The impact of U.S. interest rate hikes on borrowers and depositors in Palestine

Part One

·       While most countries of the world await the periodic release of U.S. financial data and indicators, or briefs or decisions by the Federal Reserve, The Fed, regarding U.S. financial and economic indicators, these countries then price their financial services and commercial transactions in light of what occurs on the New York Stock Exchange... We find that Palestine, held captive by Israeli military occupation for more than seventy-five years, and bound by the Paris Economic Protocol signed with the Israelis in 1994, and the resulting fetters on the Palestinian economy and its dependence on the Israeli economy, making it captive to its customs envelope, does not have a national currency; nevertheless three currencies are used mainly to settle financial transactions in the West Bank and the Gaza Strip: the shekel (ILS), the U.S. dollar, and the Jordanian dinar, with the euro used to a lesser extent.

·        In light of that, any change in the U.S. dollar interest rate, whether an increase or a decrease, will affect all lending transactions carried out by banks and financial institutions operating in Palestine, and they have already adjusted them according to standards and calculations linked to what happened to the U.S. interest rate, which was adjusted and raised by the U.S. Federal Reserve for the tenth time on 3 May 2023, bringing the interest rate to 5.25%, noting that the first time the Fed raised interest rates was on 17 March 2022, after years in which the lending rate before it had been at zero.

·       Banks operating in Palestine have notified their customers, especially via SMSs, informing them of adjustments to the interest on their loans, whether mortgage, housing, or consumer loans, existing and new, denominated in U.S. dollars, and in some cases in the Israeli shekel or the Jordanian dinar. These currencies were also affected by the rise in the U.S. interest rate, and central banks in their respective countries hastened to adjust their deposit and lending rates.

·       Interest rates on financial transactions at banks operating in Palestine in U.S. dollars were raised by about 1% in some cases, and installments due on them were adjusted accordingly. In addition, the entire Palestinian populace was affected by the repercussions of the U.S. interest rate adjustment with respect to the prices of raw materials and imports from abroad, even if via Israeli intermediaries, and energy prices, all of which are tied to the U.S. dollar. The Palestinian government, which is burdened with external debt, most of it denominated in U.S. dollars, was also affected. Note that the cost of servicing external debt in Palestine has risen as a result of the U.S. interest rate increases. Moreover, given the aforementioned debt burden, government projects will be scarce due to the lack of budgetary allocations, since funds must be set aside to service external debt; consequently the unemployment rate will remain high and households suffer from not being able to employ their graduate children. Some private-sector institutions and companies have begun restructuring their staff and have dismissed tens or even hundreds of employees in order to reduce expenditures, because these companies cannot grow their investments and because the cost of bank financing has risen as a result of the rise in the U.S. interest rate, in addition to the intractable government crisis characterized by the constant declaration of lack of funds. Thus public-sector and military salaries, of which employees have been receiving about 80% of their monthly pay for more than a year, seem likely to remain at that level in light of global financial developments and the financial squeeze declared by the Palestinian Authority, which has affected private-sector activity. The private sector supplies the government with goods and services for use by public institutions, whose receivables "arrears" have accumulated into amounts reaching billions of shekels without payment by the government. This prompted the private sector to reduce its activities, investments, and contracts with the government, which has affected the provision of public services in Palestine both quantitatively and qualitatively.

·       Palestinians were also affected by the dismissal of a number of their information technology specialists who had been working with American and other foreign companies in software and information technology, as these companies laid off thousands of employees, including Palestinian staff (Outsourcing), as a result of the repercussions of the rise in U.S. interest rates, which later led, months ago, even to the collapse of major American and other foreign banks!

·       As for individuals, particularly government employees and military personnel who receive their salaries in the Israeli shekel, the value of their shekel salaries fell against the dollar in recent days for several reasons, including the rise in the value of the dollar after the U.S. interest rate increase and the decline in the market value of the shekel. In addition, these employees who obtained bank facilities and consumer or mortgage loans in dollars will lose again when the indebted employee tries to convert part of his shekel salary into the equivalent in dollars to pay the installments and interest on his dollar loans; accordingly, they will pay a quantity of shekels for the same installment amount that is more than previously, before the U.S. interest rate increase, since the purchasing power of the shekel has decreased in light of developments relating to the dollar and U.S. interest rates and other factors..!

·       It is understood that the U.S. Federal Reserve had to raise the U.S. lending rate and tighten its provision in an attempt to control inflation rates that ravaged the U.S. economy and drove up prices in the first quarter of 2022, coinciding with or following the outbreak of the Russian-Ukrainian war, which was one of the sharp influences on prices, especially energy, foodstuffs, and fertilizers, which are mainly produced by Russia and Ukraine. For example, according to some sources, Russia and Ukraine produce 30 percent of the world's wheat supply, with Russia among the largest exporters globally and Ukraine among the top five exporting countries, according to S&P Global Platts.

·       In addition, the U.S. sanctions and those that followed from Western countries on Russia and its economy weighed on the global economy, including the U.S. economy, as did the U.S. debt crisis and the debate in the U.S. regarding raising the U.S. debt ceiling beyond $31.5 trillion. One consequence of these sanctions and the Russia-Ukraine war is that the United States, the most indebted country in the world, suffers from some of these repercussions, which will in turn affect its currency, the U.S. dollar, whose global hegemony is diminishing; the dollar’s share in global foreign exchange reserves is 58%, according to IMF statistics in 2022, after this share ranged between 70–80% in previous decades. Note that the dollar’s share in global foreign exchange reserves was 62% in the first quarter of 2020, according to IMF statistics, followed by the euro at 20%. Also, the U.S. dollar did not have this hegemony when it was first minted in 1792, but the dollar in its current form was issued in 1914 after the creation of the Federal Reserve. At that time it equaled the Spanish dollar backed by silver, then it was backed by gold, and later the Spanish dollar was followed by the British pound. The features of U.S. dollar hegemony began after World War II as a result of the conference held at Bretton Woods in New Hampshire, United States, in 1945, after the war ended with the Allies’ victory, where 44 countries met and the United States emerged as the strongest country after World War II in terms of power and economy; at that time they crowned the U.S. dollar as the world’s primary reserve currency backed by gold, which continued until 1971 when it was freed from the gold cover requirement. In addition, most commercial transactions were previously conducted in dollars, and more than 65 countries pegged their national currencies to the U.S. dollar, and at the time of the 1945 meeting they established the International Monetary Fund and the World Bank. However, as noted earlier, the U.S. dollar has begun to lose some of its luster, and many countries are trying to substitute the dollar with either their national currencies or by creating a new digital currency to move away from the U.S. dollar and avoid its sanctions—gradually including BRICS countries—yet the U.S. dollar remains strong and many countries’ currencies remain linked to it, and the U.S. economy is still considered the strongest economy in the world.

Transactions, and particularly bank lending in Palestine, were being completed in US dollars, with the variable LIBOR interest rate plus a margin, which is a percentage called margin. It is usually between 1–5% (depending on the clients) and is fixed, except if the LIBOR rate is replaced by a rate called SOFR (reference rate) SOFR (Secured Overnight Financing Rate), which is sponsored by the United States and which countries began to use in early 2022 after the LIBOR rate was discontinued. This rate reached 5.1225% for one-month US dollar financial transactions, while for three months it was 5.2259%... these prices are dated 7-6-2023.....

The second part follows with the Palestine Monetary Authority statistics for the month 4-2023, which show the repercussions of the US interest rate hike on the lending and deposit market in Palestine.....