Palestinian Economy Weighs Currency Options Amid Shekel Dependence

The Palestinian economy faces significant challenges in its reconstruction phase, including a currency framework heavily reliant on the Israeli shekel. This dependence limits the autonomy of the Palestinian Monetary Authority and creates broader risks for economic stability.

A new report from the Atlantic Council examines four currency arrangement options: maintaining the shekel-based system, establishing an independent Palestinian currency, using a cryptocurrency such as Bitcoin, or adopting the US dollar. Each option has its strengths and weaknesses, with no single solution performing well across all criteria.

The current system's reliance on the shekel has led to persistent external imbalances, limiting the PA's ability to conduct monetary policy. The lack of an independent currency and fully autonomous central bank constrains the PA's ability to manage inflation and unemployment. Around $40 billion in international aid has been channeled to the PA between 1993 and 2021, making it one of the largest per-capita aid recipients worldwide.

The surplus of physical shekels in Palestinian banks' vaults is a significant challenge. The Bank of Israel allows only up to 18 billion shekels to be transferred annually through correspondent banking channels, resulting in an estimated $4 billion worth of excess shekels by the end of 2025. This has reduced bank profitability and made routine operations more difficult.