The Paradox of Abundance: 17 Billion Shekels

In economics, there is a classical paradox known as "the paradox of abundance,” when an available resource in abundance turns into a constraint that stifles growth rather than being a lever for it. This is exactly what the Palestinian economy is experiencing today with the shekel: a cash mass exceeding 17 billion shekels accumulated within the banks' coffers, while the actual absorptive capacity of the banking sector does not exceed 6-7 billion. The currency exists in massive quantities, but is completely unable to perform its basic functions: exchange, investment, and trading. The problem is not the absence of money, but its inability to move, and this subtle difference is what makes addressing the crisis deeper than merely injecting additional liquidity or tightening control.

The Roots of the Crisis: Between Monetary Arrangements and Structural Constraints

To understand the magnitude of the problem, one must return to the nature of the monetary relationship governed by the Palestinian economy, which does not possess an independent national currency; rather, it deals in three main currencies, the most prominent of which is the Israeli shekel. This arrangement, imposed by political realities more than economic choice, has rendered the Palestinian banking system hostage to the mechanisms of "charging" the monetary surplus through the Israeli central bank, a mechanism that can be disrupted at any moment. While the Paris Agreement allowed the transfer of approximately 18 billion shekels annually, the current restrictions do not permit more than 4.5 billion shekels to be withdrawn every three months, a gap sufficient by itself to explain the accumulation of the crisis. When this channel is disrupted, surplus cash accumulates within the banks' coffers, transforming from an asset capable of investment into an operational burden that threatens the banks' ability to provide their services.

Even more dangerously, this congestion is not restricted to the technical side; it extends to the very essence of trust in the banking system. When banks begin to impose ceilings on cash deposits, they send an implicit message to the market that direct cash transactions have become safer and less costly than going through official channels, and this is exactly the moment when the informal economy begins to expand at the expense of the organized economy.

Between Paper Shekels and Electronic Shekels: Another Facet of the Crisis

Since the exceptional shipments of the surplus stopped in October 2023, the crisis has unfolded along three simultaneous paths: the accumulation of paper shekels has exceeded 17 billion shekels; banks have imposed ceilings on receiving cash from their clients, which has inflated a parallel monetary mass outside the banking system that is difficult to estimate but is certainly large; and the deferred shekel, with the cessation of clearing remittances, has turned into the almost sole source for replenishing the electronic shekel balances in banks. This distinction is essential: the crisis is not just an abundance of cash, but a scarcity of shekels available for electronic use in banking and commercial transactions.

In response, banks and the Monetary Authority resorted to graduated measures: consuming the surplus liquidity available in banks until it runs out, then the Monetary Authority resumed injecting into the reserve requirements by lending it to banks, followed by swap operations through which banks transformed surplus currencies like the dollar and euro into electronic shekels with limits of approximately 3.5 billion dollars, in addition to similar swaps conducted by the Monetary Authority from its dollar reserves, and finally, the government converted about 2 billion shekels of its loans into other currencies to inject them into the market. These measures have delayed an explosion, but they are consumer solutions that cannot be repeated indefinitely without depleting the banking system's reserves of foreign currencies.

The Hidden Cost: Shadow Economy and Erosion of the Tax Base

When an increasing portion of transactions moves outside the banking framework, the loss is not limited to banks alone. The public treasury loses documented tax revenues, consumers lose the legal protection of official transactions, and serious investors find themselves in an unfair competition with those operating outside supervision. The clearest evidence is a parallel cash withdrawal market that imposes commissions between 15% and 25%, translating directly into a decline in purchasing power.

This decline has not remained confined to theoretical numbers, as traders in sensitive sectors like fuel have been forced to hold large cash amounts inside their stores instead of depositing them, which doubles their security and financial risks, while the percentage of cash acceptance for fuel bills has dropped from levels that covered their full value years ago to much lower levels today.

A Critical Review of Proposed Solutions

The proposals circulating to address the crisis are correct in principle, but they need a realistic prioritization instead of being presented as a comprehensive package that can be implemented all at once.

In the short term, there is no alternative to diplomatic pressure to resume regular clearing and shipping the surplus, reflecting the ongoing European pressures to raise the annual transfer ceiling from 18 to 32 billion shekels.

In the medium term, expanding the electronic payment infrastructure becomes a necessity, through incentives such as fee exemptions or tax incentives for small traders.

As for diversifying the currency basket, it is a correct path but its feasibility is limited, as trade with the Israeli side represents 57-63% of foreign trade, making any radical shift contingent upon the ability of small and medium enterprises to bear exchange risks without advanced hedging tools.

Unconventional Solutions Worth Considering

Alongside traditional paths, there are less frequently discussed options that address the root of the problem rather than just its symptoms: international mediation through the World Bank or IMF to push for a permanent mechanism to address the surplus instead of temporary arrangements that can be disrupted with every political crisis; a regional settlement mechanism that circulates part of the surplus through third parties if legally and operationally feasible, in order to reduce dependence on the sole bilateral channel; an agreement with some Israeli suppliers to settle certain invoices in dollars or euros, initiated by chambers of commerce without complex political intervention; and finally, establishing an international currency swap facility with guarantees from international institutions, transforming the crisis from an "internal problem" into a "regional stability issue" that international parties with a vested interest in preventing its explosion participate in solving.

Yet, even if these mechanisms succeed in alleviating pressure, they will not eliminate the need to resume regular clearing and surplus shipments, as they remain the most sustainable and connected route to the root of the problem, while unconventional solutions remain complementary tools, not alternatives.

What Distinguishes This Crisis from Previous Ones?

What deserves attention is that this crisis, unlike previous crises that were addressed by temporary arrangements, exposes the structural fragility in the monetary relationship that the Palestinian economy has relied on for decades. Any technical solution, no matter how successful, will remain temporary unless a deeper question is raised about the sustainability of complete dependence on a currency over which the Palestinian economy has no control over its policy or flow. This does not mean calling for an independent national currency soon, but it means that any serious strategy should include a gradual path to reduce the fragility of the economy in the face of similar shocks in the future.

Conclusion: From Crisis Management to Building Resilience

The discussion about the liquidity crisis should not remain confined to language of pleas or mutual justifications. What is needed today is calm and professional handling, separating what is urgent that requires immediate political intervention from what is structural that requires patient institutional building. The trapped liquidity is not merely an accounting figure, but an indicator of the Palestinian economy's need for a radical review of its relationship with its monetary tools. Building this resilience, not just managing the crisis, is the real test of the seriousness of any forthcoming reform plan.