No Prospects for Palestinian Currency

Reinstating the Palestine pound has long been a dream for Palestinians.  Nevertheless, amid the Palestinians’ eagerness to consolidate their sovereignty  and in view of the reality of the Palestinian economy that is controlled by Israel, not to  mention the losses and challenges that could result from such a step, it seems  that this Palestinian dream still has a long way to go before becoming a  reality.

During the era of the Ottoman Empire, the Ottoman lira was the currency  circulated in Palestine. With the beginning of the British Mandate, the pound sterling was introduced and was  linked to the Egyptian pound. In the late 1940s, the government of the British  Mandate decided that the time had come to issue a Palestinian currency. This  decision, however, was strongly rejected by Palestinian civil organizations — such as the Christian-Muslim association in Haifa, the chambers of commerce and  national forces. They were opposed to this step on the basis that the  Palestinian government was not independent, as it operated under the control of  the British High Commissioner.

The civil forces warned that issuing a Palestinian currency without being  backed by a sufficient amount of gold would hold off investors and undermine  Palestinian exports — most importantly agricultural exports — at the time.  Nevertheless, the High Commissioner insisted on issuing a Palestinian currency  to be linked to the pound for which purpose he formed the Palestinian Monetary  Council. The Palestinian pound was introduced equal to the pound sterling.

When Israel occupied the rest of the Palestinian territories in 1967, it  closed all Palestinian and Arab banks, imposing its own currency — the Israeli  lira, and then the Israeli shekel. This had caused the Palestinian economy to  deteriorate, paving the way for the Israeli economy to grow at very high rates.  In 1993, the Palestinian Liberation Organization (PLO) signed a peace agreement  with the Israeli government, which resulted in new monetary and financial  arrangements.

The Paris Protocol

While the Oslo  Accords addressed the political and security aspects of the relations  between the PLO and Israel, the Paris Protocol that was signed in April 1994 addressed the  financial and economic aspects of these relations. According to the protocol, a  Palestinian Monetary Authority (PMA) was to be formed and operate as a financial  and economic adviser to the Palestinian Authority (PA), without enjoying the  powers of the central bank.

Pursuant to the Paris Protocol, the PA was obligated to allow Israeli banks  to operate in Palestinian territories, while Palestinian banks were not granted the same rights. The  agreement also stipulated that the Israeli shekel shall be one of the main  currencies in the Palestinian market, along with the U.S. dollar and Jordanian  dinar. Thus, Israel continued to control the Palestinian economy, earning major  financial gains.

Indeed, the fact that the Palestinian economy depends on the Israeli shekel  as one of its main currencies has worked greatly to the advantage of Israel. The  Palestinian market is the second market, following Israel, that deals with the  Israeli shekel. In fact, 10% of the total issuance of Israeli shekels is used in  the Palestinian market.

This is especially true given that there is no significant demand for the  Israeli shekel on the international market, despite that it was added last year  to Bloomberg’s list of 16 major world currencies. Moreover, the Israeli economy  makes $300 million each year in profits resulting from issuing shekels in the  Palestinian market.

What’s more, Palestinians receive international support and funding in hard  currencies, including the dollar and euro, boosting the Israeli shekel. The PA  exchanges all hard currencies it receives as donations for the Israeli shekel at  Israeli banks, in order to cover its expenses and the salaries of its  employees.  For instance, the PA buys a 200-shekel bill at its market value  of $45 while the cost of print does not exceed $0.20.

Moreover, preventing Palestinians from issuing their own currency has  inflicted major losses, due the cost of exchange. Palestinians are also deprived  of benefiting from the issuance profits, and their economy is subjected to the  fluctuations of the Israeli market.

Due to this policy, Israel has kept a tight grip on the Palestinian economy.  Indeed, Israel has occasionally refrained from transferring sufficient shekel  amounts to the Palestinian banks, causing major burdens on Palestinian  liquidity. Israel also refuses at times to replace mutilated shekel bills  accumulated at Palestinian banks, inflicting great losses on Palestinian banks  as mutilated bills are hard to circulate.

The situation in Gaza is a clear example in this regard. Since the  imposition of the Israeli blockade in 2007, after Hamas took  over the  Gaza Strip — which Israel has declared “a hostile territory” — Israeli banks  stopped dealing directly with banks in Gaza. This has caused a chronic shortage  of shekel bills in the Gaza market, which in turn has led to a significant  difference in the currency exchange rates between the Gaza market and the  markets of the West Bank and Israel. This resulted in the creation of a parallel  black market that took advantage of the difference in the exchange rates.

The Palestinian currency: fiction or reality?

According to the Paris Protocol, only upon Israeli approval shall the PMA be  granted the powers of a central bank and thus issue a Palestinian currency.  Nevertheless, acting as a central bank does not necessarily mean issuing  national currency.

It is not simple for Israel to give up the benefits it receives as a result  of the absence of a Palestinian currency. On the other hand, it is not rational  to issue a national currency without acquiring the means to protect it, or  without backing it by gold or other hard metals to ensure its stability.

It is true that issuing a national currency would bring major benefits, most  importantly being able to apply fiscal and monetary policies that serve the  state’s development plans. However, issuing a national currency is not a  luxury.  It is an indication of the sovereignty of a state. Nevertheless,  this should be performed within a rational economic vision stemming from  national, political and developmental interests.

The pertinent question, however, is: are Palestinians prepared to issue  their own currency?

It should be noted that the PMA has come a long way in organizing the  financial and monetary market in Palestine, as is awaiting this new policy.

Is it in Palestine’s best interest to issue a national currency in light of  the Israeli occupation and the restrictions imposed on border traffic, exports  and trade with the outside world, not to mention the Palestinian fragmentation  under the weight of the financial crisis plaguing the PA, which depends on the  unsustainable funds of the donors?

In autonomous states, the central bank and its affiliated financial  institutions are independent of the government. This makes the Palestinian case  even more complicated, as the Israeli government controls the Palestinian  economy, as well as the financial and banking sectors.

It seems that the reasons behind the rejection of issuing the Palestinian  pound during the British mandate remain valid. The times have changed but the  reasons are the same. Issuing a Palestinian currency is a dream that depends on  Israeli laws and is crippled by internal Palestinian division.