Palestinian elementary school children display NIS 100 bills in a Gaza Strip classroom in 2010 after it was distributed as aid by the United Nations Relief and Works Agency, or UNRWA. (Said Khatib/AFP/Getty Images)

The West Bank is Drowning in Shekels

Israeli law aimed at shrinking ‘shadow economy’ causes headaches for Palestinian banks

The Palestinian Territories’ struggling economy faces a major new problem: There are too many shekels in the market due to an Israeli decision limiting cash transactions.

An Israeli law passed in 2018 took effect this year, forbidding businesses and employers in the country from paying cash for wages and other financial transactions over a value of NIS 11,000 (around $3,000). In this way, Israel aims to combat tax evasion, money laundering, illegal trade and counterfeit currency trade, in addition to reducing the cost of cash management. All this means the accumulation of cash in bank coffers.

Due the nature of the Palestinian economy and its strong connection to the Israeli economy, the Palestinian market has become the destination of much of this surplus cash and the Palestinian Monetary Authority faces significant challenges in dealing with the issue.

Authority head Azzam al-Shawa told The Media Line that over the past year, under the pretext of decisions made by the Israeli government that define the Gaza Strip as a “hostile territory,” Israeli banks placed many restrictions on the banking relationship between the Palestinian and Israeli sides. This, he said, “resulted in [Israel] fully severing the banking relationship with the branches of banks operating in Gaza, and refusing to receive excess cash from banks operating in Palestine.”

He clarified further that the Bank of Israel − the country’s central bank − enforced caps on the transfer of surplus shekels, limits that were insufficient to meet the needs of Palestinian banks and which resulted in an increase in cash in their vaults.

“The excess of shekels is mainly due to the receipt of wages in cash by Palestinians working in Israel,” he elaborated. “In addition, it is currently estimated that there are more than 160,000 such Palestinian workers, and they make purchases in areas under Palestinian control. This is an additional major reason for the accumulation of surplus shekels in the Palestinian market.”

Shawa said that the net surplus cash in the Palestinian territories – after transferring the sums to Israel allowed under the new caps – totals more than NIS 4 billion.

“This amount does not include the cash held by individuals,” he added.

He said that among the negative effects on the Palestinian economy was the high cost for banks to hold this cash, thus reducing their ability to contribute to economic development. Therefore, the Palestinian Monetary Authority was cooperating with the “relevant authorities” to help reduce the surplus, for example, by promoting electronic wage deposits and payment transfers.

Based on the Paris Protocol, an economic agreement Israel and the Palestine Liberation Organization signed in 1994, the shekel is an official currency in the Palestinian territories, traded domestically and used legally as a means of payment for all purposes, including official transactions.

The protocol also places financial obligations on both sides. One of the most important is Israel’s commitment to accepting surplus shekels from the Palestinian Authority (PA) and transferring them to the Bank of Israel for conversion into foreign currency.

The Palestinian market has been severely affected the new Israeli rules due to a lack of modern means of payment.

Ahmad, a Palestinian trader who asked The Media Line to withhold his surname, stressed the poor state of the Palestinian economy.

“My business is already suffering from the bad economy and the crisis that the PA is going through,” he said, explaining that this year, he had not been able to deposit any shekels with his bank.

“I have a gas station,’ he said. “Therefore, I receive a lot of cash on a daily basis and I don’t know where to put it anymore, which is a huge issue.”

Bishara Dabah, a Palestinian economic analyst, told The Media Line that Palestinian banks were the most affected by the Israeli law, and this comes “at a time when the Palestinian economy is already suffering.”

Dabah said that the only way for Palestinian banks to deal with the issue was to offer cash loans in shekels with competitive incentives.

“Banks in the West Bank are already out of dollars,” he said.

Dabah said the issue of the surplus funds prevented any economic development, which prevented the development of the country as a whole.

“The banks must deal with the shekels to solve the problem,” he said.

Since the creation of the PA, it has transferred shekels to Israel through Bank Hapoalim and Israel Discount Bank, two private Israeli financial institutions. On more than one occasion over the past two decades, these banks stopped working with Palestinian banks, saying they were maintaining forbidden relationships with banks abroad.

According to the data provided by the Palestinian Monetary Authority, during the past year, the cash surplus in the West Bank reached NIS 5.6 billion, while in Gaza, it was NIS 100 million. In the 10 previous years, more than NIS 300 billion in cash entered the Palestinian market, and the authority was able to transfer this amount to Israel during the same period.

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