Israel has threatened to revoke a waiver for maintaining ties with financial institutions in the West Bank

Western officials have warned of an “economic catastrophe” in the occupied West Bank if Israel does not renew a banking waiver vital to the Palestinian Authority (PA), the Financial Times reported on Wednesday.

The waiver, which Israeli banks rely on to maintain relations with their Palestinian counterparts, is set to expire on July 1. It allows payments for vital services and salaries tied to the PA and facilitates the import of food, water, and electricity into the occupied Palestinian territories.

Three Western officials told FT that without the waiver, Israeli banks would cease dealings with Palestinian financial institutions, severely hampering the PA’s ability to operate and crippling economic activity in the occupied West Bank, they argued.

Not renewing the waiver “will be to the detriment not only of Palestinian interests but also to Israel’s and the region’s security and stability,” an unnamed US official said.

“The point that we’re making… is that you shouldn’t be threatening people’s access to food, electricity and water at a moment like this, especially in the West Bank,” the person added.

Most transactions in Palestine use the Israeli shekel, while the enclave’s financial institutions are supposed to use the Bank of Israel and the Jewish state’s banks to access the currency.

According to US government data, cited by FT, nearly $8 billion in trade between Israel and the West Bank passes through these channels each year. This includes $2.3 billion of payments for food, $540 million for electricity, and $145 million for water and sewage services.

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The waiver was renewed annually due to an arrangement in 2016, when US Treasury officials started providing an annual letter to Israel with assurances that Israeli banks would not be targeted with allegations of terrorist financing over their dealings with Palestinian entities.

This year, however, Israeli Finance Minister Bezalel Smotrich issued a three-month extension of the previous year’s waiver, which expired on April 1.

Smotrich said last month he would order the cancelation of the waiver to Israeli banks if the PA were to win recognition as a state by the UN Security Council, or if the International Criminal Court (ICC) were to issue arrest warrants against Israeli leaders or soldiers.

This week, the ICC’s prosecutor requested warrants against Israeli and Hamas leaders, including Israeli Prime Minister Benjamin Netanyahu and Defense Minister Yoav Gallant.

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The waiver’s renewal is “a purely political game, but they’re trying to dress it up in the veneer of concerns about terrorist financial flows and promoting money flows to Hamas,” one of the Western officials said.

Palestinian banks have safeguards to ensure money is not flowing to terrorist groups, the official added, noting that revoking the waiver would push more Palestinian economic activity to informal channels.