Government Borrowing and Liquidity and the Stability of the Palestinian Banking System

As part of its ongoing monitoring and analysis of the Palestinian economic policy scene, MAS has maintained a special focus on monetary and fiscal issues. In this respect, cooperation with the Palestine Monetary Authority (PMA) is crucial, and MAS has collaborated closely with this important institution in identifying topics for research that address pertinent policy concerns. This has allowed MAS to provide the PMA and other official policy-makers with independent, timely, and probing analysis of issues of national significance. In doing so, MAS combines its own institutional research resources with expertise from other Palestinian and international economists in order to ensure that the most relevant and feasible policy recommendations are provided. The present study is the latest to result from the continuing MAS-PMA cooperation. It focuses on government borrowing from the domestic banking system in the context of the serious fiscal challenges and liquidity risks that the Palestinian government faces. Past cooperative arrangements between the Palestinian National Authority (PNA), the PMA, and the banking system have enabled coping with shocks emanating from Israeli punitive measures, in particular the withholding of clearance revenues, and have been successful in averting a financial crisis. However, the set of circumstances that permitted that success should not be taken for granted, and this reality is what dictated the need for this research. Clearance revenue withholding is but one in a set of punitive measures which Israel has imposed in several occasions, and although isolating the effect of this measure is not possible, the aggregate effect is readily discernable as various studies, including by the World Bank, have shown. In addition, political uncertainties highlight clearly the vulnerability of the Palestinian banking system to any future suspension of clearance revenues. Thus, the author of this study attempts to come up with workable recommendations to alleviate the situation in the future. MAS would like to express its gratitude to the authors for their efforts as well as to the reviewers, especially those from the PMA. We are confident that the PMA, the PNA Ministry of Finance (MoF), and decision-makers in the banking sector will find the findings and recommendations helpful in their efforts to maintain the stability and integrity of the Palestinian financial and banking sectors. Finally, on behalf of MAS, I would like to extend our thanks to the PMA for the grant which it provided, enabling MAS to carry out this important research.