PA officials say Bank of Israel’s refusal to take back shekel build-up is political
The Palestinian Authority (PA) is accusing Israel of trying to suffocate it financially by refusing to accept the transfer of billions of Israeli shekels.
About NIS 5 billion in cash, worth close to $1.5 billion, is sitting idle in Palestinian banks, and Palestinians say this threatens to destroy their economy.
Ahmad Haj Hasan, general manager of The National Bank (TNB), the second-largest bank in the Palestinian territories, said financial institutions were scrambling to stay afloat.
“This issue is costing the banking system and the Palestinian economy millions of dollars a year,” he told The Media Line.
“It’s like we are giving Israel a continued interest-free loan of NIS 4 billion to NIS 5 billion; that’s at the minimum,” he continued. “This is a problem that all the banks face. It creates an issue with liquidity management; it creates losses; it makes it more expensive to do business.”
According to Palestinian political and financial leaders, this also wreaks havoc on Palestinian businesses.
The Palestinian economy is closely tied to Israel’s, and the PA is obligated to use the Israeli currency.
The Protocol on Economic Relations (aka the Paris Protocol), signed in 1994 by the PLO and Israel, required Palestinians to adopt the shekel as a means of payment. The protocol was meant to be in force for five years, from 1994 to 1999, but it is still in place due to a lack of progress in peace talks.
Azzam al-Shawa, head of the Palestinian Monetary Authority, says Palestinian institutions have consistently maintained good relationships with the Bank of Israel, which, for “political reasons,” recently “enforced limits” on the transfer of surplus shekels.
“The central bank was created with the idea that it won’t be politicized – you can’t politicize a commercial transaction,” he told The Media Line.
“Palestinians import and export every day, from Israel and to Israel. There are a lot of products that go from the Palestinian side to the Israeli side. This means that the trade has to be covered either through cash payments or through money transfers,” he explained.
This is not the first time Israel has stopped accepting shekels from Palestinian banks. The latest round began in October, when the PA imposed a short ban on importing calves and other livestock from Israel as part of a plan to achieve what Shawa called “gradual economic disengagement.”
Haj Hasan says that Israel occasionally imposes “sanctions” on the Palestinians by refusing to accept cash from their banks.
“This has happened for several reasons in recent decades,” he stated. “It happened… when the PA went to the UN [in 2011] asking to be a member state; it happened recently because of an issue totally unrelated to the banking sector: A [PA] government decision [was taken] to ban the import of meat, and suddenly we found ourselves unable to send cash to Israel. So it’s also a political tool.”
Israel says it was compelled to place restrictions on the movement of currency to fight financial crime, something Haj Hasan disputes, saying it encourages the growth of a so-called gray economy.
“It’s making formal business transactions very expensive, very difficult, very complicated,” he said. “You are encouraging informal business, the informal economy, to grow, because it’s easier, and this increases the risk of tax evasion, money laundering or whatever crimes are related to an informal economy.”
Mohammad Abdallah Khabeisa, a leading Palestinian financial reporter, says there are a number of reasons for the currency problem, starting with the fact that the Palestinian economy is small and fragile, and therefore Palestinians have no choice but to use the shekel.
“The PA employs at least 150,000 civil employees who receive their salaries in shekels. Almost as many Palestinian laborers cross each day to work in Israel, earning [a total of] $250 million each month” in shekels. The Palestinian market cannot accommodate so many shekels on its own, he explained to The Media Line.
According to Khabeisa, the Palestinian-Israeli banking relationship is massive.
“According to the latest figures, which are for 2018, trade between Palestine and Israel totaled approximately $4.3 billion, composed of some $950 million in Palestinian exports to Israel, and Israeli exports to Palestine valued at about $3.3 billion,” he noted.
Nader Abu Zaid, chief financial officer for Al-Huda, the West Bank’s largest gas station franchise, told The Media Line that Palestinians prefer to pay in cash.
“Sales are mostly in cash due to a lack of a culture of conducting transactions with credit cards. We sell in cash, and everyone pays in cash,” he said, adding that if banks do not take that cash, his company will not survive.
“We have to deposit the cash from our sales in banks because we have transactions to pay for and fuel to purchase from Israel,” he said.
The problem has the Palestinians thinking seriously of abandoning the shekel for another currency, yet Khabeisa believes that doing so might not be so easy and could go against the Palestinians’ best interests.
“What alternative currency? Will there even be a national currency?” he asked.
“I think a national currency at the present time would be more of an emotional solution than a realistic one because a national currency needs a reserve [of cash held by the central bank] that can support and maintain its purchasing power. You first need commercial progress; you need to build [the basis of] this currency,” he explained.
“We must first rebuild our national economy and restructure economic agreements with Israel,” he concluded.
The Media Line made several attempts to contact the Bank of Israel and the Israeli Finance Ministry for comment, but received no response by press time.