Israel is risking economic collapse in the West Bank by refusing to commit to an agreement that ensures Palestinians have access to banking services, the governments of France, Germany and the United Kingdom warned on Thursday.
“This disappointing decision prolongs uncertainty and endangers the Palestinian economy,” the three countries’ foreign ministers said in a joint statement. “Cutting off these banking ties, which Israel has a clear duty under the Paris Protocol to maintain, would create significant economic turmoil in the West Bank, jeopardising the security of Israel and the wider region.”
Businesses in the West Bank depend heavily on Israeli lenders to facilitate the use of shekels, some $14 billion of which were exchanged with Palestinian banks in 2023, according to Israeli data. Most banks, Israeli and foreign, steer clear however, afraid of being caught up in allegations of financing terror. As required by a 1994 treaty, Israel has indemnified two of its banks against such risks (albeit only since 2016), allowing them to transact freely with Palestinian counterparts. But it extended that indemnity by only a month when it expired in October, to the chagrin of Western officials.
The removal of the protections could turn the West Bank into a cash economy and provoke a Lebanon-style economic collapse, the nongovernmental organization Crisis Group has warned.
Reporting by The Times of Israel last month suggests Finance Minister Bezalel Smotrich didn’t commit to a longer extension in October because he was awaiting the United States election results. U.S. officials, according to the Times, worry that the minister, an ultranationalist who recently called for the annexation of the West Bank, intends to provoke the collapse of the Palestinian Authority, which has exercised limited governance over the region since the 1993 Oslo Accords.
The incoming administration of Donald Trump may prove more sympathetic to that aim. The president-elect earlier this month picked former Arkansas Governor Mike Huckabee — a pro-Israel hard-liner who has defended the illegal settlements in the West Bank — as ambassador to the country.
In their statement Thursday, French, German and British diplomats insisted that there was no reason for the Finance Ministry to delay. Local authorities, they said, had “taken significant steps to counter the risks of terror financing, and … financial institutions within the West Bank maintain adequate controls to manage these risks.” The waiver should be extended for another year, they added.
The economy of the enclave has already taken a battering since Oct. 7, 2023, when Hamas raids into southern Israel led it to launch a full-scale invasion of the Gaza Strip. According to a World Bank report published earlier this year, restrictive measures by Israeli authorities, including the withholding of Palestinian tax revenues, have dramatically reduced the territory’s income. As of September, the World Bank expected the financing gap — the difference between spending needs and funds available, including aid — to hit $1.86 billion by year-end.
Meanwhile, in the first quarter of 2024, gross domestic product fell by 35 percent and unemployment hit a record high of 50 percent, with some 15 percent of the population experiencing “famine-like conditions,” the World Bank added.
The Israeli Finance Ministry has been approached for comment.
