Palestine to get its own central bank

The Palestinian Monetary Authority has announced that it will open the Palestinian Central Bank after fulfilling all necessary requirements, but questions remain about if and when a national currency will be issued.

al-monitor A Palestinian woman makes a withdrawal at the Housing Bank for Trade & Finance in Ramallah, West Bank, Jan. 22, 2013.  Photo by REUTERS/Mohamad Torokman.

Nov 15, 2017

GAZA CITY, Gaza Strip — The Palestinian Monetary Authority (PMA) is currently preparing to open the Palestinian Central Bank, as soon as Palestinian President Mahmoud Abbas signs the Central Bank of Palestine law. This comes as the PMA fulfilled the requirements for transitioning into an integrated central bank. The preparations included restructuring the PMA, building the Central Bank headquarters in Ramallah, developing Palestinian banks, developing new control systems and finalizing the Central Bank of Palestine law.

In 2006, the PMA drafted a strategic plan to establish a central bank in Palestine in order to achieve the monetary policy’s ultimate objective in the Palestinian state. But it faced several obstacles.

PMA Governor Azzam Shawa told Al-Monitor, “The PMA was originally formed as the nucleus of the Central Bank of the State of Palestine. The PMA law No. 2 of 1997 is bound by the provisions of the 1994 Paris Protocol, which made the Palestinian economy dependent on Israel, given the latter’s control over the crossings and ports. A strategic plan to convert to the central bank system was developed in 2006 with the assistance of experts in global central banks and international institutions.”

Shawa said that ever since the PMA was founded, it has been in the process of gradually shifting from an institution with responsibilities mainly limited to banking oversight and some traditional technical functions to an institution with broader competences. He explained that the PMA has always sought to become a full-fledged central bank, subject to the long-term monetary policy considerations, to achieve the ultimate goal of the future Palestinian state’s monetary policy.

He added, “Ever since it came up with the 2006 plan, the PMA has been developing the capacities and capabilities of its human resources. It also addresses weak banks and immunizes them against expected and unexpected risks by raising the banks’ minimum capital, introducing oversight and credit regulations, and advanced payment systems, particularly after the establishment of the Palestine Deposit Insurance Corporation.”

Shawa noted that Abbas will sign the final draft of the Central Bank of Palestine law before the end of 2017, thus completing the legal framework for the establishment of the Palestinian Central Bank. “A law will also be laid down for the PMA’s powers in terms of exercising monetary policy and assuming its role in achieving monetary and financial stability in Palestine, and the PMA law would stop existing,” he said.

Speaking about the changes that will occur during the process of turning the PMA into a central bank, Shawa said the Central Bank of Palestine law stipulates clear and measurable objectives, sufficient powers to achieve these goals in an exemplary manner, as well as proper mechanisms of accountability and oversight.

He noted that the PMA law No. 2 of 1997 explicitly prevents the bank from providing loans to the government and grants it immunity and independence from accepting any instructions from other parties in terms of its basic responsibilities in accordance with international standards, as set by the International Monetary Fund. However, Article 36 of the current PMA law allows it to provide advances and loans to the government.

The new draft law includes provisions regulating the process of issuing and managing local currency, aims to fill the existing gaps and address the inconsistencies in the current laws and implementing regulations, so as to provide an integrated and harmonized legal framework to ensure financial and monetary stability. Shawa said the draft law includes provisions on modern payment systems, electronic offset and clearance, and credit information systems. The draft law details the central bank’s relationship with banks and provides mechanisms for addressing any disputes between them.

“This is a true transition process and not only a change of name,” Shawa said, pointing out the obstacles faced by the PMA such as the political circumstances in Palestine, not to mention the absence of a Palestinian currency and the multiplicity of traded currencies. He noted that this impedes the PMA’s ability to do its job in achieving monetary stability and properly managing the monetary policy.

As for the issuance of a Palestinian currency, Shawa added that the approval of the Central Bank of Palestine law is in no way related to issuing a Palestinian currency, saying, “The PMA has stressed in various reports and in full transparency that this is not the right time to issue a Palestinian national currency. This could be very risky, but the PMA is nonetheless ready to take all necessary measures in the event of a national decision to issue [a currency].”

Although the national currency is considered one of the symbols of economic and political independence, the PMA believes that should the currency be issued without adequate preparation, it may harm the Palestinian economy, since this step needs balance, stability and sustainability in the public finances of the Palestinian government. “This requires relying on the economy’s internal resources to ensure the independence and success of the economic policy in general, and this is not currently available in Palestine,” Shawa said.

Economic analyst Amen Abu Aisha told Al-Monitor that the PMA has completed all the requirements to become a central bank, considering that it is one of the Palestinian government’s strongest institutions.

However, he hopes for a Palestinian currency, since its issuance is one of the most important tasks of the central bank, praising the initiative of using the Palestinian pound in school cafeterias, in the context of strengthening the sense of belonging to the Palestinian identity.

Abu Aisha said that the Paris Protocol, which limits the economic independence of the Palestinians, stops them from issuing a local currency and prevents them from controlling the crossings, since Israel is the one in control of all crossings and ports, and thus all exports and imports.

He called for canceling all agreements that impede developing the Palestinian economy and attracting foreign investments, and reducing the number of domestically traded currencies, until a national currency is issued. Palestinians use the US dollar, the Jordanian dinar and the Israeli shekel, all of which negatively affect the local economy, according to Abu Aisha.

He pointed out that issuing a national currency requires an appropriate economic and political environment, in which the PMA would be able to gain confidence at the local and international levels.

“The government is suffering from a financial crisis. It is still dependent on international aid amid the insufficiency of available reserves, and relies on assets — which does not protect the financial system,” he said.

This is why, Abu Aisha believes, Israel will not allow the issuance of a Palestinian national currency at this time.

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