In a move with potentially explosive repercussions, the Israeli government announced on Tuesday, June 10, the cancellation of a crucial waiver that had allowed Israeli banks to operate with their Palestinian counterparts.
This measure threatens to bring the Palestinian banking system to a standstill, deepening the already precarious economic situation in both the West Bank and the Gaza Strip.
A Political Retaliation Framed as a Financial Measure
According to a statement from the Israeli Ministry of Finance, the decision follows Finance Minister Bezalel Smotrich’s determination to respond to what he describes as a “delegitimization campaign” orchestrated by the Palestinian Authority against Israel on the international stage.
Smotrich has ordered an end to the indemnity previously granted to Israeli financial institutions dealing with Palestinian entities operating in the occupied territories.
A Measure with Systemic Implications
The cancellation of this mechanism jeopardizes vital monetary flows—salaries, imports of goods, fund transfers, commercial payments, and international aid—all of which largely depend on interconnected banking relations between the two systems.
Analysts warn that this is far more than a technical adjustment; it represents a deliberate economic pressure tactic at a time when the Palestinian Authority is escalating its legal and diplomatic efforts against Israel at the International Criminal Court (ICC) and the United Nations.
West Bank Faces Risk of Financial Chaos
The freezing of banking relations would effectively suspend the transfer of billions of shekels exchanged monthly between the two financial systems. In 2023 alone, over 8 billion shekels flowed between Israeli and Palestinian banks.
The anticipated consequences would be swift and severe:
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Tens of thousands of Palestinian civil servants would lose access to their salaries.
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International transfers—including those from UNRWA and various NGOs—would be blocked.
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The Palestinian banking sector, reliant on clearing services and financial intermediation by Israeli banks, would face collapse.
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Cash dependency and black market activity would surge, bolstering informal networks.
Economic Weaponization as Political Leverage?
By refusing any form of technical extension or flexibility, the Netanyahu government appears to be leveraging economic tools for political ends—punishing the Palestinian Authority for its international initiatives while avoiding a complete rupture in security coordination.
This strategy further destabilizes the fragile equilibrium in Palestinian territories, already under intense strain since the outbreak of war in Gaza. It also comes as the international community struggles to follow through on symbolic gestures of Palestinian state recognition. France, for instance, has yet to take definitive action despite supportive rhetoric.
Predictable Consequences
This unilateral suspension of banking cooperation could usher in an unprecedented economic crisis and exacerbate political and social tensions across Palestinian areas.
In the long term, the weakening of the Palestinian Authority could benefit more radical factions, undermining prospects for peace and dialogue.
Ultimately, the move risks further deepening Israel’s international isolation, as it faces mounting accusations of genocide and breaches of international humanitarian law.
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