How is the Occupation Strangling the Palestinian Economy?
By Rasheed Ali, published on 7iber on 12 November 2024. Translation by Shadi Hamada.
How could Israeli restrictions on West Bank’s financial institutions impact Palestinian society?
Since the Oslo Accords and the establishment of the Palestinian Authority (PA) in 1994, the Palestinian economy in the West Bank and Gaza Strip has constituted a unique case: an economy stripped of all forms of economic and monetary sovereignty. This is a natural consequence of the absence of political sovereignty, as Palestinian society remains under occupation despite the PA’s efforts to cling to the trappings of “statehood”. This reality has entrenched chronic economic fragility, and crisis erupts whenever resistance surges—most recently with the financial and economic crisis that followed Operation Al-Aqsa Flood, which was marked by Gaza’s total economic destruction and the West Bank’s suffocating siege.
Last month, the economic situation in the Palestinian territories was addressed at the G7 Finance Ministers’ meeting in Washington. This situation is now confined to the areas administered by the PA, given how the ongoing genocide has erased Gaza—at least statistically—from the Palestinian economic landscape. The meeting produced a letter warning Benjamin Netanyahu about his finance minister Bezalel Smotrich’s policies towards the Palestinian economy. The tightening restrictions, it cautioned, would collapse the PA-backed economy and trigger a security crisis for Israel. Recommendations included preserving banking channels between Palestinian and Israeli banks, releasing withheld tax revenues owed to the PA, and reinstating work permits for Palestinians if security conditions allow.
On October 31, under pressure from U.S. Treasury Secretary Janet Yellen, Smotrich agreed to extend Israeli–Palestinian banking cooperation for another month—a pattern repeated since June, when he granted a four-month extension at the last minute. This “cooperation” entails Israeli Government guarantees shielding Israeli banks from money laundering and “terrorism” financing charges when dealing with Palestinian banks. Before October 7, these arrangements were renewed annually; now, they are month-to-month.
Terminating this correspondent banking system would cripple the Palestinian economy: blocking imports of fuel and food, halting payment for services, and freezing salaries for public-sector workers (largely funded by taxes collected by Israel on the PA’s behalf). Israel controls all border crossings for goods entering or leaving Palestinian territories, collecting customs duties (“clearance revenues”) and withholding 3% of monthly transfers to the PA as an “administrative fee”. A breakdown here would trigger complete economic paralysis, which in turn would fuel widespread social chaos.
Under the Paris Protocol—Oslo’s economic annex1—the Palestinian Monetary Authority (PMA) established a clearinghouse to settle transactions between Palestinian banks and their Israeli counterparts. However, Palestinian banks never gained direct membership in the Bank of Israel’s clearing system, and they were even less likely to after the Second Intifada. Instead, they pay fees to Israeli “correspondent banks” to access Israel’s clearinghouse—the financial gateway to the outside world.2 Why? The shekel remains the de facto currency in Palestinian territories. Thus, all financial transfers must pass through the shekel system—an Israeli sovereign currency weaponised to punish and control the Palestinian economy. This dependency reflects Israel’s status as the PA’s primary “economic partner”, with monthly trade and financial flows nearing USD $1 billion.
The G7’s warnings about the PA’s fiscal collapse were not unprecedented; the World Bank issued similar alerts, most recently in September 2023.3 The Bank noted a 25% contraction in the West Bank economy in Q1 2024 and projected the PA’s financing gap would double to $1.86 billion in 2024—threatening public services, salary payments, and debt obligations. The PA has bridged gaps by borrowing from local banks, delaying salaries/pensions, and reducing transfers to the
pension fund. Economic decline is expected to continue, with all sectors shrinking and unemployment reaching unprecedented levels. Since October 7, 500,000 Palestinian jobs have vanished—200,000 in Gaza and 148,000 held by Palestinians in Israel.
The Palestinian economy is increasingly shrinking
UNCTAD’s [UN Trade and Development] September 2024 report described the Palestinian economy’s prospects as “dire”.4 A 30% quarter-on-quarter contraction in late 2023 led to a 5.5% annual decline—“one of the deepest deepest slumps in recent history”. The report also details Israel’s punitive fiscal measures, including deductions from Palestinian tax revenues (which fund two-thirds of the PA’s budget). Since 2019, Israel has withheld $863 million under a 2018 Knesset law that legitimises seizing funds allocated [by the Palestinian Government] to families of martyrs and prisoners. Post-October 7, Israel has frozen approximately $75 million per month in Gaza salary transfers. By April 2024, the total deductions and withheld amounts was over $1.4 billion. [See point 33 of the report for more detail.]
