Could Donald Trump election win lead to Palestinian financial meltdown?

Palestine's banking sector could be cut off from the global banking system in light of Donald Trump's election win and an increase in restrictive financial penalties and threats by the Israeli government, experts have said.

Fears were heightened following Israeli Finance Minister Bezalel Smotrich's decision on 31 October to renew a waiver allowing cooperation between Israel's banking system and Palestinian banks for just one month.

Prior to the war on Gaza which broke out in October 2023, the Israeli government had renewed the cooperation agreement every year or two but in March this was extended by just four months and then for only three months in July.

Palestinians are particularly anxious about comments made by extremist Finance Minister Bezalel Smotrich on Monday when he signalled his determination to annex the West Bank to Israel as he welcomed Donald Trump's victory in the US presidential elections during a meeting in the Knesset.

Economics professor Nasser Abdulkarim told Al-Araby Al-Jadeed, The New Arab's Arabic-language sister edition, that while there have been concerns for months on this issue, Trump's election victory has exacerbated fears of a possible heavy hit to the Palestinian financial system due to Israeli actions.

While he believes the one-month renewal was due to pressure from the US, Europe, and the G7, he said the results of the US elections mean Ramallah cannot guarantee there will be other extensions after Trump enters the White House in January.

"With Trump's win, Smotrich might allow himself to take more severe measures," he said.

Palestinian banks conduct their transactions with the Israeli banking system using shekels via two Israeli "correspondent" banks: Discount and Hapoalim.

According to Israeli claims, both banks years ago requested to end their service provision with Palestinian banks, due to fears they could face lawsuits accusing them of "funding terrorism" or "money laundering" following lawsuits by Israelis against Palestinian banks.

In response, Israel's government granted them immunity through annually renewed governmental waivers, which removed the risk of legal action and would compensate them for any losses incurred due to such claims.

As there is no independent Palestinian currency - with Palestinians relying on the Israeli shekel (NIS) - the possible impact of the two Israeli banks severing relations with Palestinian banks could go beyond economic, financial, and commercial transactions.

The end of their cooperation could affect Palestinian banks' international financial transactions, isolating Palestinian banks from global markets.

The Palestine Monetary Authority (PMA) stated in a written response to TNA that the trade relationship between the two parties should have remained technical and non-politicised.

It pointed out that Ramallah is dependent on Israel for almost all its trade, as Israel controls its borders: all goods entering and exiting the West Bank must pass through Israeli ports and checkpoints.

The PMA said the continuation of the Israeli occupation makes breaking into new markets extremely difficult, and continued relations with the Israeli correspondent banks are essential for Ramallah's monetary and financial stability.

Economist and journalist Jafar Sadaqa said the annual protection waiver gives Palestinian banks some peace of mind in the medium term.

The aim behind renewing it for one month is to plunge the banks into a state of anxiety and uncertainty, forcing them to conduct all their banking operations with concern for the future.

This will even mean not facilitating any long or medium-term financial arrangement, as they can't predict what is going to happen after the next month.

If Israel severs the ties between Palestinian banks and the Israeli financial system, it would have a devastating impact on Palestinian-Israeli trade.

This would be especially significant for Ramallah as its trade with Israel is much higher than its commercial dealings with other states due to the Israeli occupation and economic agreements, most notably the 1994 Paris Economic Protocol

In 2022 and 2023, imports from Israel amounted to about 57 percent of total imports, while exports to Israel amounted to 86% of total exports, according to the Palestinian Central Bureau of Statistics (PCBS).

Abdulkarim says if the decision is enforced then Palestinian traders would be unable to pay Israeli suppliers using official channels, and Palestinian banks would be prevented from opening credit letters or issuing cheques.

Above that, it would impact the "clearance revenues" (tax revenues Israel collects on goods imported into the Palestinian territories and which are supposed to be passed on to the Palestinian Authority), as bank transactions would no longer be possible.

While the PMA states that Palestinian and international banks would be able to maintain relationships independently of the Israeli correspondent banks, Sadaqa believes if this step is taken then it will significantly isolate the West Bank from the global banking system as the two Israeli banks are used as intermediaries between Palestinian banks and many global banks.

Importing from abroad also requires currencies such as euros and dollars, so if Israeli banks are no longer accepting the shekel, then there are questions about where Palestinian banks will be able access international currencies from.

Paralysing the Palestinian economy

Sadaqa says in such a scenario, Palestinian banks would effectively turn into bureaus de change, provided they had the hard currency available.

This would mean they would be unable to cover financial credits for imports, either from Israel or abroad, crippling the Palestinian economy, although Western pressure would probably prevent Israel from enacting such measures.

Moreover, the economic impact wouldn't be limited to the Palestinians, but would also affect Israeli industries, especially smaller businesses that rely primarily on the Palestinian market for profits.

Sadaqa points out that there is a cash flow between Palestinians and Israelis ranging from 25 to 30 billion shekels ($6.7 to 8 billion) annually, so while the Israeli finance ministry will continue to taunt the PA with the threat of financial isolation as a tool of blackmail it is unlikely to execute this due to the harms it would cause Israel's economy.

This article is based on an article which appeared in our Arabic edition by Jihad Barakat on 13 November 2024. To read the original article click here.