US leads efforts to keep lifeline for West Bank lenders open

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Western officials have warned Benjamin Netanyahu that he risks “economic catastrophe” in the occupied West Bank if Israel does not renew a vital waiver that banks need to maintain relationships with their Palestinian counterparts.

The officials, led by US Treasury secretary Janet Yellen, are becoming increasingly concerned that Israel’s ultranationalist finance minister Bezalel Smotrich will not renew the waiver, which is set to expire on Thursday.

“The actions taken by some members of your government to deny the West Bank access to financial resources endangers Israel’s security and threatens to further destabilise the entire region,” a copy of the letter, signed by Yellen and seven of her counterparts and seen by the Financial Times, said.

The waiver allows payments for vital services and salaries tied to the Palestinian Authority, and facilitates the import of essentials such as food, water and electricity into the occupied Palestinian territories.  

Before Hamas’s deadly assault on Israel on October 7 last year and the ensuing war in Gaza, the waiver had been renewed annually. This year, Israel instead issued two extensions of the previous year’s waiver, which expired on April 1, rather than issuing a new year-long document. 

Smotrich has threatened not to renew it several times this year. Western officials have sought to bypass Smotrich, who they see as intransigent, and plead directly with Netanyahu. 

Yellen and seven of her counterparts, including the UK and the EU, sent Netanyahu the letter on Friday, warning that Smotrich’s actions could favour the development of informal financial channels.

“Such an economic catastrophe would threaten the integrity of the Palestinian Authority at a time when they are especially critical security partners,” the letter said.

Smotrich and Israel’s cabinet have asked for at least two key conditions to be met for the waiver to be renewed, according to people familiar with the matter.

The first is scheduling an on-site evaluation of the Palestine Monetary Authority by the Paris-based Financial Action Task Force (FATF), a global watchdog for financial crime. The second is a national risk assessment of the Palestinian financial system, done with the assistance of the World Bank.

Palestinian authorities have since completed those steps, according to the people, with the FATF evaluation set to take place early next year and the risk assessment recently completed.

The Palestinian Authority is also “on track” to strengthen its anti-money laundering and countering financing of terrorism regime, the finance ministers’ letter said.

The US and the UK have been assisting the Palestinians in meeting these conditions, according to Yellen’s letter, which said that they had provided a report to the Israeli government in June that showed Palestinian financial institutions in the West Bank “maintain adequate controls to manage” the threat of terrorist financing risks.

“We have not received any response to the report or any information from your government that would lead us to reconsider our conclusions,” the letter said.

The finance ministers’ letter requested the waiver be renewed for one year. But Israeli officials said the renewal was likely to be only for a short period, during which the Palestinian Authority would be expected to complete the risk assessment — something people familiar with the matter say the Palestinians have already done.

The matter is being discussed by senior officials in the Israeli government, with the cabinet expected to make a decision in the coming days.

While the Palestinian economy trades with other economies in multiple currencies, the economy formally runs on Israel’s shekel. Palestinian financial institutions go through the Bank of Israel and Israeli banks to access it.  

About $13.2bn in trade between Israel and the West Bank passes through those channels every year, according to data cited in the finance ministers’ letter.

Losing the waiver would severely hamper those operations, and would cripple economic activity in the occupied West Bank, which Palestinians see as the heart of a future state but which has been under Israeli military occupation since 1967. 

It would also substantially impact the Palestinian Authority, which exercises limited autonomy in parts of the West Bank, with tax funds collected in Israel likely to be frozen and Israeli companies that have business ties with it unable to receive payments from Palestinian banks. Palestinian workers in Israel would also no longer be paid by electronic bank transfer. 

Additional reporting by Andrew England in Tel Aviv