When Currency Becomes a Tool of Political Pressure

The shekel (ILS) surplus crisis in Palestine under the Paris Economic Protocol

The shekel (ILS) surplus crisis in Palestine is not a conventional liquidity crisis caused by a shortage of cash; rather it is its exact opposite: it consists of the accumulation of massive quantities of shekel (ILS) within the Palestinian economy without the banking sector's ability to recycle them back to the currency issuer. Thus, what appears on the surface to be a banking problem is in essence a reflection of a deeper imbalance represented by the absence of Palestinian monetary sovereignty, and the conversion of the currency into a tool of economic and political pressure.

During the past two years, citizens, merchants and companies have faced an unprecedented reality after some banks began imposing restrictions on depositing shekel (ILS), whether in cash or by checks, or postponed receiving deposits, or set daily and weekly limits. That generated a state of concern among customers and raised questions about the safety of the banking system, while the banks themselves became victims of a structural crisis that exceeds their capacity to address.

The roots of the crisis go back to the Paris Protocol signed in 1994, which linked the Palestinian economy to the Israeli economy within an incomplete monetary union. The Protocol granted the shekel (ILS) the status of the principal currency circulated in the Palestinian market, while actual control over monetary policy and currency management remained in Israel's hands. The mechanism for returning shekel (ILS) surpluses to Israeli banks was supposed to continue normally, but this mechanism has been subjected in recent years to increasing restrictions, leading to the accumulation of billions of shekels (ILS) inside the vaults of Palestinian banks.

This accumulation does not represent a mere logistical problem, but imposes large financial, operational, and security burdens on banks as a result of holding funds that cannot be invested or disposed of easily, in addition to full vaults and rising costs of protection, transport and insurance. Therefore, banks were forced to limit the receipt of further cash, not out of a desire to squeeze customers, but because of their inability to absorb additional quantities of shekel (ILS).

However, the effects of the crisis did not stop at the banking sector but extended to various segments of the Palestinian economy. The trade, fuels, restaurants, transport, and wholesale and retail markets have been dealing daily with cash surpluses that are difficult to deposit, while citizens find themselves unable to use a legal currency normally within the banking system. This reality threatens confidence in the financial sector, affects economic activity and investment, and increases the cost of doing business.

And this crisis cannot be separated from its political dimension. Controlling the movement of the shekel (ILS) gives Israel an effective tool to influence the Palestinian economy without the need to take direct measures. Simply restricting the return of cash surpluses is sufficient to confuse banks and markets and weaken liquidity, which makes the currency itself a means of economic pressure that goes beyond its traditional function as a medium of exchange!

By contrast, the Palestine Monetary Authority operates within limited powers: it supervises the banking sector but does not possess full monetary policy tools. It is not a central bank in the conventional sense, nor does it have the authority to issue a national currency, manage an independent monetary policy, set interest rates, or act as lender of last resort to banks. Therefore, its ability to address the crisis is limited to mitigative measures, such as negotiating with the Israeli side to increase cash transfer ceilings, improving liquidity management, and encouraging electronic payment methods.

Many people reasonably ask: why does Palestine not issue a national currency? The answer is that the obstacle is not so much technical as it is legal and sovereign. The Paris Protocol did not grant the Palestinian Authority the powers to issue currency; rather it created a monetary authority with supervisory and regulatory competences while keeping monetary policy instruments outside its remit.

In the same context, the idea of issuing a Palestinian digital currency emerged as a potential way out of the crisis. However, despite its strategic importance, this idea does not represent a direct solution to the shekel (ILS) surplus problem. The texts governing the Paris Protocol do not address digital currencies because they predate their emergence, yet any digital currency that performs the function of a national currency could practically be considered a circumvention of the framework outlined by the Protocol, and it would moreover face challenges related to recognition within the clearance revenues system and within financial transactions!

More importantly, the current crisis is not about the means of payment but about recycling the currency itself. Even if all payments became electronic, the shekel (ILS) would remain the basis for commercial settlements given the Palestinian economy's reliance on it and its close linkage to the Israeli economy, which accounts for the largest share of Palestinian trade, in both imports and exports. Therefore, digitization, despite its importance, will not remove the cause of the accumulation of shekel (ILS) within the banking sector!

