The economy shrank 1% in 2004, one in three Palestinian workers was jobless at the end of last year and 61% of households had income below the poverty line of $350 per month, the UN Conference on Trade and Development said in its annual report on the occupied territories on Thursday.
"Put simply, in the wake of the past four years of Israeli occupation and war, the Palestinian economy invests and produces less and therefore consumes more imports, especially those from Israel," the report said.
Palestinian net imports from Israel represent two-thirds of the total trade deficit of $2.6 billion, it said. Some 80,000 workers formerly employed in Israel must also be absorbed.
The Palestinian Authority must now focus on reducing widespread poverty and boosting production to revive its war-torn economy, the UNCTAD report said.
Ability to produce
But the barrier or wall Israel is building inside the West Bank will further erode the fragmented Palestinian production base and resources and "people's ability to feed themselves," it said.
Israel says the wall is a security measure and is intended to keep out bombers.
Earlier this week Israel finished evacuating all 21 Jewish settlements in Gaza and four of 120 in the West Bank, part of its plan to withdraw completely from Gaza, where some 8500 Israeli settlers lived close to 1.4 million Palestinians.
"Put simply...the Palestinian economy invests and produces less and therefore consumes more imports, especially those from Israel"
UN Conference on Trade and Development report
The Palestinian intifada, or uprising, against Israel's occupation of the West Bank and Gaza, broke out in 2000 when peace talks stalled. Israel had occupied both territories since the 1967 Middle East war.
"The top priority at this stage of the Palestinian economy's development is to focus on poverty reduction while nurturing productive capacity, eliminating occupation-related distortions and laying the ground for sustainable economic recovery," the UNCTAD report said.
The estimated opportunity cost to the economy over the past five years, representing the value of goods and services that were not produced because of conflict between Israel and the Palestinians, is estimated at 6.4 billion, while capital stock losses are estimated at $3.5 billion during the period.
"Economic realities on the ground after the prolonged conflict remain very harsh and uncertain, regardless of all the positive developments we've witnessed recently," Raja Khalidi, the report's main author, told a news briefing. "In both Gaza and the West Bank, challenges of recovery are overwhelming."
Distortions due to decades of Israeli occupation and dependence on the Jewish state must be corrected before the future Palestinian state turns to trade liberalisation, the report added.