1 . Context

Resolving the Israeli/Palestinian conflict is a longstanding UK international policy priority. The conflict resonates strongly with public opinion in the UK and abroad, exacerbates regional instability, and is a key driver of Islamic radicalisation. The UK wishes to see a negotiated outcome which leads to a viable, contiguous and democratic Palestinian state, alongside a secure and prosperous Israel, with Jerusalem as the future capital of both, and a fair settlement for refugees. We believe that direct negotiations between the parties, with the support of the US and the international community, offer the best prospects for such an outcome.

The most recent round of peace talks were launched in March 2010, but stalled when Israel’s ban on settlement building in the West Bank expired. The prospects for peace have been complicated by internal Palestinian disputes. In 2006, victory in Palestinian elections by the Hamas movement led to the suspension of most aid to the Palestinian Authority (PA) - established under the 1994 Oslo Accords as the interim administrative body governing the Occupied Palestinian Territories (OPTs) - although donors continued to support social and humanitarian spending through other channels, such as via the UN. Conflict between the Fatah party and Hamas in 2007 led to Hamas’s takeover of Gaza, and the reconstitution of a Fatah-led PA in the West Bank. The international community continues to recognise the PA as the legitimate Palestinian partner. The UK hopes that the recent reconciliation agreement between Fatah and Hamas will lead to the formation of a government that rejects violence and pursues a negotiated peace. We will judge any future Palestinian government by its actions and its readiness to work for peace. Under the reconciliation agreement, Presidential and parliamentary elections are planned within a year of the formation of the interim Government.

The PA has made impressive progress with institution-building, security and economic management since 2007. In 2009 it launched the Programme of the 13th Government, an ambitious two year plan to reform and build PA institutions in preparation for state-readiness by September 2011. According to the World Bank, IMF and UN, the PA’s governmental functions are now sufficient for a functioning state. However, significant and largely political challenges remain: the PA’s ability to govern is limited geographically (Israel controls the majority of the West Bank, and there will be many challenges to reversing the political and institutional separation of Gaza and the West Bank, even with the Fatah-Hamas reconciliation agreement) and financially (it is dependent on external assistance for 37% of its recurrent budget and all of its development budget). This aid dependency makes the PA very vulnerable to fluctuations in donor support. The PA recognises it needs to continue to improve accountability to its people and entrench respect for human rights. There is increasing aid dependency/vulnerability among the Palestinian population, with 4.8 million refugees in the region who rely on the UN for basic services. Israel’s blockade of Gaza has not dislodged Hamas, but the economy, institutions and civil society are all suffering in a process described by the UN as ‘de-development’. Israel relaxed some access restrictions after the events of summer 2010, but the situation remains bleak and fragile, and future humanitarian crises cannot be ruled out.

There is a marked difference in economic indicators between Gaza and West Bank, with Gaza in a worse situation. Average GDP in the OPTs was $1,554 in 2009, making it a lower Middle Income Country and the poorest in Middle East and North Africa region, other than Sudan and Yemen. Conflict and movement and access restrictions have led to economic stagnation, eased somewhat in the West Bank since 2007 by PA aid supported reforms. This is reflected in unemployment levels of 17% in the West Bank and 38% in Gaza, and poverty levels of 16% for the West Bank and 33% for Gaza. The PA has had success in reducing its budget deficit, from 26% of GDP in 2009 to 16% in 2010. This is due to fiscal restraint and improvements in tax collection - tax revenues in 2010 were nearly 50% higher than in 2009 (figures from the IMF and the Palestinian Central Bureau of Statistics). Total aid to the OPTs was estimated by the Local Aid Co-ordination Secretariat to be $5 - 5.5 billion in 2008 (the level of aid per head is amongst the highest in the world). The UK was the 6th largest donor (by actual aid given), behind the US, European Community (by far the largest donors), Saudi Arabia, United Arab Emirates and Norway. The scale and effectiveness of our aid programme means that the UK is considered a trusted donor by the PA, international agencies (such as the United Nations), and by Non Governmental Organisations.

Given the unpredictable nature of the conflict and the uncertainty about prospects for peace, our development support is likely to need to respond to major changes in the political and operating environments over the course of the next four years. Our overall approach is to ensure that there is enough flexibility in our programme to respond quickly to changes, as far as is possible, whilst seeking to maximise the predictability of our aid.