Washington, September 23 (Reuters) US Deputy Treasury Secretary Wally Adeyemo appealed to Israel to continue its banking cooperation with Palestinian banks for at least a year to avoid an economic crisis in the West Bank. Adeyemo urged that by cutting these connections, Israel would be putting its security in jeopardy, let alone the security of the whole region.

Adeyemo delivered this stark message on Monday during a meeting with Bank of Israel Governor Amir Yaron in New York during the UN General Assembly. He also had an audience with the King of Jordan, Abdullah, over the matter. During the meeting, he stressed the need for the continued banking connection between Israel and the Palestinian financial sector, especially given threats from some Israelis to cut off the connections. 

“He conveyed the United States government’s worry regarding threats from some in the Israeli government to cut banking relationships between Israeli and Palestinian banks, and he ensured that these should be renewed for at least one year,” the U.S. Treasury Department said after the meeting of Adeyemo with Yaron.

There has yet to be an official response from the Israeli government regarding the matter raised by Adeyemo. But US officials have been saying for months that efforts by Israeli Finance Minister Bezalel Smotrich and others to sever the Palestinian banks from their Israeli counterparts could put economic stability in the Palestinian Authority at risk. Criticizing such an approach, these scholars claim that such instability would negatively impact the security of Israel. 

Since 2006, the current authorization for the banking correspondence between Israel and Palestinian territories will last until October 31, 2024. If this waiver is not renewed, essential financial operations—quantifying $9.5 billion in imports/exports—may be negatively affected, increasing the pressure on a Palestinian economy that is already teetering on the brink. 

Speaking on the issue to King Abdullah of Jordan, Adeyemo reiterated that any attempt by Israel to de-link the Palestinian banks from the Israeli financial system would increase regional tension. It would also push more of the Palestinian financial activities outside the official and regulated sphere, which might not be suitable for the security of Israelis and the region in general. This could also lead to more significant sources of financial risks in the area, sources of the movement of money that are more difficult to identify and may potentially be posed to facilitate other nefarious operations.

Treasury Secretary Janet Yellen echoed the same concern this May during the G7 finance ministers’ meeting. Subsequently, the G7 has referred to the problem in two statements, underlining that the international community is aware of the deepened financial issues in the Palestinian territories.

“The Palestinian Authority’s stability is crucial for the West Bank as its stability is crucial for Israel’s security,” said a US official who preferred anonymity.

The economic situation in the Palestinian territories is already bad once more. According to the World Bank on Monday, the Palestinian territories’ economy is ‘on the brink of free-fall.’ Gaza’s GDP slid by 86% in the first quarter of 2024 over the same period in the prior year. Furthermore, challenges of financing deficits amassed 1.86 billion USD and hit the Palestinian Authority, escalating the possibility of a systematic failure of finance.

In June, Israeli Finance Minister Bezalel Smotrich decided to prolong the banking cooperation waiver for only four months, while previous waivers were granted for one year. The waiver enables the Israeli banks to transmit shekel payments for services and salaries related to the Palestinian Authority without violating the rules against money laundering of terrorism financing. Without the waiver, the Palestinian banks would be out of the Israeli financial system, and the situation in the Palestinian territories would worsen economically and in humanitarian terms.(More)

Washington has yet to react on what may happen next should Israel fail to renew the waiver. It has even been suggested that punitive damage claims made against them might be seen as a punitive measure in the same way that Israeli settlers fear sanctions over attacks on Palestinians in the West Bank.

On the eve of October 31, which is the deadline for the removal of the security checkpoints, the world still anxiously waits on the adverse consequences of the deterioration of the banking relations between Israel and Palestinian territories, which are security and economic.