In a statement concluding a week-long visit to the West Bank and the Gaza Strip, the IMF said Gaza rebuilding after the destruction of the 2014 summer war with Israel gave some boost to the coastal strip's economy.
But it said that the recovery was "hampered by slow aid disbursements and (Israeli) restrictions on imports of construction materials, and the humanitarian situation remains dire."
"Unemployment remains stubbornly high in the West Bank and higher still in Gaza, where two-thirds of young people are without a job," it added.
Aid officials say a lack of coordination between Hamas, the Islamist movement that rules the Gaza Strip, and the West Bank-based Palestinian Authority, dominated by rival Fatah, have also contributed to the slow pace of reconstruction.
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"Uncertainty continues to cloud the economic outlook," the IMF statement said.
"Investment remained weak, donor aid declined sharply," it said of the West Bank.
The United Nations warned Wednesday that humanitarian needs elsewhere in the Middle East were a potential threat to funding for the Palestinians.
"GDP growth in the West Bank and Gaza will likely reach 3.3 percent in 2016, with sub-3 percent growth in the West Bank and 5 percent growth in Gaza reflecting continued rebuilding," the IMF said.
"Real GDP in Gaza will not likely return to pre-conflict levels before 2018."