Israeli authorities announced on Friday that the far-right minister had reached a tentative agreement as the Israeli-occupied West Bank faces a severe economic crisis. It would release some of the frozen funds to the cash-strapped Palestinian Authority in exchange for strengthening Israeli settlements in the area.
The country’s hardline Finance Minister, Bezalel Smotrich, wants to cripple the Palestinian Authority, which controls parts of the West Bank under Israeli military control, and believes Israel should rule the area permanently. He has threatened to withhold hundreds of millions of dollars in funding to the Palestinian Authority and revoke exemptions that protect Israeli banks that do business with Palestinian banks.
To appease Smotrich, ministers agreed to measures such as retroactively sanctioning five illegally built Israeli settlements in the West Bank at a meeting late Thursday, according to Smotrich’s office and two other Israeli officials who spoke on condition of anonymity to discuss the sensitive Cabinet deliberations.
In return, Mr. Smotrich will likely agree to provide some of the funds to authorities and extend bank loan waivers, officials said, though he has not yet announced what steps he would take. But even if that temporary reprieve is implemented, Mr. Smotrich could demand further concessions down the road.
Details and a timeline for the legalization of the five settlements have not yet been released. Although much of the international community considers Israeli settlements in the West Bank to be in violation of international law, the settlements are illegal under Israeli law, meaning that if allowed, they would be able to grow and expand legally.
The Israeli military operation in Gaza is being accompanied by a simultaneous economic crisis in the West Bank, where war has left tens of thousands of people unemployed, Palestinian civil servants have not been paid their full salaries for months and near-daily Israeli raids have prevented even basic mobility.
Smotrich has used his position to deal a series of blows to the Palestinian Authority, which oversees parts of the Israeli-occupied West Bank. He has threatened to withhold much of the Palestinian Authority’s budget and not renew a key exemption that protects Israeli banks that do business with the Palestinian Authority.
The move has alarmed the Biden administration, which wants the Palestinian Authority to have a role in running the Gaza Strip after the war. U.S. officials also worry that an economic collapse in the West Bank could lead to a surge in violence in the area, which has yet to see major unrest despite months of deadly Israeli military operations.
The Palestinian Authority has been in crisis for years, struggling to pay its debts amid dwindling international aid, and Israel has often withheld taxes it collects on its behalf, sought to punish its leaders and at times sent tens of millions of dollars to keep the authority afloat.
But many noted that the West Bank’s current economic plight is the severest it has ever been.
Following the Hamas-led attacks on October 7, tens of thousands of Palestinians who worked in Israel were denied entry into the country, resulting in mass unemployment overnight. Israeli military raids, road closures and increased checkpoints have further strained the Palestinian economy.
Before the war, Mahmoud Abu Issa, 53, earned more than $2,000 a month as a construction worker in Israel, an enviable salary in the impoverished West Bank. Since Israel banned most Palestinian workers, he has been unemployed, except for occasional work as a day laborer for about $10 a day.
His son, who worked with him in Israel, had started building the house before the war began. He said his wages dried up and the house remains unfinished.
“We sit day and night hoping that something will change,” Abu Issa said, “but nothing happens.”
Under the agreement, Israel collects hundreds of millions of dollars in tax revenue and transfers it to the Palestinian Authority. Mr Smotrich has withheld the funds, which make up the bulk of the Palestinian Authority’s budget, worsening its financial crisis.
As a result, the Palestinian leadership has regularly struggled to pay the salaries of at least 140,000 employees, many of whom have received irregular partial salaries for years, with most receiving only 50 percent of their pay last month, according to a Palestinian Authority Finance Ministry official.
Shadi Abu Afifa, a father of four who lives near Hebron, said his $930 monthly salary as an officer in the agency’s security forces was cut in half last month and that his family had stopped buying cooking gas and cut off small luxuries like internet at home to save money.
“If the economy improves, maybe there will be hope again,” Abu Afifa said, “because right now we are in a very suffocating situation with war, unemployment and all kinds of problems coming together.”
U.S. officials, concerned that further economic hardship could lead to more violence in the West Bank, have been pressuring the Israeli government to release the funds, with National Security Adviser Jake Sullivan calling this week for the funds to be released “without further delay.”
Last month, after three European countries announced they would recognize the state of Palestine, Smotrich announced he would not renew an exemption that protects Israeli banks from legal liability for transactions with Palestinian banks – set to expire on July 1.
Palestinians do not have their own currency, so they commonly use the Israeli shekel, and if Palestinian banks want to offer shekel accounts, they must maintain ties with Israeli banks and rely on Israeli banks to process shekel transactions.
According to Israeli Finance Ministry spokeswoman Lilaha Weissman, the ministry has been issuing exemptions exempting Israeli banks from liability since 2017. If the exemptions are not renewed, Israeli banks are likely to sever ties with Palestinian banks, banking experts said.
“The impact will be bad and dangerous for everyone,” said Akram Jerab, chairman of the board of directors of Quds Bank, which has 31 branches in the West Bank.
At a cabinet meeting that lasted until late on Thursday night, ministers agreed to a provisional extension of the exemptions for four months, according to Eitan Fuld, a spokesman for Minister Smotric. It is unclear what will happen after that.
If the president ultimately follows through on his threat to let the exemptions lapse, experts say there could be economic repercussions for Israel as well. Palestinian merchants would be unable to use banks to pay Israeli suppliers for imported goods. Palestinians would also lose the way to pay Israel for essential goods like fuel, water and electricity, said Azam al-Shawwa, a former top Palestinian banking regulator.
“Israeli trade is closely intertwined with Palestine,” Al-Shawwa said in an interview. “Palestine is one of Israel’s largest trading partners. Is Smotrich prepared to lose that?”
Rawan Sheikh Ahmad Contributed report.