A Palestinian currency: a dream awaiting national reconciliation and political independence

By Omar Shaban

Bringing the Palestinian pound back to life once again is a dream the Palestinians have long entertained and still do. Between the enticement of national sentiments and the desire to strengthen the manifestations of sovereignty, and the reality of the small Palestinian economy controlled by Israel; between the expected benefits and the losses and challenges resulting from this strategic step — it appears the dream still has a long road ahead before it becomes a reality.

A historical background:

The Ottoman lira was the currency circulating in Palestine during the Ottoman rule over Palestine. With the beginning of the British Mandate, dealing in the pound sterling and the Egyptian pound, which was pegged to it, was imposed. In the late forties of the last century, the British Mandate government saw that the time had become suitable for issuing a Palestinian currency. This proposal was met with great rejection and doubt from the Palestinian civil associations, such as the Islamic-Christian Association in Haifa, the chambers of commerce, and the national forces, which demanded that no Palestinian currency be issued, for want of a Palestinian government independent of the control of the British High Commissioner — warning that issuing a Palestinian currency without the existence of a sufficient gold cover to protect it and strengthen investors' confidence in it would push investment to flee and would harm Palestinian exports, the most important of which were agricultural at that time. Despite that, the High Commissioner insisted on issuing a Palestinian currency pegged to the pound sterling, and formed for this purpose the Palestine Currency Board. The value of the Palestinian pound was equal to the value of the pound sterling. With Israel's occupation of the rest of the Palestinian territories in 1967, Israel closed all the Palestinian and Arab banks and imposed its currency, “the lira and later the shekel” — which made the Palestinian economy, which had entered a tunnel of deterioration, a back garden for the Israeli economy, which was growing at very high rates. With the Palestine Liberation Organisation's signing of the peace agreement with the Israeli government in the year 1993, new arrangements were placed in the monetary and financial field.

The Paris Economic Protocol:

While the Declaration of Principles agreement, known as the “Oslo” agreement, organised the political and security aspects between the Palestine Liberation Organisation and Israel, the Paris Protocol signed in April 1994 organised the financial and economic aspects between them. The Paris Protocol provided for the formation of a Palestine Monetary Authority working as a financial and economic adviser to the Palestinian Authority without enjoying the powers of a central bank. The Paris Protocol obliged the Palestinian side to allow the Israeli banks to work in the Palestinian territories without giving the Palestinian banks the right to reciprocal treatment. The Paris Protocol also provided for adopting the Israeli shekel as one of the principal currencies, in addition to the American dollar and the Jordanian dinar, in the Palestinian market — which enabled the Israeli government to continue its control over the Palestinian economy whenever and wherever it wants and to reap other financial gains. For example: Israel benefits greatly from the Palestinian economy's adopting the Israeli shekel as one of the principal currencies. The Palestinian market remains the second after the Israeli economy in terms of dealing with the shekel currency; the Palestinian market holds 10% of the total volume of issuance of the Israeli shekel, as there is no noticeable demand for the Israeli shekel in the international market despite its entry into the club of the sixteen principal currencies last year. Likewise the Israeli economy reaps what amounts to 300 million dollars annually as seigniorage profits for the shekel present in the Palestinian market. In addition to that, the international support for the Palestinians, which comes in the form of hard currencies, the most important of them the dollar and the euro, forms one of the most important sources of these currencies for the Israeli economy, as the Palestinian Authority transfers the hard currencies to the Israeli banks in return for obtaining the shekel to cover its expenses and its employees' salaries. For example, the Palestinian Authority buys a banknote of the two-hundred-shekel denomination at its market value, which is 45 dollars, whereas the cost of printing it does not exceed 20 cents. In return, depriving the Palestinians of issuing their national currency causes great losses resulting from the cost of converting from one currency to another and from depriving them of the seigniorage profits that would be realised in the event of the existence of a national currency; likewise it exposes the Palestinian economy from time to time to the fluctuations of the Israeli economy. The subjection of Palestinian financial policy to its Israeli counterpart has given Israel the possibility of controlling the Palestinian economy, as Israel refrains from time to time from transferring sufficient quantities of the shekel to the Palestinian banks in a way that causes severe hardship in the volume of liquidity available on the Palestinian side. Likewise Israel refrains at times from replacing the worn-out shekels accumulated with the Palestinian banks, which burdens them with great losses because of the opportunity cost resulting from not recycling them. The situation in the Gaza Strip gives a clear example of that: since the imposition of the blockade in June 2007 after the Hamas movement's takeover and Israel's considering the Gaza Strip a “hostile area”, the Israeli banks have refrained from dealing directly with Gaza's banks, which has caused a chronic scarcity in the quantity of shekels available in Gaza's market, and caused the creation of a noticeable difference in the currency exchange rates between Gaza's market and the markets of the West Bank and Israel. Resulting from that was the creation of a parallel black market benefiting from the exchange differences.

The Palestinian currency between desire and capacity:

The Paris Protocol provided that the Palestine Monetary Authority has the right to transform into a central bank and issue a Palestinian currency on condition of Israeli approval. Transforming into a central bank does not necessarily mean issuing a national currency! For each of them has its calculations and its criteria. It is not easy for Israel to relinquish the advantages realised for it as a result of the absence of a Palestinian currency; in return, it is not rational to proceed with issuing a national currency without possessing the capacity to protect it and prevent its counterfeiting and smuggling, and without possessing a monetary cover of hard currencies and metals in a way that guarantees confidence and stability for it. Issuing a national currency achieves many benefits, the most important of them possessing the capacity to apply the financial and monetary policies serving the state's development plans. Striving to issue a national currency is not a luxury but an indicator of sovereignty — but it must take place within a rational economic vision springing from the political and developmental interest, in addition to the national meanings. The question: do the Palestinians possess the readiness to issue a national currency? The Palestine Monetary Authority has covered a remarkable distance in organising the financial and monetary market in Palestine, awaiting the political readiness. Is it in the interest to issue a national currency under an authority deficient in sovereignty because of the occupation and its restrictions on the crossings, exporting, and trading with the outside world, and in light of the Palestinian fragmentation and under the weight of the strangling financial crisis from which the Palestinian Authority suffers and the great reliance on the donors' money, which is unguaranteed and unsustainable money! In fully independent states, the work of the central bank and the auxiliary financial institutions must be independent of the intervention and influence of the national government — which makes the Palestinian case more complex, as another, non-national government, and what is meant here is the Israeli government, controls the Palestinian economy and the financial and banking sector. It appears that some of the reasons that opposed issuing the Palestinian pound during the British Mandate are still in force — the times have differed and the reasons are the same. Issuing a Palestinian currency is a Palestinian dream and desire detained by the laws of the Israeli occupation and frustrated by the internal Palestinian division

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