Israel's move to isolate Palestinian banks will give rise to black market

Finance Minister Smotrich's plan to end the co-operation between banks will worsen humanitarian crisis, analysts say

Palestinians who are struggling amid Israel's war on Gaza could see their live savings disappear in an instant. Alamy Stock Photo

Israel’s move to cancel a waiver that allows Israeli banks to transact with their Palestinian counterparts risks worsening the dire humanitarian situation in Gaza and would likely create a cash economy and encourage a hard-to-control black market in the occupied West Bank, analysts say.

The order by Israel's Finance Minister Bezalel Smotrich last week will take time to go into effect, and would be a paralysing blow for the Palestinian financial and banking system, which is already struggling with restrictions from Israel.

Matters are likely to go from bad to worse for the Palestinian Authority, whose struggles will compound manifold, restricting it from importing even basic goods into the occupied territory.

Palestinian banks are struggling because of restrictions from Israel. Reuters

“The waiver cancellation risks worsening the West Bank's humanitarian crisis as it will very likely impede the Palestinian Authority’s ability to import basic, essential goods such as food and fuel,” said Kristin Ronzi, Middle East and North Africa analyst at New York-based intelligence firm Rane Network.

“Already difficult economic conditions in the West Bank mean that living conditions would likely deteriorate and further stoke anti-Israel and anti-Palestinian Authority sentiment.”

In a cash economy, there's far greater financial risk. Large amounts of money are less safe and vulnerable to theft, war damage, and illicit activity. This means Palestinians who are struggling to put their lives together amid Israel's assault on Gaza could see their entire live savings disappear in an instant.

Emergence of black market

Mr Smotrich, who had been threatening since May last year to cut the vital connection between Israel and Palestinian banks, when the State of Palestine was recognised by three European countries, finally pulled the trigger last week.

“Against the backdrop of the Palestinian Authority's delegitimisation campaign against the State of Israel internationally, Finance Minister Bezalel Smotrich has instructed Accountant General CPA Yali Rothenberg to cancel the indemnity provided to correspondent banks dealing with banks operating in Palestinian Authority territories," the ministry said in a statement.

The announcement came hours after the UK and other countries imposed sanctions on Mr Smotrich and another hardline settler minister.

The break in relationship banking means financial isolation of Palestinian lenders, a direct consequence of which would likely be a boost to “cash economy and black market” within the West Bank, especially if imports decline and there are shortages of basic goods in the wake of Israeli move, Ms Ronzi said.

Raja Khalidi, director general of the Palestine Economic Policy Research Institute, agreed. Cutting off the Israeli correspondent banks relations would disrupt markets affected by trade with Israel, create a huge black market of cash transactions for trade otherwise conducted through the banking system and deprive the Palestinian economy of significant trade routes,” Mr Khalidi said.

How dependent are Palestinian banks on Israel?

The Palestinian financial and banking system is largely dependent on the regular renewal of the waiver on a yearly basis. It also protects Israeli banks from potential legal action relating to transactions with their Palestinian counterparts, for instance in relation to financing terrorism.

The Palestine Monetary Authority (PMA), which acts like a central bank, is unable to print money or issue its own currency. It warned on Wednesday that “such a disruption poses a serious threat” and the cascading effect of the inability to make critical payments for trade and provide salaries.

“These efforts are vital to ensuring the continuity of commercial transactions and the payment of essential imports and services, including food, electricity, water, and fuel,” it added.

It will also force the West Bank and Gaza to suffer the consequences of a cash economy.

This emergence of a cash economy and parallel black market, however, will dent the efforts of international bodes like the Financial Action Task Force that are trying to quell financing of terrorism and illegal buying of weapons to fuel the conflict.

The correspondent banking link with Israeli financial institutions is important to maintain the integrity of Palestinian banks.

“It is an absolutely vital link to cover close to $5 billion payments for Palestinian imports from/through Israel, approximately $150 million worth of monthly tax revenue to the PA collected by Israel as well as a range of payments made by Palestinian and Israeli consumers to the other side through banks and related credit card systems,” Mr Khalidi said.

