Today, Wednesday, Israeli Finance Minister Bezalel Smotrich announced his refusal to transfer tax revenues (clearance) to the Palestinian Authority, and demanded the approval of a sanctions package against it in response to Norway, Spain, and Ireland’s recognition of the State of Palestine.
This comes at a time when Western officials warned of an “economic catastrophe” in the occupied West Bank if Israel does not renew the necessary exemption that Israeli banks need to maintain their relations with their Palestinian counterparts.
“I do not intend to transfer the clearance funds to the Palestinian Authority from now until further notice,” Smotrich said in a statement.
The clearing is tax and customs funds on imported Palestinian goods, collected by the Israeli Finance Ministry and transferred monthly to Ramallah, after deducting part of it, in exchange for electricity and hospital debts, fines, and allocations that the Palestinian government disburses to prisoners and liberated prisoners.
During 2021, the average clearing funds after Israeli deductions amounted to 700 million shekels ($220.8 million) per month. Clearance funds constitute approximately 63% of the monthly income of the Palestinian government, which is suffering from a severe financial crisis.
Smotrich announced that he asked Prime Minister Benjamin Netanyahu to approve a package of sanctions against the Palestinian Authority, in light of the new recognitions of the State of Palestine.
He called for “an immediate meeting of the Planning Council in the West Bank to approve 10,000 housing units (settlement), including Area E1,” which is the largest settlement project east of occupied Jerusalem.
Smotrich also called for “permanently canceling all VIP passes for senior PA officials, and imposing additional financial sanctions on senior PA officials and their families.”
With the recognition of the three European countries – today – the number of those recognizing the State of Palestine has risen to 147 countries out of 193 members of the United Nations General Assembly.
Israel and its ally, the United States, criticize individual countries’ recognition of the State of Palestine, and oppose Palestine’s efforts to obtain full membership in the United Nations, instead of the “non-member observer state” status that has been in place since 2012.
Veto
Last April, the United States (Israel’s ally) used its veto in the UN Security Council against a draft resolution recommending that the United Nations accept membership of the State of Palestine.
The recognition of the State of Palestine by Norway, Spain, and Ireland comes at a time when, since October 7, 2023, Israel has been waging a war on Gaza that has left more than 115,000 Palestinians dead and wounded, most of them children and women, and about 10,000 missing amid famine and massive destruction.
Israel continues this war despite the huge number of civilian casualties, and despite the request of the Prosecutor of the International Criminal Court to issue arrest warrants against its Prime Minister and Minister of Defense for their responsibility for “war crimes and crimes against humanity.”
Israel also ignores a resolution from the UN Security Council for an immediate ceasefire, and orders from the International Court of Justice to take immediate measures to prevent acts of “genocide” and improve the humanitarian situation in Gaza.
In a related context, Western officials warned of an “economic catastrophe” in the occupied West Bank if Israel does not renew the necessary exemption that Israeli banks need to maintain their relations with their Palestinian counterparts.
The exemption, which is scheduled to expire on July 1, allows payment for vital services and salaries associated with the Palestinian Authority, and facilitates the import of necessities such as food, water, and electricity into the occupied Palestinian territories.
Efforts to renew the exemption
The British Financial Times quoted 3 Western officials as saying that without this exemption, Israeli banks will stop dealing with Palestinian financial institutions, and the Palestinian economy will effectively stop over time.
A US official said, “People’s access to food, electricity, and water should not be threatened at a moment like this, especially in the West Bank,” adding that not renewing the exemption “will harm not only Palestinian interests but also the security and stability of Israel and the region.”
Two Western officials said Washington was leading efforts to renew the waiver, asking allies to put pressure on Netanyahu’s government, and British officials said the United Kingdom was concerned about the issue.
These officials said that the matter is expected to be discussed at the next meeting of G7 finance ministers this week in Italy.
While the Palestinian economy deals with other economies in multiple currencies, the economy officially operates in shekels (the Israeli currency) and Palestinian financial institutions pass through Israeli banks to obtain it.
Nearly $8 billion in trade between Israel and the West Bank passes through these channels every year, according to US government data. This includes $2.3 billion in payments for food, $540 million for electricity, and $145 million for water and sanitation services.
Losing the exemption would severely hinder the ability of the Palestinian Authority to operate and paralyze economic activity in the West Bank, which the Palestinians seek to consider the heart of their future state but which has been under Israeli military occupation since 1967.
Effect of stopping the exemption
Officials said the expiration of the exemption would significantly impact import and export operations, and Palestinian tax funds collected in Israel would likely be frozen.
Israeli companies – which have commercial relations with the Palestinian Authority, which exercises limited self-rule in parts of the West Bank – will not be able to deposit Palestinian checks or receive payments from Palestinian banks.
It is no longer possible for Palestinian workers in Israel to receive their wages via electronic bank transfer.
A Western official said, “If the exemption is not renewed, this will lead to a serious crisis that will lead to the cessation of Palestinian economic activity in the West Bank.”
Before the outbreak of the war on Gaza, the exemption was renewed annually, and this arrangement dates back to 2016, when US Treasury officials began submitting an annual letter to Israel containing assurances that Israeli banks would not be targeted with allegations of financing terrorism due to their dealings with Palestinian entities.
After the United States submits its annual letter, Israel typically issues a waiver signed by its finance minister to two Israeli banks (Discount and Hapoalim) that maintain relationships with Palestinian financial institutions and provide them with access to the broader banking system.
Political move
“There was no indication, before October 7 or even before April 1, that there were any legitimate issues that would call into question the ability of the Israeli government to renew the waiver,” a US official said.
He described the postponement as “a blatant political move, not a move based on enhancing security.”
Last March, Smotrich threatened to paralyze the economy of the Palestinian Authority after Washington imposed sanctions on 4 settlers in the West Bank accused of committing acts of violence against Palestinians.
In April, he said he would “unilaterally and immediately halt the transfer of funds to the Palestinian Authority, and order the cancellation of the exemption for Israeli banks, if the Palestinian Authority obtains recognition as a state by the Security Council, or if the International Criminal Court issues arrest warrants against Israeli leaders or soldiers.” .
US Treasury Secretary Janet Yellen wrote to Israeli officials to express her concerns.
Two Western officials and one former Western official said that the renewal of the exemption had been delayed on previous occasions due to Israeli banks’ concerns about dealing with Palestinian lenders.
