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As peace talks founder, Palestine’s central banker helps build a state

A Palestinian woman is reflected in the glass of a money changer's shop in Gaza City in April 2010. Photo: AP/Tara Todras-Whitehill

In March, gunmen dispatched by the Islamic militant group Hamas stormed a bank in the Gaza strip, forcing the tellers to hand over than half a million dollars in cash. For a group that routinely lobs rockets over the border into Israel’s Negev desert, and killed four Israeli settlers in the West Bank in August, the raid was especially brazen. Never before has the banking system in the Palestinian territories, an apolitical institution that serves millions of people, been targeted for attack.

“It became a real crisis,” said Jihad Al-Wazir, the governor of the Palestine Monetary Authority. The government in Ramallah was forced to close the banking system for a day. A bank in the Gaza strip shuttered two of its branches, and officials feared a run on banks in the region. “People were worried that the banks were going to close,” Al-Wazir said. He was forced to send more cash to Gaza, and persuade the Hamas government not to hold more banks hostage.

“The alternative,” said Al-Wazir, “is the total closure of the banking system in Gaza. And that’s very serious, and would have a severe economic impact.”

With peace talks between the Israelis and Palestinians on the brink of collapse, attention has turned to the Palestinians’ plan to build what many view as a de facto Palestinian state, through security gains and economic development. The public face of that effort has been Palestinian Prime Minister Salam Fayyad, a moderate whose economic development plan foresees the establishment of a Palestinian state by August of next year. In 2007, a columnist for the Israeli newspaper Haaretz called Fayyad “Everyone’s favorite Palestinian.”

But if Fayyad is Israel’s and the West’s political partner — “Our man in Palestine,” as The New York Review of Books put it earlier this year — Al-Wazir is their enforcer. He is responsible for implementing the anti-money laundering rules that have allowed regional traders and humanitarian groups to operate in Hamas-controlled Gaza. He is close to Israeli bankers, and has been essential in convincing them to keep financial channels open, despite an Israeli blockade. And he is the only Palestinian official who has managed, however tenuously, to unite the opposing political factions in Gaza and the West Bank.

Palestine's central banker, Jihad Al-Wazir, is helping build a de facto Palestinian state.

“Money’s needed everywhere, regardless of the ideology or the political system,” Al-Wazir said in an interview in September at the New York Metropolitan Club, where he was speaking at the Blouin Creative Leadership Summit, a conference on international development. “The role, in terms of maintaining this unity in the financial system, is essential, because if God forbid this unity is separated, the possibility of coming back to unity becomes almost impossible.”

If the peace talks do indeed founder, as many expect they will, many Palestinians say they will have no choice but to build an economically viable Palestinian state on their own, without Israel’s help. “Palestinians will have no choice but to declare their state unilaterally and hope the world will recognize it,” Daoud Kuttab, a Palestinian journalist, wrote in September.

But the task is harder than it sounds. As determined as Fayyad is, his Fatah government remains at odds with the Hamas leadership in Gaza, and the vast majority of the security gains and public investment engineered by Fayyad have been confined to the West Bank. Even if Fayyad completes his economic development agenda by August of next year, he will face a fractious and divided Palestine, and that will make it difficult to establish a unified homeland for the Palestinian people.

Only Al-Wazir has had success in linking the two regions, and in maintaining what limited economic activity there is in the Gaza strip. Those feats are crucial not only to the development of a stable and unified Palestinian state, but to staving off the influence of radical elements in Gaza. As many experts have noted, the Israeli blockade of the territory has starved the independent business class there, which tends to be moderate, and strengthened Hamas. Expanding the banking system and extending credit to Gaza’s merchants could help reverse that trend.

“The economy is totally collapsed,” Al-Wazir said, describing the situation in Gaza. After the blockade began, just persuading banks in Gaza to stay open was a difficult task. “Even the possibility of investment or expansion didn’t exist,” he said. “There was a lot of pressure. The banks wanted to close and leave, but then you couldn’t deliver the humanitarian assistance to the people.”

He added: “It’s like crisis management on a weekly basis.”

Indeed, more than half a million people in Gaza alone depend on Al-Wazir’s ability to manage the crisis. The government of Ramallah still pays the salaries of more than 75,000 people in Gaza, and the average size of the families living on those salaries is seven. The cash flow is dependent entirely on the survival of the banking system, as are the millions of dollars in remittances sent back to Gaza every year by Palestinians working abroad.

Meanwhile, the Israeli banking system has frozen its dealings with Gaza, threatening the already tenuous relationships between merchants and their suppliers in Israel. Al-Wazir spends every week trying to convince Israeli bankers, and Israeli businessmen, not to abandon the region. “That’s not very sustainable in the long run,” he said.

For every success Al-Wazir has on that front, there are other, more systemic challenges. The Palestinian Authority is still dependent largely on foreign aid, and still spends beyond its means. The World Bank said in September that the central bank had extended too much credit to the Palestinian Authority, prompting concerns that the government would be unable to service its debts. Al-Wazir is working to reign in spending and codify the central bank’s independence from the government. But, as the World Bank wrote in its report, “given the state of the economy, there are few options.”

Whether Al-Wazir can overcome these challenges, and unify the divided territories that Palestinians hope will one day become their homeland, is unclear. If conditions prove too difficult, and the banking system unravels, any hope for a Palestinian state may well unravel with it. The history of the developing world is littered with examples of failed states, and of failed central banks. “The monetary union is the last thing to go,” Al-Wazir said.

But he tries not to think too much about that.

“There are ups and downs in the peace process. It’s like a roller coaster ride, and so we choose not to look at it,” Al-Wazir said. “We work everyday as if we are living in a normal situation.”