On the face of it, the holy city of Bethlehem is flourishing this Christmas. It has had some 2.3 million visitors this year, up from 2.2 million in 2015, and its 3,700 hotel rooms are fully booked. Compared to recent years – some described last year as the worst ever for Bethlehem, with tourism down 11 per cent thanks to local violence – this is good news for the "little town" where Jesus was born.

But under the surface lies a different story. Of the 2.3 million visitors, only 900,000 have stayed overnight, and a majority of those are Palestinians. Understandably, they tend to spend considerably less money than foreign tourists in the poverty-stricken West Bank city which has an unemployment rate of 48 per cent, higher than any part of the Palestinian territories apart from Gaza.

The key to understanding the plight of Bethlehem lies in the Israeli occupation, which now means the city is surrounded – some would say strangled – by illegal settlements and the wall (or "separation barrier") that snakes round the town.

Foreign visitors are discouraged from visiting Bethlehem by the Israeli authorities, who subject passengers to more extensive questioning if they declare an interest in visiting the town while at Ben Gurion airport in Tel Aviv when they land.

Those who do venture to Bethlehem cannot avoid seeing the checkpoints and the wall erected by Israel supposedly to stop suicide bombers entering Jerusalem 10 km to the north, with detrimental effects on the every day lives of ordinary Palestinians.

The majority of pilgrims and tourists who enter the city stay for just an hour or two, visiting the Church of the Nativity and driving out again on buses, usually organised by Israeli-run firms. The Israelis control all entrances into Bethlehem, and while there are around 50 Israeli tour guides operating in Bethlehem, there are 42 Palestinians with permits to conduct tours "on the other side" in Jerusalem, compared to 7,150 Israelis.

Indeed, Israel controls all entry points into the West Bank, with tourists either arriving from Ben Gurion or neighbouring Jordan through check-points controlled by Israel. At the same time, Palestinian tour buses are forbidden from entering Israel to collect visitors from the airport and they are not allowed to take groups to visit holy sites in Jerusalem or Galilee.

Just as Christmas is linked to Easter, Bethlehem is – or should be – linked to Jerusalem, scene of the Crucifixion and Resurrection. Yet Palestinian Christians say the wall has separated both cities for first time in 2,000 years of Christianity.

For Palestinian ID holders, entry to Jerusalem remains restricted. Of those who are lucky enough to obtain an Israeli military permit, the vast majority are still restricted to certain hours and are disallowed from using a car.

Thousands of Palestinian Jerusalemites have been prevented from obtaining family reunification for their spouses and children from the rest of the Palestinian territories, especially affecting Palestinian Christians that had intermarried between Bethlehem, Jerusalem and Ramallah for centuries.

As Xavier Abu Eid, a senior adviser to the Palestine Liberation Organisation, explained to Christian Today: "Bethlehem's connection with Jerusalem, its twin city, has been cut for the first time in 2,000 years of Christianity by an illegal 'annexation wall' built by Israel. The Palestinian government has very limited access over our natural resources. As a matter of fact, the limited Palestinian control in Bethlehem doesn't go beyond 13 per cent of the district.

"In this scenario it's impossible to develop the economy just as planning for the future results into a tortuous exercise with over 100,000 illegal Israeli settlers grabbing more land around the city. This is the main reason why Bethlehem has the second higher unemployment rate in Palestine, only after Gaza."

Rula Maa'yaa, the Palestinian Minister of Tourism and Antiquities, was more positive. She told Christian Today: "Despite the security unrest in the Middle East and the Israeli occupation and their measures and actions to undermine the Palestinian tourism industry, the Palestinian tourism has witnessed a remarkable increase in the second half of the year 2016 in comparison with the same period in 2015. This comes as result of the intensive efforts of the Ministry and the private sector with the support of the international community to promote Palestine in many traditional markets, penetrate new ones and approach new target groups. In addition to the classical markets, Palestine Ministry of Tourism and Antiquities is planning to implement marketing campaigns in South America, China, India, Malaysia and Indonesia. Palestine is proud of its developed tourism infrastructure, modern facilities and unique service and hospitality that offer an unforgettable experience to all visitors."

Bethlehem today has a population of more than 220,000 people, including more than 20,000 living in three refugee camps (at Dheisheh, Aida and Beit Jibrin). At the same time there are 100,000 Israeli settlers surrounding the town, including in areas within the Israeli-defined, expanded and annexed "Jerusalem municipality".

The most prominent Israeli settlements in the Bethlehem area are Gilo and Har Homa to the north; Har Gilo, Beitar Illit and Neve Daniel to the West; Efrat to the south and Nokdim and Tekoa to the East. Prominent contemporary settlers include the right-wing Defense Minister Avigdor Lieberman, Knesset Speaker Yuli Edelstein and Minister of Environment and Jerusalem Affairs, Ze'ev Elkin.

Officials say that in the absence of the Israeli occupation, Bethlehem would have open roads connecting it with Jerusalem and the Dead Sea. The occupation and the wall make that but a distant dream.

Pilgrims still come, however, to see Bethlehem as it is. The Catholic Church hierarchy remains especially committed to visiting the Palestinian territories. Pope Benedict XVI once said that every Christian should visit Bethlehem, as Muslims seek to travel to Mecca, and the UK's own Cardinal Vincent Nichols usually leads an annual trip to Bethlehem and Gaza in the run up to Christmas.

Christian Today spoke to the Archbishop of Birmingham Bernard Longley, who is tipped inside the Church one day to succeed Cardinal Nichols as the next Archbishop of Westminster and Cardinal from England and Wales. Archbishop Longley recently visited Bethlehem with the Anglican Bishop of Worcester, John Inge, on an ecumenical pilgrimage run jointly by the British religious tour companies Tangley and McCabe.

The Archbishop sounded an optimistic note, while acknowledging the destructive role of the wall in the lives of Bethlehemites. "It is three years since I was last in Bethlehem, and my impression was that there was a much more positive and fulfilled atmosphere among people we met," he said. "They were realistic about the challenges they face, but there was a great awareness of what can be achieved and what can be done – and certainly the leaders in the communities seem to be giving time and energy to improving people's lives. But at same time, there is inevitably that sense of realism about the difference the wall has made to their communities."

Archbishop Longley, who spent three days and three nights in Bethlehem, added: "We wanted to stay in Bethlehem so as to support the local community there. We are very conscious of the need to maintain links to Bethlehem and its neighbouring Christian towns of Beit Sahour and Beit Jala... In Bethlehem itself we stayed together in Manger Square. I was conscious it was an opportunity to support local business – some of our parishes buy alter wine from vineyards in Bethlehem. To base ourselves in Bethlehem and experience some of what the local community experience [was the aim], crossing check-points but of course without the severe experiences that they [the Palestinians] experience. We deliberately wanted to give time to Bethlehem – not just to support the local community there but also to meet with some of the local community."

This Christmas, thousands of pilgrims will flock to Bethlehem, bringing life and some prosperity to the town. Hundreds will pack into Manger Square for Midnight Mass, to pray, sing carols and worship.

But look beyond the candles and decorations of Manger Square, and this is a city slowly being surrounded.

As Xavier Abu Eid concluded: "Not even the spirituality of Bethlehem is respected by the Israeli occupation."