Targeting the Palestinian economy: Is Israel driving the Palestinian Authority to collapse?

The world is witnessing the genocide of the present and future of Gazan society, while in the shadows, the West Bank is facing direct, daily attacks on its homes through demolitions, on its residents through murders and arrests, on its lands through illegal settlement and assaults, and on its economy through a series of economic sanctions aimed at draining the West Bank of financial liquidity, impoverishing and starving its citizens.

Israeli Finance Minister Bezalel Smotrich has found a new way of targeting the West Bank's civil and governmental entities by hitting its economy, despite three European countries recognizing the State of Palestine.

The West Bank is facing direct and daily attacks on homes through demolitions, on its residents through killings and arrests, on its lands through illegal settlement and settler assaults, and on its economy through a series of economic sanctions aimed at draining the West Bank of financial liquidity, and impoverishing and starving its citizens

On May 24, 2024, Smotrich decided not to renew the monetary cooperation licenses between Palestinian and Israeli banks. In recent weeks, exchange shops have also been targeted through vandalism, theft, and direct raids by occupation soldiers. Additionally, a slew of new laws have been introduced, striking the Palestinian economic institution. According to economic expert Jafar Sadaqa, these are "measures that have been escalating since October 7, and mark a fundamental change in Israel's view towards the Palestinian Authority."

Israel punishes West Bank banks

"Since seizing power, the right-wing government in Israel has implemented measures to alter its historical relationship with the Palestinian Authority (PA). Historically, Israel had attempted to maintain the PA as a weak entity," Sadaqa tells Raseef22.

He adds, "Israel provided the PA with minimal power to act as a police force that ensures Israel's security. However, the current Israeli government does not want the PA at all and is pushing it towards collapse."

Nihad Abu Ghosh, a political analyst specializing in Israeli affairs, tells Raseef22, "Israeli Finance Minister Bezalel Smotrich's decision to refrain from providing financial guarantees to the three Israeli banks that maintain relationships with Palestinian banks – Leumi, Hapoalim, and Discount – is part of a series of punitive decisions he has made since the start of the war on Gaza."

Israel does not want the PA to return to Gaza. It is in Israel’s interest to maintain division and eliminate any formula that unifies Palestinians and symbolizes their identity as one people.

Abu Ghosh believes that the Israeli government uses this issue as a threat and bargaining chip, suggesting that Israeli banks themselves may face sanctions if the decision is implemented. Consequently, a chain of events out of Israel's favor will likely unfold, especially given the difficult economic conditions in Palestinian Authority areas, which according to sources could lead to a security explosion turning the West Bank into a third front, particularly with the presence of avenues for Iranian influence.

Sadaqa suggests that if the measures end later this month, resulting in the non-renewal of the guarantee letters to Israeli banks, the Palestinian Authority will be pushed towards collapse.

However, he suggests that the Israeli mini-ministerial council has the authority to overturn Smotrich’s decision, as happened previously when Israeli authorities renewed the guarantee letters to Palestinian banks for three months.

These Israeli sanctions have taken four main forms, according to Khalil Shaheen, Director of Research and Policies at MASARAT – The Palestinian center for Policy Research and Strategic Studies. Firstly, by exerting economic and financial pressures and drying up the Authority's resources. Secondly, through the destruction of infrastructure through military intervention and weakening the ability of municipalities and local councils to address this continuous and repeated destruction.

Thirdly, through the destruction of the Palestinian economy, which is mostly based on small establishments like money exchange shops. And finally, by weakening the capacity of civil society and charitable and relief institutions by restricting their funding and limiting or shutting down their areas of work.

Laws strangling the PA

On May 29, amid the continuous and increasing Israeli practices aimed at undermining the Palestinian economic sector, the Knesset General Assembly approved two draft laws in a preliminary reading. One of these laws mandates imposing sanctions on financial institutions in the occupied West Bank and Gaza Strip if it is proven that they transfer funds to individuals considered "terrorists" by Israeli criteria.

The law also includes imposing sanctions and restrictions on Israeli financial institutions, or those operating within Israel, if they deal with these "foreign" financial institutions.

However, the second draft law, which is more dangerous, mandates the use or disposal of Palestinian Authority funds held by the Israeli government.

Jaafar Sadaqa explains that in 2018, the Israeli Knesset passed a law requiring the Israeli government to withhold Palestinian tax revenues it collects at crossings annually, an amount equivalent to what the Palestinian Authority spends on allowances for prisoners, martyrs' families and the injured.

In 2018, the Israeli Knesset passed a law requiring the Israeli government to withhold Palestinian tax revenues it collects at crossings annually, an amount equivalent to what the PA spends on allowances for prisoners, martyrs' families and the injured.

The authority to estimate these amounts was granted to the relevant ministries in the Israeli government, which has been deducting these amounts since 2019. Their estimated value is 52 million shekels per month (approximately 13.8 million US dollars).

"The deducted amount is placed in a reserve account, meaning these funds are preserved without being used. However, if this law is passed in the Knesset, these funds will be spent by Israel on various items, most of which are expected to be compensation for those affected by Palestinian military operations against Israel," Sadaqa says.

The Palestinian Monetary Authority (PMA) emphasized to Raseef22 that any changes to the foundations of the banking relationship between Palestinian and Israeli banks require amending the agreements signed between both parties.