Hence, addressing the crisis requires an integrated package of policies, including negotiating with the Israeli side to increase ceilings for returning shekel (ILS) surpluses, diversifying the currencies used in foreign trade, expanding electronic payment systems, developing a Palestinian platform for digital payments, studying the creation of a government digital token for internal settlements without considering it a legal replacement for circulating currencies, alongside continuing efforts to enhance monetary independence when the appropriate legal and political conditions are available.

In this regard, we point to the details of the Paris Economic Protocol signed in 1994, and from reviewing the provisions of the economic agreement, we find that there is basically no international reference for arbitration or mediation in resolving any dispute that arises between the Palestinian and Israeli parties. Under this economic agreement... rather there is a tool in the provisions of the Protocol to assist in resolving any disputes between the parties, which is the establishment of a mechanism called the Joint Economic Committee (JEC): and Article One of the Protocol stipulates forming this committee to address and resolve problems and to interpret the clauses related to implementing the agreement, and the committee’s decisions require the agreement of both parties (i.e., by consensus), which practically means the ability of either party to block decisions that it does not agree with! as it is largely subject to the balances of political power, not only to the legal rules of the agreement!

And the fact is that the meetings of this committee have been disrupted or frozen for many years (especially after the outbreak of the Al-Aqsa Intifada in 2000), which made the Israeli side control many financial and economic issues (such as clearance revenues) unilaterally and imperatively, in the absence of an independent arbitration mechanism in Paris, which made many tools of Palestinian economic policy more linked to the decisions of the other party than to management by an independent Palestinian economy, and the relationship between the two parties in the absence of an international reference transformed from "economic coordination" into "unilateral management" , where in reality, with the imbalance of power, Israel came to possess wide executive tools, especially because it controls: the crossings, customs, the movement of trade, import registration and the banking system linked to the shekel (ILS)!

Thus, disputes between the parties are essentially left to: direct negotiation between the parties, or the Joint Economic Committee. And in the broader political framework, if it exists, international interventions often take place that are non-binding from parties such as the United States or the European Union or the United Nations, but these interventions are not a legally binding part of the Paris Protocol. Noting that the Paris Protocol did not grant Israel an absolute right to dispose of the funds, but it also did not establish strong institutional safeguards to prevent the political use of these tools!

Therefore, and with effective international pressure, the Joint Economic Committee can be reactivated with clear authorities and a binding meeting schedule. It is also possible to add an independent arbitration mechanism with the consent of both parties, such as: an international panel of experts. or international commercial arbitration. Giving a greater role to institutions such as the World Bank or the European Union as observers and guarantors. It is possible to renegotiate the Paris Protocol to align it with the current reality of the Palestinian economy, with the intervention of international mediators such as the Europeans.... because the agreement was designed for a transitional period of approximately five years, not as a permanent framework that lasted for more than three decades!

In recent years national committees of experts were formed to study innovative solutions to this crisis, and the Palestine Monetary Authority (PMA) continued its efforts to negotiate with the Israeli side, but tangible results remain limited while restrictions on shekel (ILS) deposits increase and their effects widen in the market.

The essence of the crisis does not lie in a lack of technology or weak expertise, for Palestine possesses high banking, technical, and economic competencies, but rather in the absence of monetary sovereignty. Therefore, the Palestinian digital currency should not be viewed as an immediate remedy for the shekel (ILS) surplus crisis, but as part of a long-term strategic vision aimed at strengthening economic resilience, expanding the margin of Palestinian financial decision-making, and building the foundations of a more independent monetary policy when political and legal conditions permit!

Ultimately, the shekel (ILS) surplus crisis reveals that an economy that uses a currency it does not issue, and does not control its movement, remains vulnerable to shocks whenever the political considerations of the party holding the keys to that currency change. Hence, the shekel (ILS) crisis is not merely a banking crisis, but a matter of economic sovereignty par excellence, which will not be resolved by technical means alone, but by rethinking the framework that governs the monetary and economic relationship between Palestine and Israel.