Washington/ PNN
U.S. Treasury Secretary Janet Yellen, along with seven finance ministers from Western countries, issued a warning to Israeli Prime Minister Benjamin Netanyahu that Finance Minister Smotrich's policies could lead to the collapse of the Palestinian economic system. The ministers' letter, sent on October 25, noted that restricting financial relations between Israeli and Palestinian banks jeopardizes stability in the West Bank and Israel's security, particularly given the already tense conditions in the region.
Details of the Warning and International Concerns
The letter points to the impending expiration of the current mandate allowing Israeli banks to operate with their Palestinian counterparts, set to end on October 31. The ministers expressed deep concern that failure to renew this mandate could result in the collapse of the Palestinian banking system, potentially creating a governance vacuum that threatens the security and stability of the West Bank and exacerbates the economic crisis, which in turn impacts the Israeli economy.
Yellen and her counterparts from Japan, Canada, the European Union, the UK, the Netherlands, Australia, and France reaffirmed their commitment to Israel's security, but stressed that "cutting financial ties between Israeli and Palestinian banks could create unregulated financial channels that would put the lives of Palestinian and Israeli civilians at greater risk."
Potential Impacts on the Israeli and Palestinian Economies
The letter noted that severing banking relations would halt annual trade exceeding $13 billion, resulting in significant damage to both the Palestinian and Israeli economies. It would also prevent the flow of hundreds of millions of dollars in international aid intended to support the Palestinian economy amid critical economic conditions in the West Bank.
Required Actions from the Israeli Government
Yellen and the ministers urged Netanyahu to take urgent steps to prevent a potential "economic disaster" by extending banking relations for at least another year, allowing for the avoidance of negative impacts on the Palestinian Authority, which plays a crucial security role in the region.
Meanwhile, the Biden administration has confirmed in recent weeks that Palestinian banks have met the conditions set by Israel to prevent illegal financing, informing Israel that the current status of the banking system does not pose a security threat.
In its latest report on the state of the Palestinian economy, released on Thursday, UNCTAD found that the staggering level of economic destruction and unprecedented decline in economic activity far exceeds the impact of all previous military confrontations in the Gaza Strip since 2008.
The report indicated that Gaza's GDP fell by 81% in the last quarter of 2023, resulting in an annual contraction of 22%. By mid-2024, Gaza's economy had shrunk to less than one-sixth of its level in 2022.
Additionally, the report highlighted that between 80% and 96% of agricultural assets in the sector—including irrigation systems, livestock farms, orchards, machinery, and storage facilities—were damaged, crippling food production capacity and exacerbating already high levels of food insecurity.
Additionally, the report confirmed that 82% of businesses in Gaza, which are a major driver of the economy, have been destroyed, while damage to the production base continues amidst ongoing Israeli military operations.
