Palestinians Look To Jordan's Dinar As Israeli Banks Halt Shekel Supply

2006-05-27

Harvey Morrisin

Ramallah - The Financial Times (UK)

http://news.ft.com/cms/ s/60167132-ed1c-11da-a307- 0000779e2340,s01=1.html

The Palestinian Authority may be forced to abandon the Israeli shekel andadopt the Jordanian dinar as its currency as a result of restrictions on the transfer of funds since Hamas came to power, according to George Abed, the Palestinian banking regulator.

Mr Abed, governor of the independent Palestine Monetary Authority, said he urged the Bank of Israel to find ways to ensure that legitimate financial transactions would continue after the two Israeli commercial banks that supply shekels decided to sever ties with their Palestinian counterparts.

"Otherwise we will have to do away with the shekel and adopt the Jordanian dinar," he told the FT.

The looming monetary crisis is the latest to hit the Palestinian Authority since the US, the European Union and other states that regard Hamas as a terrorist organisation launched a boycott of its government.

It has been exacerbated by the nervousness of local and international banks about handling transfers to the Palestinian territories that might make them vulnerable to anti-terror legislation, particularly in the US.

The shekel is the principal currency in circulation in the West Bank and Gaza Strip under the terms of the Paris protocol signed by Israel and the PA in 1994 that made it legal tender for all payments, including official transactions. The territories have no currency of their own.

The arrangement favoured the Israeli banks from which the Palestinians bought shekels with dollar or euro funds to pay for imports from Israel, by far their largest trading partner.

Mr Abed, a former senior IMF official, said he had held preliminary talks with the PA government on the issue but still hoped to avoid a switch to the dinar that would involve physically shipping Jordanian notes and coins to the Palestinian territories. A changeover would involve 14-15 per cent of Jordan's money supply, he said.

The dinar would be an obvious alternative to the shekel. Land values in the formerly Jordanian-ruled West Bank and in Gaza are designated in dinars, while a quarter of deposits in Palestinian banks are in the Jordanian currency.

"The Paris protocol obliges us to have the shekelin circulation and take shekel deposits," said Mr Abed. "But it also obliges them to supply us withshekels."

However, the two Israeli banks that act as correspondents with the Palestinian banking system recently said they were severing ties. Bank Hapoalim said in April it was pulling out, while Discount Bank announced on May 16 it would end its relationship with Palestinian banks within three to six months.

Discount Bank said: "No suitable framework was found which would enable [it] to provide banking services to the Palestinian banks without it being exposed to the significant risks involved in such activities," a reference to possible legal action under international anti-terror laws.

Discount Bank officials previously told the FT they hoped for a solution that might include Israeli government indemnity against sanctions in US and other courts.

Mr Abed acknowledged that it would be difficult for Israel to open itself to potentially unlimited liabilities in the US courts. He nevertheless believed the cutting of ties was politically motivated.

"The Israeli authorities may realise that they have gone too far," he said. "But we will continue with our contingency plans. We can survive without the shekel. It would just take time."

Source: IMRA – Independent Media Review and Analysis