Another issue is shekel surplus repatriation. Under the Paris Protocol, Palestinian banks may convert excess shekels to the Bank of Israel for foreign currency to fund imports.5 But in 2009, after Israel designated Gaza a “hostile entity” following Hamas’ 2007 takeover, Israeli correspondent banks blocked shekel conversions. A 2011 compromise capped cash shipments—reaching 4 billion shekels ($1.5 billion) every four months before October 7.
The surplus of shekels flowing in from trade operations with “Israel”, from the wages of Palestinians working inside (prior to October 7), and from purchases made by Palestinians living inside during their visits to the West Bank all contribute to the accumulation of shekels in circulation channels and in bank vaults. These Palestinian banks are unable to utilise this surplus—which averages 22 billion shekels annually (about $6 billion)—by depositing it in Israeli banks to earn a certain interest rate. Instead, they are forced to stockpile the idle shekels in their vaults and bear the cost of securing them.
In other words, there is an excess of shekels beyond the needs of the Palestinian economy. This means Palestinian banks are either unwilling or unable to accept additional deposits in Israeli currency since they already hold too much of it. Nor can they lend out these shekels, as they already have large amounts sitting idle in their vaults, generating no profit. Lending would only increase the volume of shekels in circulation, since borrowers would repay with interest added to the principal value of the loan. As a result, the surplus of shekels continues to accumulate in the banks’ vaults year after year.
The Palestinian Authority and the banks operating under its framework did not face difficulties in transferring the surplus of shekels during the decade following the Paris Protocol. However, as Palestinian society grew both demographically and “economically”—in the sense that consumer needs began to rise progressively—problems started to surface in the form of restrictions on currency and imports. The surplus of shekels thus became a problem Palestinians were expected to resolve on their own. Instead of exchanging them for foreign currency or investing them within the Israeli economy, Palestinians were required to align themselves and their needs with the amount of shekels available to them—sufficient only for “individual economic behaviour” such as shopping and paying installments.
Some argue this surplus threatens Israel’s economy if Palestinian banks reject shekel deposits or loans, potentially devaluing the currency. Yet Israeli policymakers tacitly rely on West Bank counterparts to protect wealthy depositors.
The Palestinian trade balance is in chronic deficit
The shekel surplus crisis and correspondent banking threats reflect Israel’s disregard for the West Bank’s economic stability. The goal is not to manage the Palestinian economy but to expropriate the land beneath it.
These policies are the culmination of a deceptive, incremental process, since Oslo, to seize land via escalating settlements—and they empower figures like Smotrich, who now seeks to accelerate this project geographically and financially. Ramallah’s parasitic financial elites handed Israeli politicians this tool through Oslo and the Paris Protocol.
Smotrich’s threats would sever the financial lifeline of an entire society. He remains unmoved by UN appeals for West Bank economic relief because Israel—government and society across ideological spectrums—seeks to destroy the West Bank, expel its people, and dismantle the Palestinian economy. This economy has never been a truly independent entity built on self-sustaining foundations, but is a condition—essentially an accounting fiction—annexed to the occupation. The PA denies this reality, clinging to the illusion that it can perpetually manage a consumerist, aid-dependent service economy.
https://www.7iber.com/شنق-الاقتصاد-الفلسطيني-2/
Specifically in paragraph (12) of Article (4) of the Annex.
Shaibi, Hala, The Paris Economic Protocol: A Review of Practical Implementation, Palestine Economic Policy Research Institute (MAS), 2013.
“Impacts of the Conflict in the Middle East on the Palestinian Economy,” World Bank, September 2024.
“Developments in the Economy of the Occupied Palestinian Territory,” UNCTAD, September 2024.
Five out of thirteen banks operating in the Palestinian territories are Jordanian banks, accounting for 39.5% of the total assets of the banking sector there, amounting to USD $21.33 billion. Comparative Performance of Banks Operating in Palestine during 2022–2023, Association of Banks in Palestine, p. 3.