Reforming the Palestinian financial system: A way of stifling the second Intifada

The second Intifada has been sustained by an informal, parallel financial system, which has made it possible for Palestine aid to reach the Resistance. This was in response to the needs of a society under embargo as well as to the logistical needs of the resistance organizations. This is why Israel has imposed on the Palestine authority - either through direct pressure or that of the international community - a whole “economic reforms” which have played a decisive role in Israel's strategy of domination.
2018-11-12

Majd Kayyal

Palestinian Writer based in Haifa


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© Hélène Aldeguer, 2018

This publication file is in the framework of the activities of the network of independant media on the Arab world. The regional cooperation is made by Al-Jumhuriya, Assafir Al Arabi, Mada Masr, Maghreb Emergent, Mashallah News, Nawaat, 7iber and Orient XXI.

This article is an attempt to understand the role played by the “economic reforms” carried out by the Palestine Authority in tightening the grip of the occupying power, Israel, on Palestinian society and in the repression of the second Intifada.
The main thesis is that The second Intifada has been sustained by an informal, parallel financial system, which has made it possible for Palestine aid to reach the Resistance. This aid was in response to the needs of a society under embargo as well as the logistical needs of the resistance organizations. This is why Israel has imposed on the Palestine authority - either through direct pressure or that of the international community - a whole “economic reforms” which have played a decisive role in Israel's strategy of domination.

Thus different bodies have participated in the implementation of this strategy, such as the World Bank and the IMF, as well as various international organisation such as The Financial Action Task Force which has laid down nine principles to fight the financing of terrorism in the world, or the Ad Hoc Liaison Committee (AHLC) of The International Donor Group for Palestine. These reforms, as put into practice by the Palestine Authority, contributed to putting a stop to the Intifada following the death of Arafat, while being presented as a “grassroots demand by the Palestinian people in favour of better governance and the struggle against corruption.”

The financial system of the Intifada responded to real needs

Without the aid aimed at financing the resistance and Palestinian social needs, the second Intifada could never have stood up under the embargo, the bloody repression and the efforts to starve the population. The West Bank and Gaza have experienced since the end of September 2000 an unprecedented economic collapse. According to the statistics provided by a Palestinian organisation, 20% of Palestinian families lost all their income in less than two years. 56% lost half their income, which contributed to an exceptional rise in the poverty rate. 6% of Palestinian families were as a consequence living below the poverty line.

Under such conditions, individual and social needs were urgent. The same was true of Palestinian organisations; the financial support received by the Intifada via “informal” channels had been able to partially meet a great variety of needs. Food rations, orphan adoption, support for the families of martyrs as well as the families of prisoners (when the latter were the chief wage-earners), direct assistance to prisoners (cash transfers to accounts labeled “cantina” for the purchase of food and clothes in prison), enrolment and tuition fees for university students, accommodation for people whose houses had been destroyed (21,142 individuals as of the middle of 2004) as well as logistical support for the resistance to Israeli aggression.

How was the aid brought in?

With the Intifada, an official grass-roots network was formed the world over. Considered by Israel to be informal, this support was indeed distinct from the subsidies that reached the Palestine Authority since its creation with Israel’s consent. This network relied on grass-roots sources (public appeals for contributions by Palestinian Funds and Foundations throughout the world) but the network also relied on State donors (the Iraqi and Iranian governments, in particular). The aid reached the West Bank and Gaza through a whole system of companies and civil society associations, and a network of activists inside and outside Palestine.

Faced with the aggressivity of the occupation, this system found itself forced to exploit the Authority’s lack of transparency and institutional shortcomings, and to take advantage of the disorderliness of the banks, exchange brokers and company accounting. The wide use of monetary liquidity, the loose budgeting, the absence of a central accounting service within the Authority and the general inadequacy of its control systems, all of this was favourable to the development of many diversified channels of informal financing designed to irrigate Palestine and keep the territories alive. This parallel system also benefited from the increase in banking activities in the West Bank and Gaza (from 2 banks in 1992 to 23 in 2000), from the lifting of the foreign exchange barriers decreed by the Israeli occupation before Oslo and from the explosion of information technology which made possible money transfers by Internet. Thus it was that operations considered by the official economies as forms of corruption – such as “laundering”, for example – became vital and indeed indispensable to maintain a level of subsistence and resistance to the occupation.

How did Israel hit back?

