In a move that could send tremors through an already fragile West Bank economy, Israeli Finance Minister Bezalel Smotrich has ordered the cancellation of a key financial waiver that has, until now, kept money flowing between Israeli and Palestinian banks.
This decision, which effectively severs official financial ties between the two systems, threatens to destabilize the Palestinian Authority (PA) and could accelerate a banking collapse. With funds trapped and systems disconnected, the West Bank may soon feel the full weight of this political blow.
A Calculated Cutoff With Huge Consequences
Smotrich’s directive was signed off Tuesday night, confirmed by the Finance Ministry. At its core, it removes the legal shield that has allowed Israeli banks to interact with Palestinian institutions—without being exposed to charges related to money laundering or terror financing.
That protection has been essential. Without it, Israeli banks could face prosecution simply for clearing shekel payments from PA-linked entities. The risk is just too high. And now? Those transactions may stop altogether.
This isn’t just red tape—it’s a lifeline. Every public employee salary, every vendor payment, every international remittance that depended on Israeli-Palestinian bank coordination is now in limbo.
One Israeli banker, speaking off the record, put it bluntly: “This could crash their banking system. And fast.”
Politics First, Economy Later
Smotrich didn’t mince words about why he pulled the plug. According to him, the PA’s global efforts to isolate Israel—including its lobbying at international courts—left no room for financial cooperation.
He called it a response to the “delegitimization campaign” orchestrated by Palestinian leaders. But the economic implications have quickly overshadowed the rhetoric.
What had been a grudging transactional relationship—underpinned by waivers and backdoor understandings—has now become a wall. An actual one.
And not just symbolically. The Israeli shekel is the de facto currency in the West Bank. Without Israeli banks processing payments, that money simply can’t move. It’s like draining the fuel from a moving vehicle. The engine’s fine—until it stalls.
Fallout for Palestinians Could Be Immediate
For ordinary Palestinians, the impact might be visible within days. Banks may no longer be able to pay government workers, vendors might freeze shipments, and cash might begin drying up.
Let’s be clear—this decision wasn’t a small policy tweak. It was a financial earthquake.
Here’s a breakdown of what’s at stake:
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$100 million monthly: That’s the estimated tax revenue Israel collects on behalf of the PA and transfers via these banks.
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Over 170,000: Number of Palestinians directly employed by the PA.
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Dozens of Palestinian banks and credit institutions depend on shekel clearing to operate.
And none of these entities can function without that financial bridge.
Israel’s Calculated Gamble—and Internal Debate
Smotrich may have made the announcement, but not everyone inside Israel is onboard.
Senior security officials have long warned that financially crippling the PA could lead to chaos. The West Bank isn’t some abstract spreadsheet—it’s a powder keg. Add unpaid salaries, no public services, and rising unemployment, and it gets even more combustible.
Ironically, it’s the Israeli military—usually seen as the hardline force—that’s pushing back behind closed doors. They see a functioning PA as a necessary buffer, not a luxury.
One Israeli defense analyst said the silence from the army wasn’t agreement—it was caution. “They’re watching to see how bad this gets before they weigh in,” he said.
Banks in the Crosshairs
For the banks themselves, it’s a no-win situation. Without indemnity, any transaction tied to the PA becomes a legal risk. But freezing operations could also be seen as a political act.
And there’s precedent. In 2020, Israeli banks were already jittery about dealing with the PA. Several quietly flagged transactions as “high risk.” Some even began closing accounts tied to Palestinian clients.
This latest move just formalizes that hesitation. And makes it official.
Take a look at the fragile setup in place before this order:
| Area of Dependency | What’s at Risk Without Waiver |
|---|---|
| Salary Payments | Government workers unpaid |
| Health Sector Procurement | Medical supply chains disrupted |
| Tax Clearance Transfers | Loss of ~$100 million per month |
| Public Sector Operations | Budgets frozen, projects halted |
| International Aid Channels | Delays or re-routing of assistance |
That table isn’t hypothetical. It’s the actual cross-section of a system now at risk.
Could This Lead to a PA Collapse?
That word—collapse—keeps surfacing in diplomatic and media circles. It’s not just journalistic hyperbole.
If the PA can’t pay salaries, can’t provide services, and can’t access shekels, its credibility collapses. That’s the structure holding the West Bank together. Remove it, and you might get more than just civil unrest. You might get anarchy.
Even some Israeli officials who agree with Smotrich politically are worried this could backfire.
One former Shin Bet official, speaking anonymously, summed it up this way: “You can’t bomb their economy and expect quiet.”
Diplomatic Shockwaves Just Getting Started
The Biden administration, already juggling the Gaza conflict, now faces a fresh headache.
Washington helped broker previous financial arrangements that kept the PA solvent. And while U.S. aid doesn’t flow directly through Israeli banks, the secondary effects could still disrupt international support.
European diplomats are also circling. France and Germany both condemned previous financial throttling moves, and they’re expected to issue formal statements in the coming days.
This isn’t just about Israel and the PA anymore. It’s becoming a test case in whether economic warfare can be wielded with precision—or whether it just leaves ruin in its wake.
