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The National
15 hours ago
- Business
- The National
Israel's move to isolate Palestinian banks will give rise to black market
Israel 's move to cancel a waiver that allows Israeli banks to transact with their Palestinian counterparts risks worsening the dire humanitarian situation in Gaza and would likely create a cash economy and encourage a hard-to-control black market in the West Bank, analysts say. The order by Israel's Finance Minister Bezalel Smotrich last week will take time to go into effect, and would be a paralysing blow for the Palestinian financial and banking system, which is already struggling with restrictions from Israel. Matters are likely go from bad to worse for the Palestinian Authority, whose struggles will compound manifold, restricting it from importing even basic goods into the occupied territory. 'The waiver cancellation risks worsening the West Bank's humanitarian crisis as it will very likely impede the Palestinian Authority's ability to import basic, essential goods such as food and fuel,' Kristin Ronzi, Middle East and North Africa analyst at New York-based intelligence firm Rane Network, said. 'Already difficult economic conditions in the West Bank mean that living conditions would likely deteriorate and further stoke anti-Israel and anti-Palestinian Authority sentiment.' In a cash economy, there's far greater financial risk. Large amounts of money are less safe and vulnerable to theft, war damage, and illicit activity. This could mean Palestinians who are struggling to put their lives together amid Israel's year-and-eight-month-long assault, will see their entire live savings disappear in an instant. Emergence of a black market Mr Smotrich, who had been threatening since May last year to cut the vital connection between Israel and Palestinian banks, when the State of Palestine was recognised by three European countries, finally pulled the trigger. 'Against the backdrop of the Palestinian Authority's delegitimisation campaign against the State of Israel internationally, Finance Minister Bezalel Smotrich has instructed Accountant General CPA Yali Rothenberg to cancel the indemnity provided to correspondent banks dealing with banks operating in Palestinian Authority territories.' The statement came hours after the UK and other countries imposed sanctions on Mr Smotrich and another hardline settler minister. The break in relationship banking means financial isolation of Palestinian lenders, a direct consequence of which would likely be a boost to 'cash economy and black market' within the West Bank, especially if imports decline and there are shortages of basic goods in the wake of Israeli move, Ms Ronzi said. Raja Khalidi, director general of the Palestine Economic Policy Research Institute, agreed. Cutting off the Israeli correspondent banks relations would disrupt markets affected by trade with Israel, create a huge black market of cash transactions for trade otherwise conducted through the banking system and deprive the Palestinian economy of significant trade routes,' Mr Khalidi said. How dependent are Palestinian banks on Israel? The Palestinian financial and banking system can only exist with the regular renewal of the waiver on a yearly basis. The Palestine Monetary Authority (PMA), which acts like a central bank, is unable to print money or issue its own currency. It warned on Wednesday that 'such a disruption poses a serious threat' and the cascading effect of the inability to make critical payments for trade and provide salaries. 'These efforts are vital to ensuring the continuity of commercial transactions and the payment of essential imports and services, including food, electricity, water, and fuel,' it added. It will also force the West Bank and Gaza to suffer the consequences of a cash economy. This emergence of a cash economy and parallel black market, however, will dent the efforts of international bodes like the Financial Action Task Force that are trying to quell financing of terrorism and illegal buying of weapons to fuel the conflict. The correspondent banking link with Israeli financial institutions is important to maintain the integrity of Palestinian banks. 'It is an absolutely vital link to cover close to $5 billion payments for Palestinian imports from/through Israel, approximately $150 million worth of monthly tax revenue to the PA collected by Israel as well as a range of payments made by Palestinian and Israeli consumers to the other side through banks and related credit card systems,' Mr Khalidi said. The overwhelming majority of financial exchanges in the West Bank are in shekels, Israel's national currency, because the Palestinian Authority does not have a central bank under which it could print its own currency, Ms Ronzi pointed out that with all the transfer limits and other restrictions on Palestinian lenders, the PMA in May sounded the alarm and urged an immediate action to reduce the shekels' cash accumulation in Palestinian banks, which it said has 'reached breaking point'. It is 'posing a serious threat to the continued financing of trade with or via Israel through official banking channels,' the PMA said in a statement at the time. 