Israel considered this parallel financing system “illegal” and its attack on it was direct and vigorous. It was carried out on the ground by its army and security serves. But the Israeli were not content with individual arrests and raids on banks. They set up a strategy based on international cooperation enabling a stricter control of the Authority’s institutions as well as an overall surveillance of its financial activities so as to prevent and impede any and every attempt to revive the system of support for the Intifada. Israel achieved this by the pressures it exerted on an international scale. It successfully incorporated its rhetoric on the “reform of the Palestine authority” into the changes in world communication principles following the events of 11 September 2001 and the new steps taken internationally in the “fight against terrorist financing”.

Indeed, new rules were established in this respect, aimed at greater transparency and more rigorous controls. A number of important international resolutions were passed, calling for “reforms”. Among the recommendations were specific laws punishing “terrorist financing”, the freezing of assets and their confiscation, the surveillance of non-governmental organisations, stricter controls of international transfers and keeping a close watch on non-governmental financial bodies. Israel used these resolutions to pressure Western governments into closing down and even indicting several global charitable organisations who were collecting funds for Palestine, among them Interpal or the Palestinian Relief and Development Fund, a UK registered charity.

What were the pressures in favour of reform?

The international conjuncture being what it was, Israel thus succeeded in turning its demand for “the reform of the Palestine authority” into an international demand. In exchange for the continuation of the peace process, Israel demanded reforms of the Authority in every area, the idea being to limit Yasser Arafat’s role and place the Authority under its control, to make it abandon all efforts to oppose the Occupation, especially in relation to its financial and security apparatus.

In 2002, Prime Minister Ariel Sharon clearly set forth his conception of “economic reforms” in a speech at the Israeli resort of Herzlya: “it is of great importance that the PA manage its financial affairs in concordance with the rules of proper government which will obligate the Palestinian Authority, inter alia, to produce a detailed budget, under a budgetary control system. This budgetary auditing system will ensure a balance between income and expenditure, and will verify that budget spending only serves appropriate economic purposes for the benefit and welfare of the Palestinian people. Such a supervising mechanism will also prevent the transfer of money for the financing of organizations or individuals involved in terror. taking the financial system out of Arafat's hands, and appointing a strong Minister of Finance with authority, constitutes an important factor stopping the terrorist system operated by the Palestinian Authority”. (ORIGINAL TEXT)

That “strategy of reform” began to be put into practice through pressures exerted on Yasser Arafat who found himself obliged to appoint Mahmoud Abbas as Prime Minister and Salam Fayad, the IMF delegate in Palestine from 1987 to 2002, as Finance Minister. The changes known as reforms were then carried out at full speed, especially from the middle of 2007 when Salam Fayad became Prime Minister. There was the “reform of the general financial administration” followed by the “plan for reform and development of 2008-2010”.

In the eyes of Palestinians, these reforms were part of an approach in which economic development was the chief condition for the creation of a Palestinian State and the International Community’s lack of confidence in Palestinian capacity to manage State institutions the chief obstacle in the way of the advent of such a State. Indeed, Palestinian management appeared seriously afflicted by breaches of the rule of law. By making Palestine’s economic development depend on the confidence of foreign countries, this vision claimed to be “realistic”: since the Palestinian economy was precarious and a prisoner of the constraints imposed by the occupation, it was inevitably dependent on external factors.

These external factors turned out to be ones of pressure and blackmail exerted on the Palestinian Authority to implement the reforms. Among the most important pressure factors were the international subsidies which amounted to 24 billion dollars between 2006 and 2016 (5 billion between 2012 and 2016 in support of the Authority itself). Plus the clearance revenues which in 2017 amounted to 67% of the Authority’s net revenues: these could be blocked at any time by Israel as part of its pressuring tactics.

Proving its competence

Through these pressures and “international financial trusteeship, (…) auditing mechanisms, built-in budget controls, and technical assistance projects, donors and international institutions are well placed to monitor the operation of PA public finances down to the last shekel”, writes Raja Khalida (1). Thus reform programs have been applied to every aspect of collective life in Palestine. In the financial sector, this was done under the close surveillance of the IMF which reported regularly to the donor countries liaison committee. The results were conclusive: tighter controls over the Authority’s expenditures, rigorous preparation and execution of the budget, reconstitution of a statistics system, elaboration of a juridical framework for the fight against terrorism. In the banking sector strict rules were adopted for the West Bank and Gaza. The Palestinian monetary authority made sure that the regulations of the Basel Committee were effectively enforced by the banks and in particular the obligation to make available any required financial information, the measurement of credit risk and the system of electronic payment to limit the liquidity risk. A legal framework was established in keeping with international requirements, with new bank laws, a law to fight money laundering (amended to become a “law against laundering and for the fight against terrorism”). As for the financial sector other than banking, the Palestine Authority on financial markets decided to strengthen its restrictive measures in this area as well. All of this was done to comply with “international criteria” and earned Palestinians praise for their capacity to manage a State!

