US treasury chief troubled by Smotrich’s threat to cut off Palestinian banks

Janet Yellen says ties to Israeli banks crucial for Ramallah, allowing funds for services and salaries; urges moves to bolster economy in West Bank to prevent violence

Treasury Secretary Janet Yellen is awarded an honorary doctorate at the Frankfurt School of Finance in Frankfurt, Germany, May 21, 2024. (AP Photo/Michael Probst)
Treasury Secretary Janet Yellen is awarded an honorary doctorate at the Frankfurt School of Finance in Frankfurt, Germany, May 21, 2024. (AP Photo/Michael Probst)

STRESA, Italy — US Treasury Secretary Janet Yellen said on Thursday she was concerned by a threat from Israel to cut off Palestinian banks from their Israeli correspondent banks, a move that would close a critical lifeline for the Palestinian economy.

Yellen said in prepared remarks ahead of a G7 finance ministers meeting in Italy on Thursday that the US and its partners “need to do everything possible to increase humanitarian assistance to Palestinians in Gaza, to curtail violence in the West Bank, and to stabilize the West Bank’s economy.”

Far-right Finance Minister Belazel Smotrich has indicated that Israel may not renew a waiver that expires on July 1 that allows Israeli banks to process shekel payments for services and salaries tied to the Palestinian Authority, in response to the PA’s efforts for international recognition of a state and for what he said was its bid to obtain international arrest warrants against Israelis over the war in Gaza.

If the waiver is canceled, Israeli firms will not be able to receive money from Palestinian banks or deposit Palestinian checks, impacting business ties.

Yellen said it was important to keep open the Israeli-Palestinian correspondent banking relationships to allow battered economies in the West Bank and Gaza to function and help ensure security.

“These banking channels are critical for processing transactions that enable almost $8 billion a year in imports from Israel, including electricity, water, fuel, and food, as well as facilitating almost $2 billion a year in exports on which Palestinian livelihoods depend,” Yellen said.

Religious Zionism party leader Finance Minister Bezalel Smotrich leads a faction meeting in northern Israel, May 19, 2024. (Ayal Margolin/Flash90)

She added that Israel’s withholding of revenues collected on behalf of the PA also threatens the West Bank’s economic stability.

“My team and I have also engaged directly with the Israeli government to urge action that would bolster the Palestinian economy and, I believe, Israel’s own security,” Yellen said.

The treasury chief’s comments echoed criticism made a day earlier by US National Security Adviser Jake Sullivan.

“I think it’s wrong. I think it’s wrong on a strategic basis because withholding funds destabilizes the West Bank, it undermines the search for security and prosperity for the Palestinian people, which is in Israel’s interests,” Sullivan said during a press conference.

“I think it’s wrong to withhold funds that provide basic goods and services to the Palestinian people. From our perspective, those funds should continue to go — with all of the necessary safeguards — but they should continue to flow,” Sullivan added.

The tax revenues make up a majority of Ramallah’s budget, and Israel’s withholding of them risks collapsing the PA, Palestinian officials warned Sullivan during a meeting earlier this week, a US official told The Times of Israel.

In a letter sent to Netanyahu in April and widely reported by Hebrew media, Smotrich wrote that the PA is an immediate danger to Israel and called on the premier to annex the West Bank if the Palestinians don’t desist from their actions.

He also threatened to cut off hundreds of millions of shekels in Palestinian tax revenue that Israel collects for the PA and that he had previously held up against the background of the Gaza war. The move helped cause a financial crisis in the PA until an agreement was eventually reached to transfer the funds via Norway as a way to ensure none were diverted to the Gaza Strip.

Norway on February 18 said it had agreed to assist in the transfer of funds earmarked for the PA that were collected by Israel but withheld over Jerusalem’s refusal to transfer money destined for Gaza following Hamas’s October 7 terror onslaught.

Israel had argued the portion of the funds that Ramallah uses to pay for services and employees in Gaza — roughly NIS 260 million ($73 million) monthly — could wind up in the hands of Hamas, the terror group it has vowed to eliminate.

The first transfer of funds came at the end of February.

File: A Palestinian man counts a stack of Israeli Shekels in the West Bank city of Ramallah on October 5, 2021. (ABBAS MOMANI / AFP)

The PA’s diplomatic efforts against Israel have become fruitful in recent weeks, increasing the likelihood of punitive measures by Israel.

The United Nations General Assembly overwhelmingly backed Palestinian statehood in a symbolic vote earlier this month, and on Wednesday, the leaders of Norway, Ireland, and Spain announced that their countries will recognize a Palestinian state within days.

Also this week, the International Criminal Court’s Chief Prosecutor Karim Khan said he has applied for arrest warrants against Netanyahu and Defense Minister Yoav Gallant for crimes against humanity in the war against Hamas in Gaza.

Alongside the Israeli leaders, Khan also announced that he is seeking arrest warrants for Hamas’s senior leadership — Yahya Sinwar, Mohammed Deif, and Ismail Haniyeh.

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