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RAMALLAH: A central bank in the making, the Palestine Monetary Authority (PMA) is a rare bright spot as the economy of the Palestinian territories struggles with Israeli sanctions.
Enforcing on Palestinian banks a regimen of conservative lending that has kept bad loans minimal and guaranteed liquidity, the PMA’s technocratic prowess is the pinnacle of a Palestinian drive to build institutions fit for a future state.
But its efficiency is meeting a hard reality: the banks are exposed to around $2.5bn in debts incurred by the government, its workforce and its private sector partners — over a fifth of banks’ total assets. “Our room is all in order, spick and span, on what could turn out to be the Titanic,” joked PMA Chairman Jihad Al Wazir.
“Banks have reached the upper limit of what they can prudentially lend (to the government) without increasing risks to the system,” Al Wazir said. Al Wazir is the son of Khalil Al Wazir, a top Palestinian leader assassinated by the Israelis in Tunis in 1988.
Economic prospects for Palestinians in the West Bank are limited by Israeli restrictions on trade, and the Palestinian government is deeply dependent on foreign aid and bank credit to pay its bills.
Help from abroad plunged by two-thirds from four years ago to just $600 million in 2012, as the global economic downturn and Arab revolts taxed the attention of wealthy Gulf state donors and US funding dwindled.
Public debt to the Bank of Palestine, Al Quds Bank and other banks supervised by the PMA more than doubled in the same period. The government’s budget deficit has reached $1.3bn, over 12 percent of gross domestic product.
The government’s ability to pay its $300m in monthly expenditures was further hampered by Israel’s docking of $100m in customs duties it collects on the Palestinians’ behalf each month as punishment after Palestine secured de facto United Nations recognition of statehood in November.
Despite the economic difficulties, regular stress tests of banks, supervised by the PMA, have found that only a doomsday scenario of a massive run on deposits combined with a near-shutdown of the private sector could upend the system.
The banking system’s Tier 1 capital, its main benchmark of health, stood at a remarkably robust 24 percent of assets last year, according to the International Monetary Fund. Struggling European banks’ Tier 1 ratios generally hover between 7 and 10 percent, and at around 8 percent for Israeli banks.
Non-performing loans at Palestinian banks stand at less than 3 percent of total loans, and debt-to-deposit ratios remain far healthier than in neighbouring Jordan and Israel. Since they do not deal in complex financial commodities such as derivatives and are largely isolated from global financial markets, Palestinian banks weathered the 2008 global financial crisis largely unscathed.
The banks also owe their vitality to a robust PMA credit bureau which sniffs out and discourages dubious debts. “The credit registry, in which all loans and defaults on loans and credit worthiness of customers are examined, is considered one of the best in the region and an example for other countries,” said Udo Kock, resident representative of the IMF, which provides technical assistance to the PMA.
The banking sector’s stability contrasts with the pain experienced by government employees, who have staged work stoppages and protests outside government offices with increasing frequency in recent weeks because of the state’s inability to pay salaries on time.
Luay Ghashash, 45, a worker in the Palestine Liberation Organisation, a diplomatic organ, said he and his wife, a public school teacher, hadn’t received a full paycheck in almost three months, making mortgage and car loans ever more onerous. Rattling off the rising prices of food and basic commodities, Ghashash said the government’s financial problems were undermining his family’s ability to live a decent life.
“My little daughter had a school field trip the other day, but we couldn’t afford it. She came to me and said ‘It’s OK, I’ll just tell my teacher that I overslept,’” he sighed.
Bank lending for personal consumption in the Palestinian territories has risen fivefold in the last two years to $417 million, according to the PMA.
But manufacturing, construction and agriculture have now slowed, depriving the government of yet more indirect revenue, while the seeming permanence of the Palestinian economic malaise has discouraged foreign investors, analysts say.