Social aftermath

We can identify in Palestinian society today a great many consequences of these broad reforms in many areas, especially financial consequences affecting daily life and the society’s long-term resilience.

Thus Palestinian banks have tightened restrictions on transfers to and from Gaza, as well as their requirements concerning the information needed to justify such transfers. Journalists have reported that the maximum amount allowed is 100 dollars every fortnight. Reports filed with an independent Palestinian body for human rights “Dawan Al madhalem” (Board of Grievances) draw attention to frequent instances of confiscation by Palestinian security services of transfers from the West Bank to Gaza or of sales revenues sent by postal order. Other reports tell of dozens of arrests, or police summons served on ordinary citizens having sent or received bank transfers to or from Gaza. The year 2015 also saw an unlimited sit-in staged by the charitable organisations of the Gaza Strip following a suspension of all giro transfers in support of orphans, martyrs’ families and other needy persons. The Bank of Palestine merely responded to these protests by declaring that “the Bank was applying the international standards for banking activities”.

As for currency exchange, the Monetary Authority has stiffened its directives so that it has become more difficult to obtain a license. The banks have been warned against dealing with exchange brokers and of the need for regulations in the matter. This finally resulted in the banks’ imposing an iniquitous agreement on the currency exchange dealers. In 2012, the president of the Company of exchange brokers Mohamed Al Noubani declared that “the Monetary Authority was carrying out a policy aimed at closing down a number of bureaux de change”.

The Authority has also forced them to harmonise their calculating system with its own procedures and under its control. These restrictions were imposed at a time when the Israeli army was repeatedly raiding bureaux de change and arresting professionals accused of “financing terrorism”.

These control operations in bureaux de change vary from one region to another. They are stricter in Hebron or in the regions where Israel and the Palestine Authority believe Hamas has a broader popular support. Exchange brokers have said that for any operation involving more than a thousand dollars they must be vetted by two security services (preventive security and intelligence) where they are subjected to a full-blown interrogation before permission is granted. Some brokers have revealed that the security officers of the Authority got into the habit from the very start of confiscating the “cantinas” , those tiny sums meant for prisoners in the camps. Similarly, every transfer to martyrs’ widows or prisoners’ wives is closely scrutinized by the services to determine its origin, which is likely to delay actual payment for many days.

We must remind the reader that the handling of those allowances for the families of prisoners, martyrs and liberated inmates provides Israel with all the information it needs to fuel the notion of “rewarding terrorism.” This term has been propagated throughout the international community to put pressure on the Palestinian Authority to do away with these allowances. And was later used to justify reducing aid to the Authority, a decision presented as a sanction, as well as the retention by Israel of the customs duties owing to the Authority.

Salam Fayad’s government has dissolved all the committees formed by virtue of the zakat (the third pillar of Islam, obligatory alms for the poor). The Ministry of Awqaf (2) and Religious Affairs was made to create eleven new committees (responsible for collecting the alms), whose new members were deemed acceptable to the Authority. The committees were then grouped in a single entity. Similarly, severe restrictions were placed on the beneficiaries of these sums. Any bearer of a cheque for more than a thousand Jordanian dinars must obtain the signature of the Ministry of Awqaf and various other services before it can be cashed.

There is no doubt but what the whole apparatus of the Palestine Authority, as well as that of the PLO, would need radical, in-depth reform. And it would be irresponsible to underestimate the need for such a reform to put an end to the clientelism, influence-peddling and corruption, and to establish transparency and the rule of law. But there is a serious problem with a campaign which, though ostensibly meant to establish transparency and the rule of law is actually aimed at restructuring the financial system so as to hand over all its keys to Israel and enable it to prevent any new insurrection against the occupation.

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1- https://mpra.ub.uni-muenchen.de/21806/1/MPRA_paper_21806.pdf
2- Religious endowments

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Majd Kayyal is a researcher and novelist from Haifa, Palestine. He publishes his articles on Palestine and on Zionism in Assafir Al-Arabi since 2012. In 2016, his novel “The Tragedy of Sayyed Matar” won the AM Qattan award.


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