The Palestinian government is on track to deliver on its promise of building the institutions of an independent state, the World Bank said on Monday.

In its latest report, the bank offers a clear endorsement of the policies of Salam Fayyad, the Palestinian prime minister and the architect of an ambitious programme designed to achieve independence and statehood by the middle of next year. It notes the impressive economic growth in the West Bank in 2009, and praises recent improvements in the management of public finances.

The World Bank is, however, critical of Israeli policies in the occupied Palestinian territories. It says Israeli restrictions on movement and access are the “biggest impediment to private sector investment in the West Bank and Gaza”, and calls on the Israeli government to take further steps to lift such restrictions.

Overall, the World Bank's most recent assessment of the Palestinian economy paints a positive picture – and comes as fresh vindication for Mr Fayyad and his government. Re-appointed as prime minister last year, the US-trained economist has promised to focus his attention on improving governance, social security, the economy and infrastructure.

His ultimate ambition, however, is to create all the institutions that are needed for the establishment of an independent Palestinian state by mid-2011 – a goal that the World Bank suggests is within reach: “By many measures, the [Palestinian Authority] is well on track to delivering on its promise to create a Palestinian state that can deliver services and economic prosperity to its population,” the report states.

The PA will, however, continue to depend heavily on foreign aid to cover its budget shortfall, which rose from $1.3bn in 2008 to $1.6bn last year. The rise was largely the result of the need to provide additional funding to the war-ravaged Gaza Strip, the bank said.

The Gaza Strip has been under the control of the Islamist Hamas group since June 2007, since when the Palestinian Authority has enjoyed de-facto rule only in the West Bank.

Last year’s war, along with the continuing closure of Gaza’s borders with Israel and Egypt, has devastated the strip’s economy. Growth there was only 1 per cent in 2009 – adjusted for population growth, this means the average Gazan is now poorer than before.

In the West Bank, in contrast, economic growth in 2009 reached 8.5 per cent. But the bank notes in its report: “The revival of growth in the West Bank is impressive but it is also precarious. It is being driven by a combination of large sustained inflows of donor assistance, PA government reforms that have increased investor confidence, and the loosening of some Israeli security restrictions.”

Sustainable growth, however, will require the lifting of further Israeli restrictions on movement and access, the report says.