The PMA stated, “this relationship is vital for the continuation of trade relations and the payment for goods and services imported to the West Bank and Gaza Strip. Any harm to it will lead to a humanitarian crisis before becoming an economic or political one."

The PMA believes that the proposed legal amendments are unrealistic, especially since the allocations for prisoners and the families of martyrs are not paid through banks, money exchangers or the official financial system.

The shekel surplus crisis

Sadaqa believes that the "shekel surplus crisis" began with the establishment of the Palestinian Authority in 1994 and the founding of Palestinian banks. The PA suffers from a significant surplus in the shekel currency, which is causing a crisis for Palestinians.

He explains, "The Palestinians' need for the shekel is limited to purchasing Israeli goods, worth 22 billion shekels annually. However, the volume of financial transactions between the Palestinian Authority and Israel, including clearance funds (Palestinian taxes collected by Israel at crossings) and the wages of Palestinian workers in Israel, amount to nearly 60 billion shekels annually, which exceeds the currency needed for importing goods."

Sadaqa clarifies that currency is a store of value, and when you hold shekels, the owner of this currency, Israel, borrows your effort and work. When Israel refuses to accept this surplus, it is considered a theft of the people's effort and many months of work.

"Additionally, the Authority needs to convert its money into other currencies to purchase goods from outside Israel. Although the bank that issues the currency is obligated to accept it, Israel delays the process and throws the shekels back at the Palestinians," Sadaqa asserts.

The most important question is not whether Israel supports the continuation or collapse of the Palestinian Authority, but rather what kind of authority Israel wants.

What kind of Authority does Israel want?

There is a division within Israeli circles, according to Abu Ghosh, and the push towards the collapse of the PA remains limited to the extreme right-wing settler factions. It has not yet become a central policy even within the right-wing government and security services oppose it.

"This will likely also provoke reactions and possibly lead to American and European sanctions, weakening the chances of normalization with Saudi Arabia and other Arab countries," says Abu Ghosh.

He adds, "So far, Israel has no interest in the collapse of the Authority unless a convincing alternative is available. The Authority provides Israel with the benefits of security coordination, suppressing resistance and Israel's opponents, and relieving Israel of the burden of dealing with five million Palestinians and their daily living and service needs."

"This all, in addition to creating the impression that a political process could be resumed, even if it's currently stagnant. It also shifts all responsibilities for the suffering of the Palestinian people – poverty, oppression, and corruption – onto the Authority, rather than the occupation. As if the occupation is innocent of all that," Abu Ghosh emphasizes.

He believes the most important question is not whether Israel supports the continuation or collapse of the Palestinian Authority, but rather what kind of authority Israel wants.

"Israel prefers to cooperate with Palestinians as residents, and if possible, as families and clans, not as a people with the right to self-determination. Meanwhile, the current Authority defines itself as the nucleus of the independent state project, a product of the National Movement and the Palestinian Liberation Organization," says Abu Ghosh.

He adds, "But what Israel specifically wants is to reduce the Authority's role to limited security and service functions, preventing it from being capable of evolving into a state. Israel wants a weak, subordinate Authority, whose existence or absence depends on Israeli decisions, living on clearance funds and can collapse at any moment by an Israeli decision."

Israel has no interest in the collapse of the PA unless a convincing alternative is available. The PA provides Israel with the benefits of security coordination, suppressing resistance and Israel's opponents, and relieving Israel of the burden of dealing with 5 million Palestinians.

Israel also does not want the Palestinian Authority to return to Gaza, according to analyst Abu Ghosh. This is not out of love for Fatah or hatred for Hamas, nor the reverse. Rather, it is in Israel’s interest to maintain division and eliminate any formula that unifies Palestinians and symbolizes their identity as one people.

The bitter harvest of the Oslo Accords

"We are now in the stage of the bitter harvest of the Oslo Accords and the associated Paris Economic Protocol, which entrenched economic dependency on Israel and deprived the emerging Authority of using resources that could have contributed to any development," says Khalil Shaheen of MASARAT. He adds, "Even the margins available in this agreement were not utilized by the Palestinian Authority, such as establishing power plants or importing energy instead of buying these basic services from Israel."

"It is true that the world is pressuring Israel, but Arab and foreign donor countries have decided that serious reforms in the Authority are necessary. The international community says it wants a strong, transparent Authority capable of managing Palestinian public affairs and able to transform into a state when the time comes," Jafar Sadaqa tells Raseef22.

He points out that the Palestinian Authority's current capabilities are almost nonexistent, and it is completely unable to pay its employees' salaries. Local tax revenues have declined due to weak economic activity following the war, and it is barely surviving on advances from large companies like telecommunications. As a result, it had to take money from the Road Accident Victims Compensation Fund and other savings funds.

Shaheen explains that the essence of Israel's historical policies for both the West Bank and Gaza Strip is based on "changing the status quo." What happened after October 7th is an acceleration of this process by bringing about changes in the political relationship with the Palestinian Authority to change the demographic situation.

"Israel does not have a final, detailed, agreed-upon vision for the West Bank. But it falls under the broad title of a comprehensive war of attrition aimed at exhausting the PA and Palestinian society," Shaheen emphasizes.

He concludes, "As for the Gaza Strip, Israel wants it empty or, at best, as 'humanitarian islands,' to quote Yoav Gallant, which would be handed over to Palestinian entities under the supervision of the Israeli military."