Treasury Secretary Janet L. Yellen on Thursday warned Israel not to cut ties with Palestinian and Israeli banks, arguing that such a step would further destabilize the West Bank economy at a time when Palestinians already face dire economic conditions.
Yellen's comments came after Israel decided on Wednesday to withhold tax revenues from the Palestinian Authority in retaliation for three European countries unilaterally agreeing to recognize a Palestinian state. Yellen and other senior economic officials from the G7 countries are expected to discuss the issue, as well as the humanitarian situation in Gaza, at a summit that starts on Thursday in Stresa, Italy.
“I am particularly concerned about Israel's threats to take action to cut off transactions between Palestinian banks and their Israeli counterparts,” Yellen said in remarks before a news conference.
Yellen added that the banking channel is crucial for processing transactions that allow for $8 billion in annual food, fuel and electricity imports from Israel and $2 billion in Palestinian exports.
The Palestinian economy uses the Israeli currency, the shekel, and relies on Israeli banks to process transactions. Israel's Ministry of Finance typically signs annual exemptions that protect Israeli banks from liability related to transferring funds to terrorist groups when they broker transactions with Palestinians.
After granting a three-month extension to the exemption earlier this year, Israel's hardline Finance Minister Bezalel Smotrich has signalled he may not extend it again when it expires in July.
A UN official said last month that cutting off Palestinian banks from Israel would effectively cut Israel off from the global banking system and cripple the Palestinian economy.
On Wednesday, Smotrich also said he had told Prime Minister Benjamin Netanyahu that he would no longer send tax revenue to the Palestinian Authority, which works closely with Israel and administers parts of the Israeli-occupied West Bank. Israeli and Palestinian leaders agreed earlier this year to a deal in which Norway would hold part of its revenue in trust until Israel agreed to send troops to the Palestinians. On Wednesday, Smotrich called on the government to immediately cancel that agreement.
Biden also criticized decisions to limit Palestinians' access to tax revenue.
“Israel's withholding of revenues collected on behalf of the Palestinian Authority also threatens economic stability in the West Bank,” Yellen said. “We and our partners must do everything possible to expand humanitarian assistance to the Palestinian people in the Gaza Strip, curb violence in the West Bank, and stabilize the West Bank's economy.”
Ms. Yellen sent a letter to Mr. Netanyahu in February urging him to increase commercial engagement with the West Bank, arguing that doing so is critical to the economic well-being of Israelis and Palestinians.
