Palestinian Currency Governor Warns of Imminent Economic Collapse Amid Israeli Banking Cutoff Threats

Yahya Shinar, Governor of the Palestinian Monetary Authority, warned last week at an urgent conference in Ramallah that the Palestinian economy is only weeks away from total collapse. He attributed this looming crisis to Israeli banks' plans to sever their financial ties with Palestinian banks, a move that would isolate the Palestinian banking system from the global financial network and severely disrupt the supply of food and fuel.

Israeli banks Bank Hapoalim and Discount Bank have informed the Palestinian banks and the Israeli Ministry of Finance of their intention to end correspondent banking services by October 1, 2026. This decision follows a prolonged failure by the Palestinian Authority to establish an alternative financial mechanism. The Palestinian Monetary Authority highlighted that about 90% of Palestinian exports go to Israel, and 60% of imports come through Israel, with Israeli banks processing transactions worth 51 billion shekels annually. Shinar cautioned that the cutoff would escalate beyond the financial sector, triggering a rapid economic and humanitarian crisis marked by shortages, rising prices, unemployment, and poverty.

The conference included representatives from international bodies such as the Central Bank of Jordan, the Arab Monetary Fund, the International Monetary Fund, and the United Nations, all emphasizing the urgent need for coordinated intervention to maintain the Palestinian banking system's connection to the global economy. In response, Palestinian banks like Bank of Palestine have begun diversifying their currency options to reduce reliance on the Israeli shekel.

The root of the issue lies in the 1994 Paris Protocol, part of the Oslo Accords, which requires Palestinian banks to operate through Israeli banks for international transactions. This arrangement was intended to allow Israeli oversight to prevent money laundering and terrorism financing. However, Israeli banks face legal risks and rely on state-backed indemnity agreements, which have been repeatedly extended but are now under threat. Finance Minister Bezalel Smotrich has repeatedly threatened to cancel these indemnities, which would force Israeli banks to cease their intermediary role.

Despite government approvals to extend the indemnity framework until the end of 2026, Israeli banks are unwilling to continue without clear state-backed protections. The Ministry of Finance claims the current extension will last until after the upcoming elections, potentially leaving the issue to the next government. US Ambassador to Israel Mike Herzog has warned that an economic collapse in the Palestinian territories could lead to increased violence and despair, posing security risks to Israeli citizens amid recent tensions in the West Bank.