The Palestinian Economy at a Crossroads: 4 Files Awaiting Resolution

Exclusive SadaNews: Two years of genocide have placed the Palestinian economy in its biggest predicament since the establishment of the Palestinian National Authority in 1994, as the Central Bureau of Statistics indicates that the Gross Domestic Product (GDP) in Palestine has decreased by 29% (18% in the West Bank, 86% in the Gaza Strip) during the two years of genocide, compared to the same period prior to October 7, 2023, bringing the GDP level to around $10 billion after it had amounted to between $13 and $15 billion before October 7.

Today, the Palestinian economy, two years into the war, stands at a crossroads with four files awaiting resolution, but the Israeli side uses them as part of a systematic plan to impoverish Palestinians and create a repelling environment. So, where are these four files headed: clearance, Palestinian workers working within the Green Line, banking relations between Israeli and Palestinian banks, and the reconstruction of the Gaza Strip?

Economic expert Sami Miari told "SadaNews": From a practical standpoint, the four files are interrelated; for instance, one cannot talk about reconstruction or transfer clearance money if the banking relationship is severed between the two sides.

Clearance Funds

Six months have passed without the Israeli side transferring a single shekel to the Palestinian Authority's public treasury from the clearance funds, which constitute 68% of total revenues, noting that they used to deduct about 270 million shekels monthly under the pretext that it was allocated to the Gaza Strip, in addition to other deductions imposed since 2019 amounting to about 52 million shekels under the claim that they were designated for prisoners, ex-prisoners, and families of martyrs and the wounded, based on a law in the Knesset.
The total amount deducted from the Israeli side for clearance funds is about 13 billion shekels, according to the statement of Government Communications Director Dr. Muhammad Abu Rab. This highlights that these deductions have put the National Authority in a financial predicament that is the most severe, as the government has been forced to rely on bank loans and international aid, as well as some local settlements with electricity companies and local entities, and some local revenues to fulfill some of its obligations, particularly in paying incomplete salary payments and covering its operational expenses.

However, observers emphasize that the Palestinian Authority's policy of "putting on caps" to manage its affairs in the absence of clearance funds cannot last indefinitely, and that the margin is decreasing for the Authority month by month.

European sources confirmed to "SadaNews" that there is pressure being exerted by the European Union and the international community on Israel to release the clearance funds, which donors consider to be Palestinian funds that should not be withheld or confiscated by Israel.

A government source revealed to "SadaNews" that there are actual pressures being exerted from "more than one party on Israel to release the clearance funds, but the Israeli side only wants to transfer the remaining value of the clearance funds over the last six months after the deductions, amounting to 2-2.5 billion shekels, while they consider the funds that were deducted under the heading "salaries of prisoners and ex-prisoners" to be confiscated according to a law in the Knesset followed by decisions from Israeli courts for compensation to settlers killed in operations. As for the funds deducted "as allocations for the Gaza Strip," they want to deduct them and transfer them to the Gaza Strip instead of to the National Authority without clarifying the terms of their use.

Therefore, the Palestinian Authority rejected this matter, considering that the confiscated funds amount to 13 billion shekels, demanding their complete release. Thus, the prospect of a breakthrough in this file appears slim at the current time due to the significant gap between the two parties despite the international pressures exerted on "Israel".

Economic expert Dr. Saeed Sabri believes that clearance remains the most sensitive financial card because it constitutes the backbone of government revenues, and thus of any capacity to pay salaries or operate services.

He noted that the expectations regarding this file indicate continued deductions and linking the transfer of funds to political and security conditions, making the financial flow unstable. Nevertheless, international interventions are likely to occur to ensure that the financial situation does not collapse, through phased arrangements that allow for partial release of funds. He says: "These solutions, despite their necessity, keep the government in a 'liquidity management' circle rather than 'financial reform'. The absence of a comprehensive and stable agreement will link each month to new negotiations and delay any possibility of reducing the deficit or rearranging the financial priorities for Palestinians".

As for Miari, he confirms that the clearance issue needs greater international pressure to create a breakthrough.

Palestinian Workers Inside the Green Line

Before October 7, about 200,000 workers were employed inside the Green Line, generating for the Palestinian market approximately 1.5 billion shekels, or about 18 billion shekels annually. This category of the Palestinian workforce constituted more than 15% of the workforce and contributes about 20% to Palestinian national income.

Miari told "SadaNews": "There is an Israeli interest in the return of these workers to work inside the Green Line, pointing out that during the Al-Aqsa Intifada in 2002, about 150,000 workers were prevented from going to their jobs, but Israel was later forced to respond to the requests of the business sector to attract Palestinian workers into Israel".

Miari explains that the Israeli government's efforts to find alternatives for labor from abroad have failed, attributing this to a single reason represented in the professionalism of the Palestinian worker, as employers did not find the foreign worker to be an alternative to the Palestinian worker, especially in the construction and agriculture sectors. Miari believes that despite the current closure on this issue by the Israeli government, they will eventually be forced to respond to employers' requests to attract Palestinian workers to Israel.

However, this somewhat optimistic view does not align with the current trends of the Israeli government, which still firmly rejects the return of Palestinian workers to Israel. The spokesperson for the occupation army, Avichai Adraee, appeared in a video warning Palestinian workers against risking their lives in the event they attempt to infiltrate for work through the wall, and elements from the Israeli police have been seen targeting economic establishments employing Palestinian workers.