'Due to continuing restrictions, Palestinian banks are no longer able to accept additional shekels cash deposits, as they are unable to transfer the surplus to Israeli correspondent banks. With the waiver removed, Palestinian banks are likely to be cut off from the world. 'The waiver cancellation will likely isolate the Palestinian financial system since Israeli banks will very likely stop conducting transactions due to the risk of becoming embroiled in legal investigations and potentially face charges related to money laundering and/or terrorism financing,' Ms Ronzi said. Ratification needed The withdrawal of waiver, so far, is nothing more than an announcement from the Israeli Finance Ministry that needs ratification from the country's Security Council. 'It should be clarified that the finance minister has issued instructions to his ministry to begin preparations for the annulment of the waiver, something that he has done twice before and been overruled,' Mr Khalidi said. 'Even if his decision is approved by Israeli government, it would possibly take weeks to take effect.' Ms Ronzi said thus far a security cabinet vote has not been scheduled. However, despite international backlash and pressure to reverse the cancellation of the waiver, 'Israel is unlikely to reverse the decision ahead of the security cabinet vote, unless there is mounting pressure from the US, Israel's closest ally'. Still Resilient Despite the adversity facing the Palestinian banks, the PMA was quick to assure Palestinians that the financial system was robust and their deposits were safe. 'The PMA reiterates that depositors' funds within the Palestinian banking sector are secure and that the banks maintain high levels of financial solvency in accordance with relevant international standards,' the Palestinian regulator said in the statement on its website following the Israeli Finance Ministry announcement. The Palestinian banking system remains integrated with the global financial network through a range of correspondent banks that will continue to provide financial services to individuals and businesses both domestically and internationally, according to the PMA statement. 'The Palestinian banking system is sound, prudentially regulated by the PMA and is one of the strongest sectors amid the two-year disastrous impacts of the war,' Mr Khalidi said. 'In the absence of an independent macroeconomic policy and currency, however, there is only so much smoothening that the PMA could do of what would be a very hard landing.' Is it Legal? In July last year, G7 countries urged Israel to 'take necessary action' to ensure the continuity of Palestinian financial systems. It came after US treasury secretary Janet Yellen warned that 'to cut Palestinian banks from Israeli counterparts would create a humanitarian crisis'. The UN has warned that 'unilaterally cutting off Palestinian banks from the global banking system would be a violation of the fundamental principles of international law'. This pressure had until now pushed the Israeli government to continue agreeing to short extensions of the waiver, but far-right ministers such as Mr Smotrich and National Security Minister Itamar Ben-Gvir have long objected. Saul Takahashi, a professor of human rights and peace studies at Osaka Jogakuin University, said Israel following through with the waiver removal is a clear breach of international law. 'Israel occupies Palestine, and has an international obligation to provide for the welfare of the occupied population. Anything it does which goes against that overriding obligation is unlawful,' he told The National. 'A lot of people think that somehow all of this is up to negotiation, but it isn't,' added Prof Takahashi, former deputy head of office in Occupied Palestine for the Office of the UN High Commissioner for Human Rights. Mr Khalidi said it is time for friendly states to put their money where their declarations are, so to speak. 'Recognising Palestine's legitimate statehood is not simply a symbolic diplomatic gesture, it requires treating the state of Palestine as an economic sovereign, even under occupation,' he said. It requires granting fiscal autonomy to Palestinian finances, by assisting in maintaining the banking and public finance systems as well as basic liquidity. Other steps needed include 'allowing access to international financial stability funds … and reorienting trade flows through Jordan with regional and international partners', he added.
