Palestine is facing the first big sanitary crisis of the 21st century in an uncertain situation. Since the beginning of the new millennium its growth rates have been negative but in the time they reduced in absolute value. In the Position Paper published by the Research and Monetary Policy Department of the Palestine Monetary Authority (PMA) it is stated that Palestine’s economy is capable to cope with crisis. In fact, data show that the path towards zero of negative growth rates continued even after the 2008 financial crisis and a severe fiscal crisis in 2019.
PMA’s Governor, Mr. Azzam Shawwa released an exclusive interview for Kritica Economica. We discuss the challenges brought by the pandemic and the future of Monetary Policy in Palestine.
Will your administration do "whatever it takes" to minimize the damage of this contingency?
From the very beginning of the appearance of the Corona pandemic in the city of Bethlehem, a state of emergency was declared, followed by a set of precautionary measures taken by the government to limit the spread of this pandemic. All expectations indicate that the effects of this pandemic will affect various aspects of the Palestinian citizen's life. However, the severity of these impacts will vary according to the expected time period. There is no doubt that the measures taken by the PMA were effective, and contributed to mitigating the impact of this crisis on the Palestinian economy. It is estimated that these measures have contributed to mitigating the decline in GDP, according to a first scenario, from about 5.2 percent to about 2.1 percent, and from about 8.5 percent to 5.9 percent according to our predicted second model.
In 10 years of history Palestine has faced an international financial crisis (2008), a fiscal one (2019) and the current sanitary crisis. How do you deal with these situations?
It should be mentioned that the ability of the PMA to intervene is limited compared to what other central banks have done in the absence of a national currency, and the lack of comprehensive monetary policy tools and/or quantitative easing programs. Nevertheless the series of measures taken by the PMA since mid-March provided additional liquidity to banks by about USD 1.5 billion over the next four months.
As I said before, these measures undoubtedly contributed to mitigating the severity of the impact on the one hand, and in maintaining the continuity of some economic activities on the other.
What were the instruments available to the PMA in order to respond to the Covid19 crisis?
To support the health services sector, we directed the funds allocated to social responsibility. It is noteworthy that the banking sector during the first days of this pandemic in Palestine provided urgent assistance to the Ministry of Health, at a value of USD 5 million.
We worked on Financial and social safety nets by postponing the periodic installments for all borrowers for the next four months, and for borrowers from the tourism and hotel sector for the next six months, subject to extension. In addition to extending credit card ceilings and ceilings granted to individuals and small and medium enterprises.
We are energetically supporting small and medium enterprises and start-ups, by directing new credit to these projects, and granting temporary ceilings to clients in order to maintain the continuation of the business cycle.
Furthermore I announced that the PMA is ready to provide the overnight liquidity needed to assist banks in emergencies. It is crucial that we continue providing banking services that will ensure the continuity of the business cycle in the economy, provide basic goods and services to citizens throughout the crisis. We provided to banks contingency and business continuity plans in order to safeguard the continuity of critical jobs for the economy.
Generally speaking, the banking sector is always invited to make further contributions to alleviate the adverse consequences that will hit especially small and medium enterprises (SMEs).
As you pointed out in your speech about the Sustainability Program, 98 percent of Palestinian businesses are SMEs. In the beginning of May, the PMA launched an additional USD 300 million program to provide financing to these enterprises. In Italy, a big debate has arisen on the efficiency of financial institutions to quickly provide the funds. Do you think you will overcome this issue? Will these funds be subject to any kind of fiscal constraints?
Palestine is fundamentally a trade deficit country and exports continue to be constrained by the ongoing trade restrictions. As you were mentioning before, due to the Paris Protocol (1994), government's debt cannot be financed in Palestinian currency, in fact its debt is denominated in USD. Isn't it a vicious circle?
I believe as a Palestinian first and decision maker second, that as long as there are restrictions imposed by the Israeli occupation on the freedom of movement and access of individuals, goods and the capital, the trade balance and the current account in the balance of payments will continue to suffer from a chronic structural deficit. I also believe that in order to get out of this closed circle, it is necessary to review the Paris economic protocol, whether in terms of amending it in full or at least some of the articles, in order to serve the public interest of the Palestinian people.
At the end of last year and the beginning of 2020 you invited to reduce the volume of external investment of banks, encouraged domestic investments from start-ups to renewable energy and agriculture. You incentivized electronic payment services. Are these the signs of a radical change of course for the future of Palestinian monetary system?
Placement abroad represents the second source to use the funds available to banks operating in Palestine. In spite of that, it is declining in volume and importance, for the sixth consecutive year, falling to 19.0 percent of the total use of funds available, and to about 23.0 percent of total deposits. That is, it is well below the maximum limits set on the PMA's instructions of 40 percent of total deposits. In general, this continued decline reflects the effectiveness of the PMA's actions and policies aimed at encouraging banks to invest more funds in the domestic economy, through the gradual reduction of the placements abroad.
In addition, at the end of 2019, the PMA's Board of Directors approved a new strategy for the PMA for the next five years. This strategy contains 9 strategic objectives with 11 initiatives. Some of them are dealing with establishing the foundations for strong digital financial services and supporting the development of innovated financial services. In fact, in May 2020, the PMA allows two electronic payment companies to work in Palestine.
The vision of your authority is "To be a full-fledged and modern central bank for an independent Palestine". What are the next steps to get there?
As a matter of fact, after nine institutional reforms that had been done since 2007, and according to some international institution such as IMF and World Bank, the PMA is technically ready to act as a full-fledged and modern central bank. Moreover, we are now looking forward the new Palestine Central Bank Law to be approved by the President of the state of Palestine.
Indeed in 2017 you mentioned the possibility of launching a "Palestinian pound" in the forthcoming future. Central Bank Digital Currency is being tested and analyzed by many countries of the world. Considering today's decline in the demand for cash in some countries and that there is an opportunity for emerging economies to broaden financial access and inclusion (on which your administration is significantly investing) by leveraging new technologies, do you think that a "token-based" currency represents a possible future for Palestine?
It is worth to mention that PMA is still in the process of studying and exploring all the available options in this regard. Digital currency of central banks is just another form of traditional currency. It is necessary to emphasize that the Palestinian economy is still a cash-based economy, so it is not easy to shift directly and immediately toward a cashless economy. This transformation should gradually take place. From the beginning of 2020, PMA is moving further steps toward this transformation, by starting licensing electronic payment services companies.