The overwhelming majority of financial exchanges in the West Bank are in shekels, Israel's national currency, because the Palestinian Authority does not have a central bank under which it could print its own currency, Ms Ronzi pointed out.

She said that with all the transfer limits and other restrictions on Palestinian lenders, the PMA in May sounded the alarm and urged an immediate action to reduce the shekels’ cash accumulation in Palestinian banks, which it said has “reached breaking point”.

It is “posing a serious threat to the continued financing of trade with or via Israel through official banking channels,” the PMA said in a statement at the time. “Due to continuing restrictions, Palestinian banks are no longer able to accept additional shekels cash deposits, as they are unable to transfer the surplus to Israeli correspondent banks.

With the waiver removed, Palestinian banks are likely to be cut off from the rest of the global financial system.

“The waiver cancellation will likely isolate the Palestinian financial system since Israeli banks will very likely stop conducting transactions due to the risk of becoming embroiled in legal investigations and potentially face charges related to money laundering and/or terrorism financing,” Ms Ronzi said.

Ratification needed

The withdrawal of waiver, so far, is nothing more than an announcement from the Israeli Finance Ministry that needs ratification from the country’s Security Council.

“It should be clarified that the finance minister has issued instructions to his ministry to begin preparations for the annulment of the waiver, something that he has done twice before and been overruled,” Mr Khalidi said. “Even if his decision is approved by Israeli government, it would possibly take weeks to take effect.”

Ms Ronzi said thus far a security cabinet vote has not been scheduled. However, despite international backlash and pressure to reverse the cancellation of the waiver, “Israel is unlikely to reverse the decision ahead of the security cabinet vote, unless there is mounting pressure from the US, Israel’s closest ally”.

Still Resilient

Despite the adversity facing the Palestinian banks, the PMA was quick to assure Palestinians that the financial system was robust and their deposits were safe.

“The PMA reiterates that depositors’ funds within the Palestinian banking sector are secure and that the banks maintain high levels of financial solvency in accordance with relevant international standards,” the Palestinian regulator said in the statement on its website following the Israeli Finance Ministry announcement.

The PMA has assured Palestinians that their deposits are safe. Alamy Stock Photo

The Palestinian banking system remains integrated with the global financial network through a range of correspondent banks that will continue to provide financial services to individuals and businesses both domestically and internationally, according to the PMA statement.

“The Palestinian banking system is sound, prudentially regulated by the PMA and is one of the strongest sectors amid the two-year disastrous impacts of the war,” Mr Khalidi said. “In the absence of an independent macroeconomic policy and currency however, there is only so much smoothening that the PMA could do of what would be a very hard landing.”

Is it Legal?

In July last year, G7 countries urged Israel to “take necessary action” to ensure the continuity of Palestinian financial systems. It came after US treasury secretary Janet Yellen warned that “to cut Palestinian banks from Israeli counterparts would create a humanitarian crisis”.

The UN has warned that “unilaterally cutting off Palestinian banks from the global banking system would be a violation of the fundamental principles of international law”. This pressure had until now pushed the Israeli government to continue agreeing to short extensions of the waiver, but far-right ministers such as Mr Smotrich and National Security Minister Itamar Ben-Gvir have long objected.

Saul Takahashi, a professor of human rights and peace studies at Osaka Jogakuin University, said Israel following through with the waiver removal is a clear breach of international law.

“Israel occupies Palestine, and has an international obligation to provide for the welfare of the occupied population. Anything it does which goes against that overriding obligation is unlawful,” he told The National.

“A lot of people think that somehow all of this is up to negotiation, but it isn’t,” added Prof Takahashi, who is also the former deputy head of office in Occupied Palestine for the Office of the UN High Commissioner for Human Rights.

Mr Khalidi said it is time for friendly states to put their money where their declarations are, so to speak.

“Recognising Palestine's legitimate statehood is not simply a symbolic diplomatic gesture, it requires treating the state of Palestine as an economic sovereign, even under occupation,” he said.

It requires granting fiscal autonomy to Palestinian finances, by assisting in maintaining the banking and public finance systems as well as basic liquidity.

Other steps needed include “allowing access to international financial stability funds … and reorienting trade flows through Jordan with regional and international partners”, he added.

Nada AlTaher contributed to this report