Bezalel Smotrich blocks Israeli and Palestinian banks from working together

Scrapping of waiver sparks fears of destructive effect on Palestinian economy

Israel's Finance Minister Bezalel Smotrich had UK sanctions imposed on him over his links to 'extremist violence and serious abuse of Palestinian human rights'. EPA

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Israel's Finance Minister has cancelled a waiver allowing Israeli banks to work with Palestinian counterparts in a move that could paralyse the Palestinian economy. It comes hours after the UK and other countries imposed sanctions on him and another hard-line minister.

Bezalel Smotrich had threatened in May last year to cut the vital connection between Israel and Palestinian banks in the occupied West Bank in retaliation for the recognition of the State of Palestine by three European countries.

A statement issued by the Israeli Finance Minister's office on Wednesday read: "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 Palestinian financial and banking system is dependent on the regular renewal of the waiver. It protects Israeli banks from potential legal action relating to transactions with their Palestinian counterparts, for instance in relation to financing terrorism.

The move comes after the UK, Canada, New Zealand and Norway announced sanctions on Mr Smotrich and Israeli Security Minister Itamar Ben-Gvir over links to "extremist violence and serious abuses of Palestinian human rights", the countries said in a joint statement.

This is not the first time Mr Smotrich has sought to punish Palestinians for international condemnation of Israel's occupation and actions. After Norway, Ireland, Spain, Armenia and Slovenia announced their recognition of a Palestinian state last year, the minister announced Israel would recognise five illegal Israeli settlements in the occupied West Bank, a territory he has repeatedly called for his country to annex.

In July, 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 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.

But Israeli banks were continuing to work with Palestinian branches because of the waiver.

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 Mr Ben-Gvir have long objected.