Is the Palestinian Financial System in Danger? And How Long Can It Withstand Pressure?

Amid increasing financial pressures, a question arises that seems simple in formulation but is profound in content: Is the Palestinian financial system approaching a state of danger?

But the more important question today is no longer just about the existence of danger, but about the duration of the ability to endure it.

This reality cannot be summed up with a decisive answer, because we are not experiencing a state of collapse, but at the same time we are not operating within a stable environment. What we are actually facing is a state of sensitive equilibrium, which continues but grows more fragile over time.

In previous discussions, emphasis was placed on what can be termed the "gap economy," meaning the continual disparity between available revenues and existing expenditures. However, today’s discussion is no longer related to the reasons for this gap, but rather to the financial system's ability to continue managing it without it turning into a real danger.

Figures indicate the extent of the existing pressure. Public debt is nearing $15 billion, a level that is almost equal to the gross domestic product. Additionally, the wage bill consumes between 900 million to 1 billion shekels monthly, while debt service ranges from 250 to 300 million shekels monthly. On the other hand, revenues depend on unstable sources, primarily clearance funds, which remain subject to fluctuations and delays.

Despite these indicators, one cannot say that the financial system is collapsing. Institutions continue to operate, salaries are paid even partially, and services continue. Furthermore, the banking sector still maintains a degree of stability and plays an important role in absorbing some of the pressures. However, this image does not reflect true stability as much as it reflects a continued ability to manage the crisis.

The core problem lies not only in the size of the debt or the deficit but in the nature of the financial model itself. The Palestinian financial system operates without complete sovereign tools and relies on unstable revenue flows against fixed obligations that cannot be postponed. This structural imbalance makes any financial shock quickly turn into a liquidity crisis, limiting the system's ability to absorb risks as is the case in traditional economies.

As this pattern continues, collapse does not occur suddenly; rather, what can be described as "slow erosion" takes shape. The same crises repeat: delayed salaries, accumulation of obligations, and a decline in planning capacity. With each new cycle, the system becomes less resilient in facing shocks.

In this context, the banking sector emerges as a key balancing factor, but it simultaneously carries an important paradox. Palestinian banks manage assets estimated at around $22 to $25 billion, of which about $17 to $19 billion are deposits, reflecting a large volume of liquidity within the economy.

However, this liquidity does not fully convert into productive investment. Part of it remains in short-term placements or directed towards financing the deficit, rather than being used for projects capable of generating sustainable income. Here emerges a strategic opportunity, not related to increasing borrowing but to redirecting resources.

Estimates indicate that directing a limited and well-studied percentage of deposits, ranging from 5% to 10%, through safe financing tools, could create an investment portfolio ranging from $1 to $2 billion, without compromising the stability of the banking system. However, this approach does not mean using depositors' money directly but designing investment tools that ensure protection and provide stable returns.

Within this framework, financing can be directed towards projects with clear feasibility, such as energy projects that contribute to reducing the consumption bill, or infrastructure projects that generate direct revenues, in addition to investing in digital transformation, which can enhance collection efficiency and reduce financial losses.

Partnership models can also be developed to bring together the banking sector and the Palestinian Investment Fund to form investment platforms directed towards long-term strategic projects. Such models not only enhance investment opportunities but also contribute to risk distribution and create a more stable environment, transitioning liquidity from a tool for crisis management to a tool for building the economy.

However, continuing to rely on borrowing to finance ongoing expenditures places additional pressure on the banking system and limits its ability to play its developmental role. Over time, this role may shift from supporting the economy to merely managing liquidity, which diminishes its positive impact on growth.

In this context, a more sensitive question arises than all of the above: How long can this pattern of financial management last? And to what extent can Palestinian public finance withstand this level of pressure without reaching a point where it becomes difficult to continue with the same tools?

The answer is not tied to a specific time frame as much as it is tied to margins of endurance. The financial system can continue as long as three essential elements are present: a minimum flow of revenues, the continued capacity of the banking system to absorb, and maintaining an acceptable level of trust among the market and the public. But these very elements are not fixed; rather, they gradually erode with continued pressures without structural remedies.

With each new deferral cycle, the ability to maneuver becomes less, and crisis management shifts from a temporary option to a permanent state. Here lies the real issue: it is not in the question of when collapse occurs, but in how long the erosion continues before the system reaches a point where any additional disruption is enough to cause a wider imbalance.

Despite all this, there remains a margin that prevents sliding into collapse. However, this margin is not open indefinitely; it erodes with continued pressures.

In light of this, the real challenge lies not just in avoiding collapse, but in the ability to prevent mere survival from turning into long-term depletion, and transitioning from crisis management to redirecting resources towards a more sustainable path.