JERUSALEM: 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 warned on Tuesday.

In a report issued ahead of a meeting of international donors in Brussels on March 19, the World Bank explored the long-term damage to the competitiveness of 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's authors concluded.

"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."

Following robust GDP growth in recent years, economic activity significantly slowed in 2012, the report said.

"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 found.

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 reports 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," it said, meaning Palestinians' long-term employability prospects were being eroded.

The quality of infrastructure in key sectors like water and transport is deteriorating and causing damage to the long-term 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 $870 million was needed for Gaza's water and wastewater sector, $430 million for municipal services, $200 million for the electricity sector and $1 billion 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 for much greater attention must be given to the removal of obstacles to allow real private sector-led growth.