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West Bank economy under threat as Israel sidelines the Palestinian Authority


Israel's finance minister has announced that he will lift financial sanctions against the Palestinian Authority, which governs part of the occupied West Bank. In exchange, the Israeli Cabinet will legalize five unauthorized settlements in the West Bank. There has been international concern of a West Bank economic collapse, which would have wider security implications in Israel. NPR's Hadeel Al-Shalchi reports.


BEZALEL SMOTRICH: (Non-English language spoken).

HADEEL AL-SHALCHI, BYLINE: In a video posted early Friday morning, Israel's finance minister, Bezalel Smotrich, says he has fulfilled a promise. Five illegal Jewish settlements in the occupied West Bank will now be recognized by the state. What he doesn't mention in that video is that this is his reward for retracting some harsh economic punishments he placed on the Palestinian Authority after the war in Gaza began. In May, he withheld customs tax revenue that Israel collects and transfers to the Palestinian Authority. With this deal, he will release the funds. He had also announced that he'd cut off Palestinian banks from their Israeli counterparts by July 1. He also canceled that.


SMOTRICH: (Non-English language spoken).

AL-SHALCHI: Smotrich is a far-right Jewish West Bank settler who vehemently opposes a Palestinian state. Many of the Israeli settlers living in the occupied West Bank see the region, which they call Judea and Samaria, as the biblical heartland of their country. For years, the Israeli government and the Palestinian Authority, which was established in the early '90s, had a strained but civil relationship. The Authority kept the West Bank more stable and provided an alternative to militant groups like Hamas. But now...

SAMIR HULILEH: Israel used to speak about prosperity for peace. This is not anymore the slogan.

AL-SHALCHI: Samir Hulileh is a leading economist from the West Bank. He says settling the region is now the major priority for the finance minister.

HULILEH: Expulsion is the slogan of this religious government.

AL-SHALCHI: After some European countries recognized a Palestinian state in May, Smotrich vowed that the Palestinian Authority would pay the price. In a video he posted at that time, he said...


SMOTRICH: (Non-English language spoken).

AL-SHALCHI: "We'll pass government decisions to strengthen settlements in Judea and Samaria," he said.


SMOTRICH: (Non-English language spoken).

AL-SHALCHI: "We will impose sanctions and stop money transfers," Smotrich said.


AL-SHALCHI: Michael Milstein was head of the department for Palestinian affairs in the Israeli military intelligence for four years. Analysts like him say Smotrich's economic plans, if enacted, would crush the whole West Bank economy. That could lead to more violence, perhaps even open yet another front Israel would face, along with fighting in Gaza and with Hezbollah in Lebanon. Milstein believes Smotrich is OK with that.

MILSTEIN: He wants the escalation. This is the main issue here because he believes that this kind of crisis will bring Israel to what he consider as the long-term goal, and this is the control over all the West Bank.

AL-SHALCHI: Milstein says Smotrich's religious ideology is that only Israel should be in charge of the West Bank.

MILSTEIN: The strategic, the formal aim of Smotrich is to bring the PA to total collapse because he really believes in (non-English language spoken), you know, one state between the river and the sea.

AL-SHALCHI: Part of the reason the Palestinian Authority hasn't been able to pay its workers their full salary since the war is because Smotrich had withheld those tax revenues. Ruba Jaradat is the International Labor Organization's regional director for Arab states, based in Geneva.

RUBA JARADAT: Public sector workers play a crucial role in sustaining the purchasing power in the West Bank.

AL-SHALCHI: Jaradat says their lack of income has knock-on effects like layoffs. After the October 7 Hamas attacks from Gaza, Israelis feared Palestinians in the West Bank could launch a similar attack, so Israel imposed a severe security crackdown there and canceled thousands of work permits held by West Bank Palestinians who had jobs in Israel. That contributed to the West Bank unemployment rate jumping to 32%, according to the ILO.

But while Smotrich controls Israel's purse strings, his far-right ideology is not shared by the Israeli security establishment. Michael Milstein says the military and intelligence community have told this to Prime Minister Benjamin Netanyahu.

MILSTEIN: They warned Netanyahu that if more and more and more Palestinians will feel that they have nothing to lose, first of all, they will join very quickly to all kind of violent steps against Israel. And second is that Hamas can get into every vacuum that will be created.

AL-SHALCHI: The Biden administration wants the Palestinian Authority to play a role in Gaza's governance after the war is over, but Netanyahu is fiercely opposed to that idea. He fears that the Palestinian Authority controlling both the West Bank and Gaza would lay the groundwork for a Palestinian state, something he and Smotrich refuse. Milstein assesses that it was finally a combination of American and Israeli security pressure to make the deal Smotrich announced on Friday, but that while the finance minister had to give something away, he is the final winner.

MILSTEIN: This is not really a broad or a deep giving up. Smotrich and the religious Zionism, they had also a lot of strategic achievements out of the current developments.

AL-SHALCHI: Strategic achievements that will greatly shape the future of the West Bank.

Hadeel Al-Shalchi, NPR News, Ramallah. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Hadeel al-Shalchi is an editor with Weekend Edition. Prior to joining NPR, Al-Shalchi was a Middle East correspondent for the Associated Press and covered the Arab Spring from Tunisia, Bahrain, Egypt, and Libya. In 2012, she joined Reuters as the Libya correspondent where she covered the country post-war and investigated the death of Ambassador Chris Stephens. Al-Shalchi also covered the front lines of Aleppo in 2012. She is fluent in Arabic.