* Proto-central bank presides over conservative lending
* One of few technocratic, non-political institutions
* Central bank working with IMF
* But exposure to government debt may be Achilles heel
* Occupation, unrest undermine government revenues
By Noah Browning
RAMALLAH, West Bank, Jan 23 A central bank in
the making, the Palestine Monetary Authority (PMA) is a rare
bright spot as the economy of the Palestinian territories
struggles with Israeli sanctions.
Enforcing on Palestinian banks a regimen of conservative
lending that has kept bad loans minimal and guaranteed
liquidity, the PMA's technocratic prowess is the pinnacle of a
Palestinian drive to build institutions fit for a future state.
But its efficiency is meeting a hard reality: the banks are
exposed to around $2.5 billion in debts incurred by the
government, its workforce and its private sector partners - over
a fifth of banks' total assets.
"Our room is all in order, spick and span, on what could
turn out to be the Titanic," joked PMA chairman Jihad Al Wazir.
"Banks have reached the upper limit of what they can
prudentially lend (to the government) without increasing risks
to the system," Al Wazir told Reuters. Al Wazir is the son of
Khalil Al Wazir, a top Palestinian leader assassinated by the
Israelis in Tunis in 1988.
Economic prospects for Palestinians in the West Bank are
limited by Israeli restrictions on trade, and the Palestinian
government is deeply dependent on foreign aid and bank credit to
pay its bills.
Help from abroad plunged by two-thirds from four years ago
to just $600 million in 2012, as the global economic downturn
and Arab revolts taxed the attention of wealthy Gulf state
donors and U.S. funding dwindled.
Public debt to the Bank of Palestine, Al Quds Bank and other
banks supervised by the PMA more than doubled in the same
period. The government's budget deficit has reached $1.3
billion, over 12 percent of gross domestic product.
The government's ability to pay its $300 million in monthly
expenditures was further hampered by Israel's docking of $100
million in customs duties it collects on the Palestinians'
behalf each month as punishment after Palestine secured de facto
United Nations recognition of statehood in November.
Despite the economic difficulties, regular stress tests of
banks, supervised by the PMA, have found that only a doomsday
scenario of a massive run on deposits combined with a near-
shutdown of the private sector could upend the system.
The banking system's Tier 1 capital, its main benchmark of
health, stood at a remarkably robust 24 percent of assets last
year, according to the International Monetary Fund. Struggling
European banks' Tier 1 ratios generally hover between 7 and 10
percent, and at around 8 percent for Israeli banks.
Non-performing loans at Palestinian banks stand at less than
3 percent of total loans, and debt-to-deposit ratios remain far
healthier than in neighbouring Jordan and Israel.
Since they do not deal in complex financial commodities such
as derivatives and are largely isolated from global financial
markets, Palestinian banks weathered the 2008 global financial
crisis largely unscathed.
The banks also owe their vitality to a robust PMA credit
bureau which sniffs out and discourages dubious debts.
"The credit registry, in which all loans and defaults on
loans and credit worthiness of customers are examined, is
considered one of the best in the region and an example for
other countries," said Udo Kock, resident representative of the
IMF, which provides technical assistance to the PMA.
PAIN AND NO PAYCHECK
The banking sector's stability contrasts with the pain
experienced by government employees, who have staged work
stoppages and protests outside government offices with
increasing frequency in recent weeks because of the state's
inability to pay salaries on time.
Luay Ghashash, 45, a worker in the Palestine Liberation
Organisation, a diplomatic organ, said he and his wife, a public
school teacher, hadn't received a full paycheck in almost three
months, making mortgage and car loans ever more onerous.
Rattling off the rising prices of food and basic
commodities, Ghashash said the government's financial problems
were undermining his family's ability to live a decent life.
"My little daughter had a school field trip the other day,
but we couldn't afford it. She came to me and said 'It's OK,
I'll just tell my teacher that I overslept,'" he sighed.
Bank lending for personal consumption in the Palestinian
territories has risen fivefold in the last two years to $417
million, according to the PMA.
But manufacturing, construction and agriculture have now
slowed, depriving the government of yet more indirect revenue,
while the seeming permanence of the Palestinian economic malaise
has discouraged foreign investors, analysts say.
"The Palestinian economy is squeezed into 40 percent of
land, with less than 20 percent of water," said Samir Abdullah,
head of the Palestine Economic Policy Research Institute and a
PMA board member.
"Jerusalem is excluded, the wall takes 10 percent of the
land - all this makes it more difficult for normal movement and
access," Abdullah said, referring to a security barrier built by
Israel on West Bank lands.
ABOVE THE POLITICAL FRAY
In the wake of the Arab uprisings elsewhere in the region,
social unrest has become a more important concern in the
government's fiscal policy, and this has also limited its
ability to balance its books.
Protests thwarted a government plan for across-the-board
income tax rises and a public sector early retirement scheme in
2011, while austerity measures last September were eased after
violent street protests rocked West Bank cities.
Even collecting electricity and water bills risks blowback.
When the government issued an amnesty for old utility bills
to poor refugee families in the northern city of Nablus last
month, on condition that customers just pay in future, their
neighbours took to the streets calling for debt forgiveness too.
The government acquiesced.
"Residents want the economic burden on them eased and don't
like government initiatives that seem ad hoc or selective," said
economic analyst Nasser Abdul Kareem.
Part of the PMA's discipline and success is based on its
independence from the rough-and-tumble of Palestinian politics.
The PMA was the only national institution to survive the
bitter split in 2007 between the Islamist Hamas party in Gaza
and the secular Fatah, which rules in the West Bank.
Neither faction appeared willing to undermine the banking
system or compromise supporters' deposits by dragging the PMA
too close to its political orbit.
In the previous year, the PMA cut much of its staff and
hired experts and degree-holders based on merit - a luxury that
swollen and inefficient ministries can ill afford, given current
"The banking system is the livelihood of the Palestinian
people," Al Wazir said. "We have to survive."