Dr. Firas Melhem: We are working on developing appropriate solutions to limit the negative effects in the event that banking relations with the Israeli side are severed

Dr. Nasr Abdel Karim: I rule out severing banking relations due to the serious economic consequences that could befall the Authority and Israel

Dr. Muawiya Al-Qawasmi: If this happens, it will lead to a major economic crisis that will affect all economic sectors and Palestinian banks.

Muhammad Salama: The danger lies in the transformation of the Palestinian economy into a cash economy, and this will undermine the progress achieved by the banking sector.

Raja Khalidi: What Smotrich is demanding is a violation of the Paris Agreement, especially since the monetary relationship is managed by the Bank of Israel, not the Minister of Finance

The guarantees or letters of immunity granted by the Israeli government to Israeli banks in exchange for their continued dealings with Palestinian banks will expire on October 31, which threatens to sever banking relations between the Israeli and Palestinian sides if these letters are not renewed.

Israeli Finance Minister Bezalel Smotrich threatened to isolate Palestinian banks by not extending guarantees to Israeli banks dealing with them against potential lawsuits, as part of “punitive” steps against the Palestinian Authority in response to the decision of European countries to recognize the State of Palestine.

These guarantees expired several months ago, but under pressure from the US government, the World Bank and the International Monetary Fund, they were renewed until October 31. If Israel carries out its threat and cuts all ties with these banks, this will make them unable to fulfill many tasks, including paying the amounts needed for imports and exports carried out by Palestinians in the West Bank.

85% of Palestinian exports to Israel, including 55% of imports

The Governor of the Palestine Monetary Authority, Dr. Firas Melhem, told “Y”: “The percentage of Palestinian exports to Israel is about 85% of total exports, while the percentage of direct imports is about 55% of total imports, and the value of these exports and imports is paid through the correspondent banking relationship between the two sides.

He added: Since their licensing, Palestinian banks have worked to pass and implement payments with the Israeli side through Israeli banks, and facilitated the implementation of commercial transactions, and the payment of prices for goods and services supplied from the Israeli market and goods exported to Israeli suppliers, while banks have succeeded in the last two years in receiving a significant percentage of the wages of Palestinian workers working in Israel through electronic transfers.

Melhem confirmed that since 2018, Israeli banks have been requesting immunity letters from the Israeli government in exchange for continuing to deal with Palestinian banks, threatening the Israeli government with severing banking relations if these letters are not issued. The Israeli government has traditionally renewed these letters annually, which has allowed correspondence relations between the two sides to continue.

Implications for the Palestinian economy and trade

The Governor of the Monetary Authority said: At the beginning of this year, the Israeli Finance Minister threatened not to renew these letters in light of the US Treasury’s decision to include a group of settlers on the OFAC LIST, while the Israeli government renewed the letters until the end of October 2024.

He added: If the Israeli government decides not to renew these letters, it is expected that this will have several effects and repercussions on the Palestinian economy, the most important of which is the halt in the ability of Palestinian traders and companies to supply basic goods and services to the Palestinian market and pay for them through the official system (the banking sector), which will lead to the growth of the informal market that relies on cash payments in trade operations.

He added: The transition from the formal system to the informal system is fraught with many risks and challenges, the most important of which are the high prices of goods and services, and the government’s inability to collect customs and taxes on these goods, which will affect tax revenues, in addition to the high expenses and risks that Palestinian traders will bear if they carry out trade operations and pay their prices in cash.

Impact on the ability to ship surplus shekels to Israeli banks

Melhem continued: “In terms of banking, the threat of severing banking relations will affect the ability of Palestinian banks to transfer surplus shekels to Israeli banks, and limit their ability to replace damaged cash, in addition to the problems related to carrying out transactions internally in shekels. It is important to note that dealing with currencies other than the shekel will not be affected, and therefore what was published about the collapse of the banking sector in the event of the cessation of banking relations is exaggerated and out of place.”

He stressed that the Monetary Authority and banks operating in Palestine are working to develop appropriate solutions to limit the negative effects in the event that the Israeli government does not renew the immunity letters, which will lead to severing the banking relationship between the two sides, while the correspondent banking relationship with the world will continue without any effects, as the Palestinian banking system enjoys a wide network of global correspondent banks through which financial and banking transactions can be carried out in various currencies to ensure the continued supply of basic goods and services to the Palestinian market.

The Governor of the Monetary Authority concluded his speech by stressing that the Israeli decision will not have any consequences on depositors’ funds, and that if this decision is taken, it will not threaten any of the banks operating in Palestine.

International community opposes collapse of Palestinian Authority

Academic and economic expert Dr. Nasr Abdel Karim expressed his doubts about the implementation of Finance Minister Smotrich’s decision, pointing to the serious economic consequences that could befall the Authority and Israel as a result of this step, in addition to the international community’s position opposing the collapse of the Palestinian Authority and harming the Palestinian banking sector as one of the vital pillars in the survival of the Palestinian economy and its minimal functioning.

Abdul Karim told "I have doubts that Smotrich will actually take this step by the end of October for reasons related to the international position and the international community and the economic damage that may be inflicted on Israel and the Palestinians."

The most serious consequences will be on the commercial and banking sectors.

Abdul Karim explained that if this threat is implemented, the consequences will be clear on the commercial and banking sectors, and that there will be great confusion in the banking settlements resulting from commercial deals or services exchanged between the two sides, as Palestinian banks will not be able to benefit from Israeli banking settlement channels.

He added: "Israeli banks will not find representation for Palestinian banks in the Israeli clearing, which will lead to caution in commercial dealings on both sides of the Green Line in the matter of trade and deals."

