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The international response to the new Hamas government is doing damage to the Palestinian private sector. Arab businesses are increasingly skittish about investing in the territories, and many banks are now reluctant to issue new credit in the West Bank and Gaza. In addition, as NPR's Eric Westervelt reports, the U.S. has suspended a new multi-million dollar project aimed at boosting private enterprise.

ERIC WESTERVELT reporting:

At his dry cleaning business in Ramallah, Kalig Coran(ph) thumbs through a big stack of IOUs that his customers sign these days instead of paying their bills. The stack is eight inches thick and growing.

Mr. KALIG CORAN (Business owner, Ramallah): (Through translator) We're thinking of closing down. We are incapable to get money for our work, than why should we open.

WESTERVELT: Coran's money woes are emblematic of the Palestinian private sector's downward spiral since the terrorist-labeled Hamas government won January's election, prompting an economic boycott and a cutoff of aid. The moves came just as the West Bank economy had begun to witness something of a rebound, after nearly five years of stagnation amidst Palestinian/Israeli violence. Arab investment money had just started to come back.

Last year the Palestinian stock marker hit record highs. But since the election the stock market is down more than 30 percent. Palestinian businessman Mozra Sunikra(ph), whose industries include food, agriculture and tourism, says the prevailing foreign investment attitude now is why in the world should I risk it with the Palestinians.

Mr. MOZRA SUNIKRA (Palestinian businessman): Why should I go into this mess? I have the whole market in front of me. I mean it's not worth the try to look for a partner there, or an importer or exporter.

WESTERVELT: Many Arab banks aren't distinguishing between the Palestinian public and private sectors. Companies report growing problems securing new credit. And many that have loans are defaulting in big numbers. Economist Samir Barghouthi heads the Arab Center for Agricultural Development, which lends to farmers. He says with local salaries unpaid and produce prices falling the farm default rate on his loans shot up from 15 percent in January to 50 percent in March. He expects April's numbers to be even worse.

Mr. SAMIR BARGHOUTHI (Economist, Arab Center for Agricultural Development): Now people will not be able to repay back because they have no salary. You are talking about huge amounts will be default.

WESTERVELT: When Hamas won the election a new 20 million dollar USAID project, aimed at bolstering the Palestinian private sector was just taking off. U.S. trained MBAs and experts had arrived to train bank loan officers, stockbrokers, information technology workers, and to help small business owners. The program is now suspended.

An American consultant involved into the project, who asked not to be named, said, “many of these new converts to private enterprise will become disillusioned now and the Palestinians could lose a generation of entrepreneurs.” Businessman and ex-Palestinian economy minister Sinokrot says the cumulative affect threatens to undo years of efforts to build a viable and modern Palestinian private sector.

Mr. MAZEN SINOKROT (Ex-Palestinian Economy Minister): We don't understand why the private sector has been put in the same circuit of the government.

WESTERVELT: But when people went to the polls in January and voted for Hamas they had to know there were economic consequences.

MR. SINOKROT: No, they did not know, perhaps. They never thought of it, that the world would look at democracy like this.

WESTERVELT: USAID officials say some funds from some of the suspended American projects could be redirected to ongoing humanitarian programs, meaning food and other direct aid. It's a move Sinokrot says will only reinforce a handout mentality in a population already reeling from 30 percent unemployment.

MR. SINOKROT: Palestinian people, with their dignity, I don't think that they would like to be classified as another Somalia region, as people of beggars just waiting for donations.

WESTERVELT: Hamas officials call the economic moves unjust collective punishment. Israeli and U.S. officials say unless Hamas recognizes Israel, accepts signed accords and renounces violence, the economic pressure will continue. One Palestinian official said the West's plan seems aimed at bringing down the Hamas government, adding Hamas may take the private sector down with it. Eric Westervelt, NPR News, Ramallah.

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