The National
05-06-2025
- Business
- The National
Arab debt explained: Why some Middle East countries keep borrowing at a high cost
The debt pile in the Middle East and North Africa is growing. State borrowing, considered by many to be a necessity, has steadily increased over the past decade. Compounded with their increasing dependence on donor funding, some nations find their foreign policies, and even domestic measures, at the mercy of external actors, possibly at the cost of their own economic growth. 'For countries like Jordan and Egypt, where aid makes up a substantial part of their budget, US aid is often tied to both political and strategic outcomes – i.e., human rights and their relations with Israel and Iran,' says Ryan Bohl, senior Mena analyst at New York-based intelligence firm Rane Network. 'Aid from the US is often leveraged for these policy goals." This includes Jordan and Egypt establishing ties with Israel at the behest of the US and the expectation that they take in a significant portion of Palestinian and Syrian refugees while their struggling economies bear the burden. Jordan's decision in 1994 to sign a peace treaty with Israel came after President Bill Clinton's administration promised to forgive $700 million of Jordan's debt along with further relief from US allies. This was a "key factor in the king's decision making", according to the Washington Institute for Near East Policy in its 1999 analysis titled America and the Jordan Israel Peace Treaty, Five Years On. Egypt signed the Camp David Accords in 1978 and the Egypt-Israel Peace Treaty in 1979. The country became one of the largest recipients of US foreign aid from 1979 to 2003 with about $19 billion in military aid and about $30 billion in economic aid. The US authorised the funds to Egypt "to promote the economic stability and development of that country and to support the peace process in the Middle East" according to the Office of the Law Revision Counsel United States Code. Jordan, the world's second-most water scarce country, must also negotiate the use of its own water resources with the US and Israel as a result of agreements it signed in the 90s. Jordan relies on US aid for about 3 per cent of its gross domestic product. This is significantly higher than most countries globally, whose reliance on international aid averages 1 per cent. Although countries in conflict are falling deeper into debt year by year, Lebanon, Sudan, Yemen and Egypt are knocking on the doors of international lenders asking for more financial assistance. Why borrow? While debt is a popular tool for regional oil-exporting nations to fund their ambitious economic diversification drives and a primary source of financing for their multi-billion-dollar projects, it has a more existential dynamic for oil importers. Some countries in the Arab world, including Sudan, Yemen, Lebanon and Syria, are at a stage where they need external support for their economic survival, says Daniel Murray, deputy chief investment officer and global head of research at EFG International. 'Such countries likely need some external assistance to help rebuild and give them a chance of achieving a degree of economic success in the future. This is not just about being able to issue debt, but it is also about a multitude of factors, including infrastructure, education, political stability and planning,' Mr Murray says. 'It is unlikely that such countries can achieve economic success without external assistance.' Countries looking beyond survival are borrowing to climb out of deficit spending and poverty, and to raise long-term economic growth. In April, the Egyptian government presented its 2025-26 national budget, which projected record spending and revenue, while relying heavily on continued borrowing and subsidy reductions to meet its commitments. The budget forecasts a 23 per cent increase in public revenue, to 3.1 trillion Egyptian pounds ($60.6 billion). The budget aims to reduce the overall deficit to 7.3 per cent of GDP by June 2026. However, expenditure is projected to rise by 19.2 per cent to 4.6 trillion pounds, and the Arab world's most populous nation plans to borrow an additional 3.6 trillion pounds during the fiscal year to cover costs. Interest payments on existing loans will account for 50 per cent of the country's total expenses in the new fiscal year. The debt-to-GDP ratio will remain above 92 per cent, but Finance Minister Ahmed Kouchouk defended the borrowing plan at the floor of the house, saying it is 'necessary to fund critical investments in health care, education and social protection'. However, Monica Malik, chief economist at Abu Dhabi Commercial Bank, says 'reducing government debt will be critical to fiscal sustainability' of Egypt as debt servicing costs accounting for a significant portion of expenditure 'limits wider spending' ability of Cairo. Debt levels Total external debt in the Middle East and North Africa climbed to $443 billion in 2023, according to the World Bank's Global Debt Report issued in December. The region's external debt level was at its highest since at least 2013, the furthest year the World Bank data goes back to. Private creditors accounted for 40 per cent of the region's public and publicly guaranteed (PPG) debt at the end of 2023, compared to 36 per cent for