The Palestinian Authority's capital on the West Bank has had a persuasive veneer of prosperity for the past five years, but there are fears that the economic boom may soon turn to a very painful bust. Hugh Naylor, Foreign Correspondent, reports

RAMALLAH // Sari Sakakini is under no illusions. He admits his restaurant sits on over-priced land, serving gourmet food to heavily indebted customers in a place still reeling under the harsh reality of Israel's occupation.

The fruits of the Ramallah financial bubble allowed his family to borrow more than US$250,000 (Dh918,300) to open Orjuwan, which offers Palestinian-Mediterranean dishes to wealthy businessmen and foreign NGO workers. But, like many here, he thinks the bubble will eventually burst and may bring down the family business.

"It will blow," said Mr Sakakini, 30, who opened the restaurant with his brother and sister more than two years ago. "It's an illusion. The stability here is an absolute illusion."

Such pessimism would seem at odds with the flashy veneer of Ramallah's villas, European-type cafes and luxury vehicles. More than any other city in the West Bank, the Palestinian Authority's administrative capital stands out as a model of Palestinian people's potential.

But there are predictions the five-year boom may soon turn to bust. The city lacks a self-sustaining economic base and, like the rest of the West Bank, is at the mercy of Israel's stranglehold on trade, borders and resources.

Ramallah is home to diplomatic missions, international aid organisations and the bulk of the PA's 165,000-person workforce. But it serves as the nerve centre of a political system precariously reliant on foreign-aid money and the whims of Tel Aviv.

The downside to this reliance became apparent with a shortfall in donor money and temporary Israeli-imposed financial sanctions that have forced the West Bank government to delay paying salaries several times during the past year.

Moreover, optimism from the statehood-building agenda of Salam Fayyad, the PA prime minister, has given way to brooding over a still-languishing peace process and ceaseless Israeli settlement expansion. Palestinians also hit a political bump when their bid for United Nations statehood recognition failed last year.

Some see this as signalling harder times for the 300,000 residents of Ramallah and its environs.

"All indications are pointing to this bubble bursting," said Sam Bahour, an American-Palestinian businessman and activist in Ramallah.

Indeed economic growth in the West Bank, with more than 20 per cent unemployment, slowed substantially last year. According to the International Monetary Fund, this was the result of Israeli restrictions and US$500 million (Dh1.83bn) of foreign aid cancelled as punishment for the UN statehood bid.

Property prices in Ramallah remain exorbitantly high compared to other cities in the West Bank. A lack of space and strong demand has sent prices in some areas to US$4,000 a square metre or higher.

Fuelling this are droves of diplomats and foreign NGO employees who, flocking to Ramallah with high salaries, pay top-dollar rents. While landlords are enriched, others are resentful. Many landlords refuse to let their flats to poorer Palestinian locals, said Fares Azar, 36, owner of Ramallah's EuroRent real-estate company.

"This whole bubble was caused by internationals, not locals," he said. "People are complaining that this is discrimination against locals."

Analysts say this inflation pressured people to take out loans, which the PA also encouraged by relaxing banks' lending requirements in recent years.

Naser Abdelkarim, professor of financial economics at Birzeit University, just outside Ramallah, believes the majority of Palestinians working in the city spend half their monthly salaries or more financing mortgages and car loans. Banks targeted employees in the city because their salaries are two or three times higher than the Palestinian average, he said.

Some say the debt issue is distracting Palestinian from grappling with their foremost problem: Israel and the occupation. Sam Bahour, the businessman, said heavy debt burdens have made Ramallah residents more focused on their material needs, less politically active and more reluctant to question their leaders.

"The more they stick their necks out, the more they risk losing their jobs, going to prison, or being harassed by both the Israelis and the Palestinians," he said.

Bashar Al Shawwa, 27, a Ramallah resident, said he became politically pacified when he was working for the US Agency for International Development (USAID). He was earning $1,300 a month and, in the last two years, saddled himself with $120,000 in loans.

"I was living the dream of every Palestinian, which is to work for an NGO or USAID, because the salaries are a lot higher than the PA's," he said.

But he and dozens of other employees lost their jobs in October when the US Congress suspended its aid to the PA. To save money, he was forced to move back in with his parents and put off marriage plans.

Recently he began organising demonstrations with other disaffected Palestinians against the PA to protest Ramallah's high cost of living. He criticises Palestinian leaders for letting so many people fall into the debt, which he called a tool for the PA "to control the situation and the Palestinian people from rising up".

Back at his restaurant, Mr Sakakini is waiting for the day when the frustrations of Mr Shawwa and his supporters will boil over into popular revolt. But until then, he has a business to run.

The issue of politics, he said, "is absolutely out of my hands".