Palestinians in the West Bank are facing more financial hardship after a plan to borrow US$100 million (Dh367m) was rejected because they have no state of their own.

The plan called for Israel to borrow the money from the International Monetary Fund and then turn it over to the Palestinian Authority to prevent its financial collapse. The PA would repay the loan to Israel, which in turn would repay the IMF.

The IMF, which provides short-term loans from a pool of money contributed by member countries, turned down Israel's request in late spring. The Washington-based financial institution said it did not want to set a precedent of a state borrowing money on behalf of a non-state entity.

The failed loan plan by two parties normally at odds is the latest indication of the serious financial crisis facing the West Bank administration led by the president, Mahmoud Abbas.

The PA faces an estimated US$1.1 billion budget deficit this year, slowing economic growth, and a cash-flow squeeze that is making it difficult to meet its payroll, particularly for security personnel.

Both the PA and the Israeli government are said to be fearful that the deepening economic troubles in the West Bank, together with the absence of any progress towards a Palestinian state, could spark a third intifada among the 2.2 million Palestinians in the occupied territory.

The loan plan was forged in April at the IMF's annual conference in Washington, where the PA prime minister, Salam Fayyad, met Israel's central bank governor, Stanley Fischer, the Israeli daily newspaper Haaretz reported yesterday.

The Palestinian leader asked Mr Fischer to approach Benjamin Netanyahu, the Israeli prime minister, with the idea of how to obtain the loan.

The Israeli premier endorsed the proposal. "Netanyahu is interested in preventing a situation whereby the PA collapses financially, which is liable to have a very negative impact on the West Bank security situation," the newspaper said.

Even with its military forces in the West Bank, Israel relies heavily on the PA to maintain law and order there, and the two often coordinate their operations.

Without the US$100 million in fresh funds, there has been no brake on the spiralling financial woes of the PA, which is already millions of dollars in debt to its contractors.

Early last month, Jihad Al Wazir, head of the Palestine Monetary Authority, warned that lenders operating in the West Bank would no longer be able to offer loans to the PA. It had already taken US$300 million in emergency loans from local banks in recent months, reaching its maximum borrowing limit, Mr Wazir said.

On Saturday, the PA labour minister, Ahmad Majdalani, announced that it would not be able to pay July salaries of the authority's 150,000 employees on time.

International aid, which forms the bulk of the PA budget, has declined, primarily because Arab governments have not met their aid pledges, Palestinian officials said. From US$1.8bn in such aid in 2008, the number fell to about US$1bn last year to an estimated of US$600 million this year.

Hanan Ashrawi, a member of the Palestine Liberation Organisation (PLO) Executive Committee, said the ebb and flow of foreign aid is not the main source of the West Bank's economic ills. Rather, she said, it is the expansion of Jewish settlements and restrictions on Palestinian movement and trade.

"Israel wants other people to pay for its occupation, other people to bail out the Palestinians, but at the same time it wants to keep us captive, to continue stealing our land and resources and inhibit our" our goal of becoming an independent state, she said.

The World Bank, another powerful, Washington-based international financial institution, said in a report earlier this year that Israeli restrictions had contributed to the PA budget shortfall and dwindling growth prospects.

It said the PA's gross national product that in the first three quarters of 2011, growth fell to 5.8 per cent from 7.5 per cent during the same period a year earlier. This year, it predicted, growth will drop to 5 per cent.

Nasser Abdul Karim, professor of financial economics at Birzeit University, said the PA must look domestically to shore up its finances. The PA had racked up potentially unsustainable debt from local banks since Mr Fayyad embarked on his statehood-building agenda in 2009, Mr Karim noted. Since then, it had accumulated some US$1.5bn in outstanding loans, frightening lending institutions.

"I think the banks gave the PA the maximum they can lend," he said, adding that the authority is the largest borrower from the banking system. holding about 50 per cent of total banking credit.

This contraction could ripple through the West Bank economy and endanger private companies that are under contract with the PA to buy everything building materials to pharmaceutical supplies for hospitals.

"These companies are suffering now and as a result, the fiscal crisis is deepening."