multilateral institutions and 24 per cent for bilateral partners. Egypt and Morocco held the highest levels of external debt in the region at roughly $168 billion and $69.3 billion, respectively. Lebanon, whose debt-to-GDP ratio is projected to have hit 140 per cent at the end of 2024, held roughly $67 billion in total external debt in 2023, the vast majority of it coming from private creditors. Jordan ($44.63 billion), Tunisia ($41.297 billion) and Iraq ($20.33 billion) were also among the highest holders of external debt in the region, according to the World Bank report. Globally, low and middle-income nations spent a record $1.4 trillion on servicing their foreign debt, which was roughly a 23 per cent increase from 2020 levels, according to the World Bank data. Total external debt owed by all low and middle-income countries hit $8.8 trillion at the end of 2023, an 8 per cent increase since 2020. In February this year, International Monetary Fund managing director Kristalina Georgieva said the fund had approved about $33 billion in financing for the region since early 2020, including its funding initiatives in 2024 to help curb the impact of conflicts in the region. A coalition of Middle East countries and multilateral institutions, including the IMF and the World Bank, in February agreed to establish an informal co-ordination group to provide financial support for the economic recovery of Middle East countries devastated by conflict – with a focus on Syria. Price to pay Aid-dependent Jordan is a prime example of a sovereign that has borrowed heavily over past decades at its own domestic expense. The country has taken in Syrian refugees in crisis since the civil war broke out in the neighbouring Arab republic. It has also about 2.39 million registered refugees from Palestine with the US asking Jordan and Egypt to take in more . For example in January, President Donald Trump said they will agree to take Palestinians from Gaza. "They will do it. They are going to do it, OK?", he said at the time, although both Egypt and Jordan rejected the idea. It is a major recipient of foreign financial assistance, as well as aid from the US and loan packages from the IMF to support its economy. The Trump administration's move to cut US aid for Jordan broke a longstanding agreement between the two sides, leaving Jordan's economy suddenly in the lurch and in need of a financial shot in the arm from either its rich oil-exporting peers in the region or lenders such as the World Bank and IMF. Jordan has received $4 billion from the US since 2021 and it was the third-largest beneficiary of US Aid globally until the fund tap was shut. The US and the 28-member EU economic bloc are among the major donors to some of the most distressed economies in the Middle East. In comparison to the US, Mr Bohl says, European assistance tends to be 'less strategically stringent', as it is focused more on outcomes of programmes rather than specific, broad strategic goals, without pushing sovereigns to strengthen or weaken their ties with other nations in the region to advance the donor's foreign policy goals, he adds. Some Gulf countries are also becoming involved, with their own objectives. They're looking to these economies in need for investment opportunities. Regional countries periodically receive help from their richer oil-exporting peers in the form of financial assistance and central bank deposits to reduce stress on their foreign currency reserves. This was the case with Syria in May, when it was announced that Saudi Arabia and Qatar paid off Damascus's $15.5 million debt to the World Bank, giving the war-torn country a clean slate for economic recovery. The move could also give Riyadh and Doha a diplomatic foothold in the Arab state, with access to future reconstruction and energy contracts as Syria seeks to rebuild. Debt trap? Although some Mena oil importers remain economically vulnerable to the political whims of donors, and not one country has broken free from year-on-year borrowing, they continue to ask for more. Lebanon, Jordan, Yemen and others who borrowed over the years to support their economies do not have a visible exit in sight, instead their debt levels have ballooned to the point where they have to borrow more to pay the loans secured earlier. Each cycle of borrowing comes with a different set of market conditions, interest rates and are costlier than the debt raised before, so the cycle is perpetuating. Many of these countries are in debt traps of their own making, with their political elites choosing subsidies, generous public sector wages, etc., to maintain power Ryan Bohl, senior Mena analyst, Rane Network The financial support packages from multilateral lenders such as the IMF are 'technocratic in nature and are typically hinged on economic performance and structural reforms rather than political or strategic outcomes', Mr Bohl says. But not many counties in the Middle East have successfully managed to the implement those social, economic, fiscal and structural reforms despite successive support packages, analysts say. Lebanon is a notable example. Under attack from Israel and facing decades of political instability, the country needs recurrent financing to keep its economy afloat. The Lebanese economy went into a tailspin in 2019 when the