It's time to decolonise the Palestinian economic system

Middle East Eye

4 days ago

Israel's recent move to cancel the waiver enabling cooperation between Israeli and Palestinian banks is not merely a bureaucratic measure. It is a calculated manoeuvre that strikes at the economic foundation of the Palestinian Authority (PA) and the occupied territories as a whole.
This policy shift must be seen as part of a broader campaign to erode what remains of Palestinian institutional autonomy. It is also a punitive response to international censure, including UK-led sanctions on ministers inciting settler violence.
Since October 2023, Israel had already banned cash inflows to banks in Gaza, most of which have suspended their services. The cancellation of the indemnity framework further deepens this financial blockade.
Only two Israeli banks, Hapoalim and Discount, maintain correspondent banking ties with Palestinian banks. The waiver enables these Israeli banks to indemnify foreign banks that process payments on behalf of Palestinian institutions; its removal effectively severs the Palestinian banking system from global financial networks.
The centrality of Israeli financial institutions in the architecture of Palestinian economic life is not incidental. Under the 1994 Paris Protocol, a sub-agreement of the Oslo Accords, the Palestinian economy is tethered to the Israeli shekel, with Israel acting as both gatekeeper and bottleneck for trade, tax revenues and monetary transactions.
New MEE newsletter: Jerusalem Dispatch
Sign up to get the latest insights and analysis on Israel-Palestine, alongside Turkey Unpacked and other MEE newsletters
The banking waiver is essential for maintaining liquidity in the occupied Palestinian territories, particularly through transferring shekels accumulated by Palestinian banks via local commerce back to Israel. The suspension of this waiver would freeze vital financial flows, risking systemic instability within the Palestinian banking sector.
Finance Minister Bezalel Smotrich's policy shift followed the UK's decision to impose sanctions on him and Itamar Ben Gvir, another extremist Israeli minister involved in stoking violence across the occupied West Bank. Rather than distancing itself from these figures, the Israeli government's response has been to escalate its economic warfare against the Palestinian people.
Follow Middle East Eye's live coverage of the Israel-Palestine war
Smotrich's ideological project is to dismantle the PA incrementally while advancing ambitions for annexation and settlement expansion, often under the guise of regulatory measures.
The recent announcement by some Hebron sheikhs to abandon the PA and seek incorporation into the Abraham Accords reflects the Palestinian leadership's growing legitimacy crisis. As financial containment deepens, political alternatives to Oslo are being forged - not through diplomacy, but from the ground up.
The sheikhs' economic offer and embrace of joint enterprise with Israel underscores how fiscal paralysis is catalysing secessionist currents within the occupied West Bank.
Acute pressure
The consequences of the banking decision will be profound if it is not quashed amid external pressure. Without the ability to repatriate shekel surpluses to Israeli clearing houses, Palestinian banks risk exceeding their liquidity thresholds.
Such an overflow would disrupt the operations of domestic banks and constrain their capacity to issue loans, pay salaries or conduct cross-border payments for imports. Although the Palestinian Monetary Authority (PMA) has publicly rejected rumours of an imminent banking collapse, its own statements acknowledge the acute pressure facing the sector.
The current crisis underscores the structural impossibility of Palestinian financial sovereignty under Oslo's asymmetric framework
Already, many Palestinians are reporting their struggles to access dollars and make withdrawals from local banks, creating a black market for the currency as scarcity increases. The current crisis intensifies this dollar liquidity shortage, deepening dependence on Israeli regulatory discretion.
The shekel surplus is not a new crisis. Rather, it is a chronic symptom of a distorted economic arrangement, wherein the PA cannot issue its own currency, lacks sovereign control over its borders, and is dependent on an adversarial occupying power for financial operations. The current predicament underscores the structural impossibility of Palestinian financial sovereignty under Oslo's asymmetric framework.
Decades of aid dependency and fiscal containment have created a distorted political economy that rewards stability over sovereignty. The illusion of economic governance under occupation has served to insulate Israel against political blowback, while outsourcing service provision to a donor-financed authority with no real fiscal sovereignty.
The PMA's reassurances, while institutionally understandable to prevent a run on the banks, do little to mask the core reality. Palestinian banks operate within a financial regime designed to be permanently precarious.
They are not immune to coercive shifts in Israeli policy, nor are they buffered by an international community willing to enforce economic and financial protections for a stateless people.
The international response thus far remains tepid. While the UK's sanctions on violent ministers are a symbolic step, they fail to address the material levers through which Israeli policy subjugates the Palestinian economy. Legal mechanisms exist to challenge these practices, particularly through frameworks that prohibit economic coercion and collective punishment under international humanitarian law. But such instruments remain politically under-utilised.
The shift by the UK and France from pursuing immediate recognition of Palestinian statehood to merely demanding a credible path towards that goal represents a retreat in political boldness. Yet it still constitutes a diplomatic counterweight to the financial containment strategy advanced by Smotrich.
Financial recalibration
A planned conference in New York (initially set for June but later postponed indefinitely), whose agenda explicitly links recognition to institutional reforms within the PA and other measures, could challenge the Israeli economic coercion campaign by reframing recognition as both a political and financial recalibration. Such an initiative could embed statehood within a framework of international guarantees and structural PA transformation, offering a possible alternative to the Oslo-derived dependency model.
Dedollarisation could insulate the Palestinian economy from foreign exchange shocks and external regulatory pressures
But preconditions include dismantling parallel Hamas governance. Hamas has rejected disarmament, and neither the US nor Israel has committed to a Palestinian state, raising questions about the likelihood of such efforts succeeding.
If the recognition agenda gains traction, it could provide scaffolding for a new financial architecture, supported by regional and European actors, that challenges Israel's monopoly over the Palestinian financial system. Brics members, including China and Russia, could also help with their emerging financial systems.
Dedollarisation, as advocated by the PMA and other economic actors, represents one such strategy to reduce vulnerability. By lowering reliance on dollar liquidity and promoting local digital payment systems and trade in national currencies, dedollarisation could insulate the Palestinian economy from foreign exchange shocks and external regulatory pressures. But this would require robust international backing in order to establish alternative clearing arrangements, secure regional buy-in, and develop interoperable digital finance infrastructure.
What is needed now is not merely crisis management, but a fundamental rethinking of Palestinian economic and financial strategy. This entails moving beyond the hollow language of 'resilience' and addressing the structural impediments to sovereignty by reasserting the Palestinian right to monetary policy, exploring alternatives to Israeli shekel dependency, and building regional and international alliances that can provide alternative financial conduits.
The recent move by Smotrich may have unintended consequences. In attempting to punish the PA and retaliate against European sanctions, Israel might have inadvertently catalysed a broader reassessment of the Oslo economic regime.
The technocratic consensus that once held Oslo's financial architecture together is fraying. It is now incumbent on Palestinian policymakers, civil society, and diaspora networks to articulate a coherent economic and financial vision rooted in decolonisation rather than dependency.
The current banking crisis is not a sudden shock, but the logical outcome of a prolonged process of economic containment.
Each financial rupture, whether in clearance revenues, banking regulations or trade flows, is a reminder that economic governance under occupation cannot be neutral or technocratic. It is an arena of power, one where control over money functions as control over Palestinian life.
To break this cycle requires more than technical fixes. It demands a political break with the Oslo economic paradigm, and the assertion of a strategy that reclaims the Palestinian right to define the terms of its own economy and financial system.
New technologies and financial propositions in the global economy today offer potential avenues for exploration. The stakes are no longer about growth or reform. They are about liberation and survival.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Eye.