Cash Crisis Looms Large for Palestinian Banking System

Jerusalem, West Bank - The Palestinian banking system is facing a severe cash crisis due to an influx of shekels from workers’ remittances and informal sources. According to data from the Palestine Monetary Authority (PMA), the regular cash shipment limit set by the Bank of Israel (BoI) is insufficient to manage the actual inflows, leaving banks struggling with liquidity.

The Root of the Problem

The issue arises from the fact that business in the West Bank is largely conducted in cash, particularly at gas stations, restaurants, and electricity and fuel vendors. This has led to a significant influx of shekels into the country, exceeding the BoI’s regular shipment limit of NIS 3.6 billion.

• Exceptional shipments have been made above the annual limit to ease the problem, but these are ad hoc and unpredictable, making it difficult for banks to rely on them in their liquidity management.
• Shekel inflows into the banking system reached NIS 20 billion in 2021, with regular shipments amounting to NIS 16.6 billion and exceptional shipments of NIS 4.6 billion.

Exacerbating Factors

The situation is further complicated by:

• More formal Palestinian workers being allowed to work in Israel and Israeli settlements, adding to shekel cash inflows into the West Bank.
• Informal activity may be decreasing, which could lead to a larger influx of shekels into the country.

The Informal Economy

Experts estimate that the size of the informal economy in the West Bank is over 50% of GDP, with some studies suggesting it could be as high as 57%. This means that a significant portion of economic activity goes unreported and untaxed, further straining the banking system.

Solutions and Challenges

The PMA has recommended that Palestinian banks be allowed to deposit their excess shekels in its vaults instead of holding them in each branch. However, this would only displace the problem rather than solve it. Dollarization could also be a solution, but it would be impractical given the volume of trade and formal flows between the West Bank and Israel.

The Future

As the situation continues to unfold, Palestinian banks are left struggling to manage their liquidity, leaving many wondering if a cash crisis is on the horizon. The Palestinian banking system must find a solution to this problem before it’s too late.