The legal advisor to the Arab Workers Union in the interior, Wahbi Badarna, pointed out that all statements issued by officials and union representatives and relayed by some media about the imminent return of workers to work in Israel are unfounded, noting that the Israeli government's current position is still strict towards allowing the return of Palestinian workers in Israel.

For his part, economic expert Dr. Saeed Sabri told "SadaNews" that the workers' file remains the most socially and economically impactful in the short term, but at the same time, it is the most ambiguous. Until now, there are no indicators that work inside the Green Line will return to its previous level, which places tens of thousands of families under direct financial pressure. The local alternative is unable to compensate due to the weak absorptive capacity of the private sector and the slowdown in projects. Therefore, it is expected that unemployment will continue to rise, purchasing power will decline, and the informal economy will expand. The most likely scenario in the coming months is partial measures linked to vital sectors, without a comprehensive breakthrough. This means that the current situation will remain one of "managing the crisis temporarily" instead of reaching a sustainable solution that restores balance to the Palestinian labor market.

Renewing Banking Relations with Israeli Banks

Dr. Sabri says that this file is the most dangerous because the deadline at the end of the month puts Palestinian banks in a real test regarding the continuity of their work with the Israeli banking system.

He emphasizes that the relationship with the Israeli banks is not an option; it is a mandatory channel for the passage of clearance, trade, remittances, and private sector payments, indicating that the most likely scenario is the renewal of relations but with stricter conditions including raising compliance levels, expanding audits on transfers, and possibly setting ceilings for certain operations.

Sabri believes that "complete severance" is unlikely due to its high costs for both sides, but we may witness a partial tightening that affects the speed and cost of transactions. In short, what will happen is a "risk management" rather than a "return to normalcy", with greater expansion in oversight and regulation during the upcoming period.

The Governor of the Palestinian Monetary Authority, Yahya Shinar, confirmed in a meeting with journalists that the Monetary Authority has prepared a Plan B in case Israel proceeds with cutting banking relations with the banks operating in Palestine, based on dealing with correspondent banks through a third party to complete financial transactions with Israel.
Recently, Hebrew media indicated that a sharp dispute has erupted between Israeli Finance Minister Bezalel Smotrich and Prime Minister Benjamin Netanyahu over Netanyahu's attempt to push for the renewal of banking relations between Israeli banks and those operating in the Palestinian territories.
The Hebrew newspaper "Israel Hayom" learned that Smotrich threatened to resign from the government after it became clear to him that Netanyahu intends to pass a decision in the cabinet that would take away his powers in this sensitive file.

The dispute erupted because the exemption that was granted for years to banks in Israel, allowing them to transfer money to the Palestinian Authority, has expired. However, Smotrich, since the beginning of his term, has sought to eliminate this arrangement, which he sees as inherently encouraging "terrorism" and "rewarding the killers".

On the other hand, the international community fears that severing relations between Israeli and Palestinian banks could lead to an economic collapse of the Palestinian Authority. For this reason, significant pressure is being applied recently from Washington on Netanyahu and Smotrich to extend the exemption.

Netanyahu decided to respond to the pressures, and to circumvent Smotrich's opposition, plans to pass a decision in the cabinet transferring authority to another minister so that he can continue the exemption arrangement.

However, Smotrich became aware of this and was extremely angered. In a meeting between them, he made it clear to Netanyahu that he would not allow his powers to be taken away and would not agree to extend the mechanism that, in his view, enables Israel to pay money for "terrorism".

"Israel Hayom" learned that at one point, Smotrich threatened to resign, which would mean dismantling the government and going to elections.

Netanyahu reverted, and at this stage, it appears that the decision he initiated will not be put to a vote in the cabinet.
It is noted that the protective mechanism regulating cooperation between Israeli and Palestinian banks will expire at the end of this month, just a few days away, and it remains unclear how the issue will be addressed.

The Reconstruction File

Miari believes that the reconstruction of the Gaza Strip remains the most important file among the four, as it has immediate humanitarian dimensions, and its explosion would harm several local and international aspects since the United States and Egypt were sponsors of the ceasefire agreement.

Meanwhile, Dr. Sabri sees that reconstruction will remain hostage to the political equation and security conditions, meaning progress will be slow and insufficient for the level of destruction.

He points out that the expectations indicate a trend towards "relief first" through restoring basic services and humanitarian infrastructure before moving on to larger economic and investment projects. The anticipated funding will be fragmented and multi-sourced, creating coordination challenges and potentially hindering the pace of execution. The lack of a comprehensive economic vision for reconstruction could lead to scattered efforts unable to create jobs or support the private sector. Therefore, it is likely that reconstruction will remain in a state of "phased restoration" instead of turning into a comprehensive developmental program that rebuilds the economy in a balanced and sustainable manner.

The United Nations had indicated that the reconstruction of the Gaza Strip would require about $70 billion, according to the urgent needs assessment conducted by the UN, the EU, and the World Bank, noting that this means a requirement of $20 billion for this purpose over the next three years.

How will the Palestinian economy move during the upcoming period?

Economic expert Dr. Saeed Sabri confirms that the Palestinian economy will move during the upcoming period through negotiations rather than policies; and the extent of improvement will depend on the parties' ability to reach a "minimum" of financial, banking, and economic arrangements that prevent collapse and allow for some recovery. However, without stable solutions for these four files, the economy will remain in a state of "day-to-day crisis management" rather than in a developmental path.