The Palestinian Monetary Authority is considering issuing a digital currency to facilitate monetary independence from Israel.
According to accords signed with Israel in the 1990s, the Palestinians agreed not to immediately create their own currency. As a consequence their economy primarily depends on the Israeli shekel, the Jordanian dinar and the US dollar.
Palestinian banks currently have a surfeit of shekels. One reason is because of an Israeli law prohibiting large cash transactions, due to AML regulations. Additionally, Israel limits the amount of shekels Palestinian banks can transfer back into Israel monthly. Because of this, Palestinian banks sometimes have to borrow to cover foreign exchange payments to third parties, leaving them with a surplus of Israeli banknotes. Issuing a digital currency could potentially disrupt this inefficient arrangement.
A Palestinian CBDC
Currently, a pair of studies on cryptocurrencies are underway, although no decision has yet been made. Palestinian Monetary Authority Governor Feras Milhem hopes to eventually use digital currency “for payment systems in our country and hopefully with Israel and others to use for actual payments.” But whether this is possible is questionable.
Because the Palestinian economy suffers from Israeli constraints on the free flow of goods and people, it is inherently weak. Besides relying on donor money and remittances from Israel, the economy contracted 11.5%. According to the World Bank, this is likely due to the COVID-19 pandemic. This was also exacerbated by the refusal of the Palestinian Authority to receive taxes collected by Israel on its behalf. A 20% drop in aid also contributed to a fiscal gap exceeding $1 billion.
According to Raja Khalidi, Director of the Palestine Economic Policy Research Institute, “the macroeconomic conditions don’t exist to allow a Palestinian currency, digital or otherwise, to exist as a means of exchange.” However, issuing a digital currency could act as a political symbol of monetary autonomy from Israel.
CBDCs as a statement
With the pair of studies, Palestine joins other nations around the world in developing central bank digital currencies (CBDCs). The Bank of International Settlements (BIS) has been working with several of the more prominent central banks in developing a standard for CBDCs.
Similarly to Palestine issuing a CBDC to make a stand against Israel, the BIS said recently that central banks need to issue CBDCs to make a stand against cryptocurrencies. The BIS warned that if central banks do not issue CBDCs they could lose control of the money supply to private issuers and Big Tech companies.
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