government defaulted on its Eurobond payments. The financial crisis that followed saw the Lebanese currency losing most of its value and its banking system verging on a complete collapse. The Covid-19 pandemic has exacerbated the country's economic crisis to historic proportions and the recent conflict with Israel has pushed it to the limits. In April 2022, Lebanon reached a staff-level agreement with the International Monetary Fund on a comprehensive economic reform programme supported by a 46-month extended fund facility, proposing access to about $3 billion. However, Lebanese authorities have been accused of dragging their feet on the required reforms. The 2019 economic collapse was blamed on decades of financial mismanagement and corruption by Lebanon's ruling elite, including the former central bank governor Riad Salameh, who has been accused of helping to embezzle hundreds of millions of dollars from the central bank. 'Many of these countries are in debt traps of their own making, with their political elites choosing subsidies, generous public sector wages, etc, to maintain power … while other countries like Lebanon have functioned with a shadow economy that has benefit only the elites,' says Mr Bohl. 'It's very hard for the IMF, US, or Europe to force a country to take a loan they don't want – let alone don't need.' Is borrowing a broken system? The goal of lending is to get a country to a point where it can engage in global markets in a way that creates a cycle of increasing prosperity. While Mena countries in economic turmoil have struggled to pay off their loans and reach that state, some countries in South-East Asia, Latin America, and Africa have found success. "It's hard to believe that South Korea, 40 years ago was essentially a developing country," said David Bach, president of the IMD Business School for Management and Leadership in Lausanne. Thailand and Vietnam are other examples, as is Georgia, which faced its own particular challenges, he added. "They used to have endemic corruption, a weak economy, and then with its own policies but also external support, it has progressively improved." Yet some NGOs say that the conditions for loans by the IMF and World Bank hinder development and exacerbate inequality by preventing social reform. "Ninety-four per cent of countries (94 out of 100 countries) with current World Bank and IMF loans have cut vital investments in public education, health and social protection over the past two years," according to 2024 report by Oxfam and Development Finance International. "I think it's really easy to point the finger at the IMF in particular and say in fact, it's taking advantage of countries that have gotten themselves into a challenging situation," says Mr Bach, adding that there's no better alternative. "With all its flaws, the market system has lifted more people out of poverty than anything else we've come up with," he added. Not a worrying level yet Although financial needs in the Mena region are sizeable, the level of overall debt is not worryingly high, particularly in the six-member Gulf Co-operation Council , when compared to the global debt level for which policymakers have already started ringing the alarm bells. Global debt increased by nearly $7 trillion in 2024, reaching $318 trillion – the highest year-end figure on record. Total debt in emerging markets increased by $4.5 trillion in 2024, reaching an all-time high of over 245 per cent of GDP, according to the Institute of International Finance data. 'We do not anticipate major debt strains in the near term, many emerging markets have experienced a marked deterioration in their debt-carrying capacity in recent years, as the growth differential between emerging markets and mature economies has become less pronounced and government interest expenses continue to rise,' IIF executives including Emre Tiftik, director of sustainability research, global policy initiatives, said in a joint report. In emerging markets of the broader Europe, Middle East and Africa region that includes the GCC, Egypt and Israel, sovereign borrowings will remain close to the peak at about $624 billion, according to S&P data. The IMF total gross public financing needs for Mena emerging markets and low-income countries are projected to reach $268.2 billion in 2025 –the equivalent of above 100 per cent of aggregate fiscal revenues, up from $260.6 billion in 2024. Mena sovereigns are likely to meet their financing needs by $235.9 billion in domestic and $32.3 billion in external debt issuance in 2025, the IMF said in its Mena outlook report. Mr Murray of EFG International says the steady increase in Mena debt-to-GDP ratio over the past decade has been in line with the trend elsewhere in the world, partly because global interest rates have been very low, also because governments during the Covid crisis borrowed heavily to support their economies. For Mena region as a whole the debt-to-GDP ratio has increased from a little over 20 per cent in the past decade to a bit under 50 per cent at present. 'Whilst this is a large increase, it compares favourably with other parts of the world,' he says. This is especially in comparison to US debt-to-GDP that has increased from slightly more than 70 per cent to nearly 120 per cent over the same time period, he adds.
