Israel Responds to Move to Recognize Palestinian State by Withholding Funds

Western officials warned of an “economic catastrophe” that would hit the West Bank unless Israel renews a vital exemption that Israeli banks need to maintain their relations with their Palestinian counterparts.

The British newspaper said in a report published Wednesday that the exemption, which expires at the beginning of next July, allows for the payment of the costs of vital services and salaries associated with the Palestinian Authority and facilitates the supply of basic materials, such as food, water, and electricity, to the Palestinian territories.

Three Western officials reported that without this exemption, Israeli banks would stop dealing with Palestinian financial institutions, which would lead to the halt of the Palestinian economy over time.

An American official said: The point we are making is that people’s access to food, electricity, and water should not be threatened at a time like this, especially in the West Bank. The official warned that not renewing the exemption would harm Palestinian interests and the security and stability of Israel and the region.

Two Western officials, for their part, said that Washington is leading efforts to renew the exemption and is asking allies to pressure Prime Minister Benjamin Netanyahu’s government. British officials also indicated that the United Kingdom is concerned about this issue.

The Palestinian economy uses the Jordanian dinar in trade with other economies. Still, this economy officially depends on the Israeli shekel, so the financial transactions of Palestinian institutions must pass through the “Bank of Israel” and other Israeli banks.

According to American data, about $8 billion in trade between Israel and the West Bank passes through Israeli channels annually. This includes $2.3 billion in food payments, $540 million for electricity, and $145 million for water and sanitation services.

Israel will not transfer much-needed funds to the Palestinian Authority as its foreign minister denounced the European moves that oppose Palestinian sovereignty, threatening to push the Palestinian government into a more profound fiscal crisis.

 Mr Smotrich’s office signalled that the decision was at least partly a response to Spain, that the Palestinian leadership bore responsibility for campaigning for the move and were acting against Israel legally, said Eytan Fuld.

The Israeli move drew a rebuke from the White House because withholding funds destabilises the West Bank as it highlights the security and safety of Palestinians.

Mr Netanyahu’s office did not respond to Mr Smotrich’s statement. Israel collects customs and import taxes, which constitute most of the Palestinian budget. 

The Ramallah-based Palestinian Authority is already experiencing a severe financial crisis; it has paid only 50 per cent of the salaries of tens of thousands of civil servants.

Palestinian government’s deepening financial problems could lead to even more unrest, and more than 500 Palestinians have been killed in the territory, according to the Palestinian Authority Health Ministry.

Over 100,000 Palestinians who worked in Israel were barred from entering, and stricter checkpoints have further choked the Palestinian economy.