Given the Palestinian economy is an extension of the Israeli one, due to the prolonged state of military occupation, Palestinians import over 85 percent of their goods and services from Israel and sell over 80 percent of their exports to Israel. From a purely economic perspective, given Palestine is still a state in the making and, as such, lacks its own currency, using the Israeli currency is expected.
The Palestinian economy in the West Bank and Gaza Strip was purposely made structurally dependent on Israel ever since the Israel military occupied the area in 1967. This Israeli-crafted structural dependency took many shapes and forms, starting with Israel creating a captive Palestinian consumer base for its products and services by militarily controlling all the borders between the occupied territory and the outside world, all the way to installing the Israeli currency, the Israeli Shekel, as the daily currency among Palestinians. Before the Oslo Peace Accords, within the Accords itself, and all the way through today, this forced dependency has been maintained.
The Israeli currency enters Palestine from multiple sources, primary among them being the salaries received from Palestinian workers who receive Israeli military permits to seek employment in Israel. There are 47,350 Palestinian workers who enter Israel legally (quota as of March 2014) with an estimated additional 15,000-20,000 who enter illegally without permits. Prior to the era of the Oslo peace process, which introduced a physical separation barrier between the two economies, the total number of Palestinian workers from the West Bank and Gaza Strip who used to work in Israel reached 120,000. These workers are paid in New Israeli Shekels and usually return home to the occupied territory every night where they spend their money in the Palestinian economy.
When Palestinians purchase the goods and services they consume, such as electricity, petroleum, natural gas, foodstuffs, medical care at Israeli hospitals, etc., they are required to pay Israeli suppliers in their home currency, the New Israeli Shekel (NIS). These payments are made on behalf of Palestinian clients from the Palestinian banking system to Israeli suppliers via the Israeli banking system. For example, the Palestinian Authority (PA) consumes 70-80 million NIS every month from the Israeli electric company for the electricity that is purchased for the occupied territory, including Gaza; 500-600 million NIS is purchased from the Israeli petroleum refineries every month to cover all the petroleum products consumed; and 25 million NIS is paid monthly to Israeli health care providers. As can be seen, the magnitude of these purchases is enormous given the $6 billion Palestinian economy purchases over 85% of its goods and services from Israel.
As these Israeli-supplied goods and services are sold in the Palestinian market, retailers collect and accumulate New Israeli Shekels and then deposit them in their bank accounts. Subsequently, either the Palestinian retailers or their Palestinian suppliers (the PA in the case of electricity and petroleum since these are centrally bought by the PA government and resold to Palestinian retailers), request their banks to make payments to their Israeli suppliers.
When Palestinian banks make an electronic transfer to Israeli banks they must back up such a transfer with actual cash, New Israeli Shekels. It is common practice in the world of banking that countries respect their own currency. Actually, not only is it common practice that a country respect its own currency but the norm is for it to actually pay what is called seignorage to other counties who adopt their currency to compensate for the profits the home country makes from others using their currency, thus increasing its value. Israel has always refused to pay seignorage to Palestinians and now has gone one step further and has declared that Palestinians cannot physically transfer their surplus Israeli currency to the Israeli Central Bank.
The expected results of this punitive measure are many. First, given the Palestinian bank safes are now overflowing with their clients’ Shekels the banks will need to stop accepting deposits. Secondly, as Palestinian businesses will not be able to make electronic transfers, they will be forced to move large sums of cash directly to their Israeli suppliers. Given most Palestinians do not have access to cross the illegal Israeli separation wall, they will need to look for intermediaries to transfer the cash to their Israeli suppliers, causing not only the creation of a black market, but a dangerous security situation.
The equivalent of a central bank in the Palestinian Authority is the Palestine Monetary Authority (PMA) and they are not accepting this Israeli administrative punishment sitting down. The PMA Governor, Dr. Jihad Al-Wazir, has made it public that he is looking to use this regrettable situation to further advance structural changes in the Palestinian monetary system. One such immediate change is the possibility to “dollarize” the Palestinian economy and stop using Israeli currency altogether Another possibility is the issuing of an independent Palestinian currency, which is a much larger project that has been in the works for quite some time and may be accelerated in response to these latest Israeli measures.
In the meantime, the Israeli “Civil” Administration (the branch of the Israeli Ministry of Defense, which is responsible for managing the occupied territory) is negotiating with Palestinian authorities and bankers to restart, incrementally, the flow of Shekels to the Israeli Central Bank. Sadly, Palestinians are all too familiar with having to negotiate these administrative issues just in order to survive.
It is not a secret that Israel and Israeli banks have used Israel’s occupation to not only reap huge financial benefits, but also to allow Israeli banks to further advance the occupation itself. The Coalition of Women for Peace, an Israeli organization of women activists which created the Who Profits from the Occupation website, has addressed this Israeli banking complicity with the occupation in their report, Financing the Israeli Occupation (October 2010). Since this report was issued many things have changed, mainly, the Palestinian side has since been recognized as a member state in the United Nations, which places at its disposal many more diplomatic tools to hold Israelis directly accountable for its illegal practices.
Many believe that the Israeli military occupation is comprised only of tangible items, like settlements, walls, checkpoints, warplanes and the like, whereas the reality is that the weight of the occupation is actually comprised of myriad administrative rules and restrictions. These administrative elements of the occupation are ones that cannot be photographed, things like a permit system, which dictates Palestinian movement and access; control of Palestine’s electromagnetic spectrum, which deprives Palestinians of 3G mobile services; prohibitions on the ability to dig wells, which limits not only our ability to build a proper agricultural sector, but deprives many of us of drinking water; and, of course, military dictates that have the power to collapse an entire banking sector.
The international community is starting to wake up to the three-dimensional reality of the Israeli military occupation. For those who prefer to remain in their deep slumber, Palestinians, acting in their capacity as a state, will be reminding them of their obligations under international law to not allow Israel to continue to act in the rogue fashion that has become commonplace. Israel’s ongoing actions are jeopardizing any possibility for a negotiated settlement between Palestinians and Israelis.
Sam Bahour is a Palestinian-American business consultant in Ramallah and serves as a board member and executive committee member at a leading Palestinian bank. He is co-author of "Homeland: Oral Histories of Palestine and Palestinians" (1994) and blogs at www.epalestine.com.