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Western officials have warned Benjamin Netanyahu that he risks an “economic catastrophe” in the occupied West Bank if Israel does not renew the vital waiver that banks need to maintain relations with their Palestinian counterparts.
The officials, led by the US Secretary of the Treasury Janet Jellenare increasingly concerned that Israel’s ultranationalist Finance Minister Bezalel Smotrich will not renew the waiver, which expires on Thursday.
“The actions of some members of your administration to deny the West Bank access to financial resources endanger Israel’s security and threaten to further destabilize the entire region,” said a copy of the letter signed by Yellen and seven from her colleagues and seen by the Financial Times reports.
The waiver allows payments for vital services and salaries linked to the Palestinian Authority, and facilitates the import of essential items such as food, water and electricity into the occupied Palestinian territories.
Before Hamas’s deadly attack on Israel on October 7 last year and the subsequent war in Gaza, the waiver was 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 one-year document.
Smotrich has threatened several times this year not to renew it. Western officials have tried to bypass Smotrich, whom they see as intransigent, and plead directly with Netanyahu.
Yellen and seven of her colleagues, including Britain and the EU, sent Netanyahu the letter on Friday, warning that Smotrich’s actions could promote the development of informal financial channels.
“Such an economic catastrophe would threaten the integrity of the Palestinian Authority at a time when they are particularly critical security partners,” the letter said.
Smotrich and the Israeli cabinet have asked that at least two key conditions be met for the waiver to be extended, according to people familiar with the matter.
The first is to schedule an on-site review of the Palestinian Monetary Authority by the Paris-based Financial Action Task Force (FATF), a global financial crime watchdog. The second is a national risk assessment of the Palestinian financial system, conducted with the assistance of the World Bank.
According to the public, the Palestinian authorities have since completed these steps, with the FATF review due to take place early next year and the risk assessment recently completed.
The Palestinian Authority is also “on track” to strengthen its regime against money laundering and terrorist financing, the finance ministers’ letter said.
The US and Britain have helped the Palestinians meet these conditions, according to Yellen’s letter, which said they had provided a report to the Israeli government in June showing that Palestinian financial institutions are in trouble. West Bank “maintain adequate controls to manage” the threat of terrorist financing risks.
“We have not received any response to the report, nor any information from your government that would cause us to reconsider our conclusions,” the letter said.
The letter from the Finance Ministers asked for the exemption to be extended by one year. But Israeli officials said the extension would likely only be for a short period, during which the Palestinian Authority is expected to complete the risk assessment — something people familiar with the matter say the Palestinians have already done.
The issue is being discussed by senior officials in the Israeli government, and the cabinet is expected to make a decision in the coming days.
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While the Palestinian economy trades in multiple currencies with other economies, the economy formally runs on the Israeli shekel. Palestinian financial institutions go through the Bank of Israel and Israeli banks to access them.
According to data cited in the finance ministers’ letter, approximately $13.2 billion in trade between Israel and the West Bank passes through these channels annually.
Losing the waiver would severely hamper these operations and paralyze economic activity in the occupied West Bank, which Palestinians see as the heart of a future state but has been under Israeli military occupation since 1967.
It would also have significant consequences for 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 with business ties to it unable to receive payments from Palestinian banks . Palestinian workers in Israel would also no longer be paid via electronic bank transfers.
Additional reporting by Andrew England in Tel Aviv