Janet Yellen warns Israel not to cancel waiver for Palestinian banks

US Treasury secretary Janet Yellen has warned Israel not to cut its banks’ ties to Palestinian lenders, saying its “threats” to cancel a vital waiver between financial institutions would rob the Palestinian Authority of essential services and sources of revenue.

US officials believe Israel’s ultra-nationalist finance minister, Bezalel Smotrich, will not renew the annual waiver when it expires on July 1.

“I’m particularly concerned by Israel’s threats to take action that would lead to Palestinian banks being cut off from their Israeli correspondent banks,” Yellen said on Thursday.

The waiver facilitates payments for $8bn-worth of imports from Israel, according to US government data. These include vital utilities, such as electricity and water, as well as food. The banking links also enable about $2bn-worth of exports to be sold by businesses in the occupied West Bank to foreign customers.

The waiver’s cancellation would shut down much of the Palestinian economy in the West Bank, officials have said.

The issue is set to be discussed at a meeting of G7 finance ministers and central bank governors in Stresa, Italy, over the coming days.

Yellen said during a press conference that she expected “other countries to express concern about the impact of the decision” to cancel the waiver. She added that the US and others would “try to do all that we can diplomatically” to keep the waiver in place.

The US Treasury had urged Israel’s government to take action “that would bolster the Palestinian economy and, I believe, Israel’s own security”, Yellen said, adding that she sent a letter on the subject to Prime Minister Benjamin Netanyahu earlier this year.

“We and our partners need to do everything possible to increase humanitarian assistance to Palestinians in Gaza, to curtail violence in the West Bank, and to stabilise the West Bank’s economy,” she added.

US national security adviser Jake Sullivan on Wednesday in Washington said Israel’s move to withhold funds from the Palestinian Authority, which administers limited parts of the West Bank, was “wrong” and “they should continue to flow”.

“It’s wrong on a strategic basis because withholding funds destabilises the West Bank,” he said. “And I think it’s wrong to withhold funds that provide basic goods and services.”

The UK shares Washington’s concerns, according to British officials.

The Palestinian territories do not have their own currency, and rely on Jordan’s dinar and Israel’s shekel, along with US dollars. The economy formally uses the shekel, leaving the Palestine Monetary Authority — the central bank — and its lenders reliant on the Bank of Israel for access to reserves and financial services.

Without the waiver, Israeli companies with business ties to the Palestinian Authority would also be unable to deposit Palestinian cheques or receive payments from Palestinian banks.

Before Hamas’s deadly assault on Israel on October 7 and the ensuing war in Gaza, the waiver had been renewed annually since 2016.

Since its introduction US Treasury officials have provided Israel with a letter assuring it that its banks would not be targeted with allegations of terrorist financing over their dealings with Palestinian entities.

Additional reporting by Felicia Schwartz