Financial Crime World

Israeli Correspondent Banks Renew Clearing and Settlement Agreements with Palestinian Institutions

TEL AVIV/ JERUSALEM - Two Israeli correspondent banks have renewed their clearing and settlement agreements with Palestinian banks, ensuring that shekel transactions continue uninterrupted for now. The move comes as the Palestine Monetary Authority (PMA) and the Bank of Israel work towards a longer-term solution to address liquidity management issues.

Renewal Ensures Access to Shekel Liquidity

According to reports, the renewal allows Palestinian banks to maintain access to shekel liquidity, which is crucial for conducting business with Israeli counterparties. However, the agreement does not resolve the underlying issue of limited cash flow from the West Bank to Israel, which has led to a buildup of excess shekel cash in Palestinian banks.

Challenges Remain

The Palestine Monetary Authority and the Bank of Israel are working together to find a more sustainable solution to this issue. In the meantime, Palestinian banks will continue to hold significant amounts of excess shekel cash, which could lead to asset quality concerns if interest rates rise further or other shocks occur.

Convergence between West Bank and Gaza Remains Elusive

Despite some progress in recent years, convergence between the economies of the West Bank and Israel remains elusive. The gap in standards of living has not narrowed significantly since 1996, with inflation rates in both regions moving in lockstep.

  • Trade between the two economies has decreased over time
  • Labor mobility has remained lower than in the early 2000s
  • The business cycles of the two economies are highly asynchronous
  • The West Bank’s economy has become less competitive over time

Reform Agenda Needed to Achieve Convergence

To achieve income convergence, the Palestinian economy’s potential and actual growth rate must rise above current levels and that of the more mature Israeli economy. This requires important contributions from the PA, Israel, and international community donors.

Key Reforms

  • Fuller labor, capital, and goods mobility
  • Facilitation of investment in Area C
  • Resolving the fiscal crisis and dealing with accumulated arrears
  • Additional donor flows to support the reform process

Structural Reform Critical to Growth

Israeli-imposed movement, access, and investment restrictions and the near-total blockade of Gaza weigh heavily on growth. To build and sustain a higher growth momentum, significantly easing these restrictions is critical, as they are the main obstacles to an expansion of the West Bank’s private sector activity.

Positive Developments

  • Increase in permits for Palestinians from both the West Bank and Gaza Strip
  • More needs to be done to unlock the economy’s potential