by the government of Israel continue to stand in the way of potential private investment and remain the major impediment to sustainable economic growth."
Both institutions urged donors to pledge additional support, which the World Bank said would be "critical in the medium term to sustain... achievements and support the PA through its current crisis."
The Palestinian government has warned for months of a major budget shortfall, created in part by the failure of donors to deliver on pledged funds.