Alternatives for all possible scenarios

Abdul Karim pointed out that Palestinian banks have already worked on developing alternatives for these possible scenarios.

He added: One of these alternatives includes using European correspondent banks to facilitate financial transfers between Palestinian and Israeli banks. Palestinian banks also have the ability to deal with other foreign currencies such as the dollar and the euro, which enables them to continue international transactions.

Abdul Karim said: Despite the expected damage, I do not believe that the Palestinian economy will be paralyzed or that the banking system will be isolated from the world because Palestinian banks can send and receive remittances in foreign currencies.

Dr. Abdul Karim expressed his belief that this crisis may constitute an opportunity for the Palestinians to re-evaluate their economic relations with Israel.

He added that reducing dependence on the Israeli economy might push the Palestinians to look for alternatives, such as enhancing local agricultural and industrial production or networking trade relations with other countries outside Israel.

Abdul Karim believes that this option may be beneficial to the Palestinians in the long run.

Smotrich seeks to blackmail the authorities

In turn, Dr. Muawiya Al-Qawasmi, Secretary of the Palestinian Businessmen Association, confirmed that the decision to deal with Israeli banks had been in place for more than twenty years, as the Israeli Ministry of Finance had always sent letters to Israeli banks as a letter of guarantee, that they would not be subject to prosecution in Israeli courts.

Al-Qawasmi told "Y": Israeli Finance Minister Smotrich is seeking to blackmail the Palestinian National Authority and the Palestinian economy by not renewing this guarantee that it sends to Israeli banks, stressing that these guarantees expired several months ago, but under pressure from the American government, the World Bank and the International Monetary Fund, they were renewed until October 31.

Al-Qawasmi explained that one of the conditions was to examine the extent of Palestinian banks’ commitment to compliance and money laundering prevention rules, as an assessment was conducted by the World Bank, which showed that Palestinian banks are the best in the region.

Complicated electricity, water, taxes and commodity exchange

Al-Qawasmi pointed out that failure to renew the guarantee will negatively affect the economic relationship between Israel and Palestine, which will lead to complicating matters related to electricity, water, taxes, and the exchange of goods between the two parties.

Al-Qawasmi also stressed that this decision is a blackmail card, expressing his concern that the right-wing Israeli government might take any step.

However, he expressed his belief that the international community and the Americans will pressure to prevent the implementation of this decision.

Al-Qawasmi warned that if this happened, it would lead to a major economic crisis, affecting all economic sectors and Palestinian banks.

Positive economic impacts

For his part, the financial and Egyptian advisor, Mohamed Salama, told “Y”: The fear is that if Smotrich carries out his threats and Israeli banks stop dealing with Palestinian banks, European and American banks will follow the Israeli measure and stop dealing with Palestinian banks under the pretext of stopping Israeli banks from dealing with Palestinian banks. Thus, there will be a major challenge in dealing with the dollar as a currency to finance foreign trade, whether with Israel or others.

Salama believed that the danger lies in the transformation of the Palestinian economy into a cash economy, and this will undermine the progress achieved by the banking sector in combating money laundering and terrorist financing, and will hinder money transfers to and from Palestine, pointing out that the West Bank had experienced cash dealings before the return of Cairo Amman Bank during the eighties of the last century.

He stressed that there are positive economic effects that may result from this measure, the most important of which is the decline in trade with Israel, the elimination of the consumption of Israeli goods, and the rationalization of the consumption of many goods, which is in the interest of the Palestinian economy, especially since such a measure will stop the flow of goods and services from the Israeli occupation state to the Palestinian territories, which will prompt the search for alternatives, either locally or through neighboring countries.

The gradual decline in the use of the shekel currency

Salama pointed out that such a measure would lead to a gradual decline in dealing with the Israeli shekel, and this would serve the interests of the Palestinian economy by finding a monetary alternative to the shekel, either by issuing a local currency or by adopting the dinar or the dollar as an alternative currency.

He said: It is clear that such a measure will hinder the movement of the Authority's money, especially the transfer of clearance funds to the Authority's accounts, and will force the Authority to restructure its accounts such as salaries, taxes, customs, electricity, water and petroleum payments from the shekel to other currencies.

Salama concluded by saying: “As a result, such a decision, which I rule out taking, if it happens, will confuse the financial system and the Palestinian economy for a period, but the Palestinian Authority and the Palestinian economy will overcome this confusion by finding alternative solutions that have positive results in the medium and long term.”

Salama stressed that this step would have negative effects on Israel that may not be less than the damage it would cause on the Palestinian side, and such a step would mean the cancellation of the Paris Economic Protocol, which would require an international position that would cost Israel a lot, especially since what is being proposed as a possible economic peace contradicts such behavior by this fascist settler, Smotrich.

The monetary relationship is managed by the Bank of Israel.

Raja Khalidi, director general of the Palestine Economic Policy Research Institute (MAS), told WAFA: “Regardless of the seriousness of the renewed threats, they may still be in the context of Israeli political maneuvers to achieve new compromises regarding settlements and the process of reoccupying the West Bank and making it all Area C.”

Al-Khalidi added: "What the Israeli Finance Minister is demanding in exchange for not implementing his threat, of a financial audit of the Monetary Authority, is a blatant violation of the Paris Agreement, especially since the monetary relationship is managed by the Bank of Israel, not the Finance Minister."

"It is a ridiculous demand, as it is internationally known that the Palestinian banking system is audited and free of any risk of illicit cash flows," he said.

Al-Khalidi concluded by saying: “In any case, we must prepare for the worst, and therefore MAS is preparing a special study on Israeli financial and monetary sanctions, their potential consequences, and ways to confront them.”