CASHLESS IN GAZA?

S E C R E T TEL AVIV 002447



SIPDIS



NEA/IPA

INR/TNC

TREASURY FOR GLASER, D.



E.O. 12958: DECL: 10/28/2018

TAGS: PREL, KPAL, KTFN, EFIN, IS

SUBJECT: CASHLESS IN GAZA?



REF: A. 10/22/08 AGOR-BURNETT HOLMSTROM ET. AL. E-MAIL

B. TEL AVIV 2144

C. TEL AVIV 2291

D. TEL AVIV 1742

E. TEL AVIV 1508

F. TEL AVIV 1075

G. TEL AVIV 624

H. 07 TEL AVIV 3201

I. JERUSALEM 1840



Classified By: DCM Luis G. Moreno for Reasons 1.4 (b) and (d)



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SUMMARY

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1.(S) Since the Hamas takeover, Israel has designated Gaza

as a &hostile entity," and maintained an economic embargo

against the territory. Under this designation, decisions on

shekels in circulation in Gaza and the territory's economy in

general are treated by the GOI as security matters, and

therefore are subject to the same high levesl of uncertainty

that the GOI uses to keep potential sources of security

threat off-balance. Israeli officials have confirmed to

Embassy officials on multiple occasions that they intend to

keep the Gazan economy functioning at the lowest level

possible consistent with avoiding a humanitarian crisis. The

Palestinian Authority's request for a guaranteed "floor"

transfer rate of NIS 100 million per month will not be

seriously considered by the GOI until after January 2009,

when the Palestinian political situation becomes more clear.

In any case, given the size of the population and economy in

Gaza, GOI interlocutors find it implausible that the number

of workers on the Palestinian Authority,s (PA) payroll there

and the amount of money to be paid each month accurately

reflect the current size of the territory,s civil service or

its future government service requirements, nor do they agree

with the PA's contention that these payments are buying

loyalty. Furthermore, GOI officials doubt the effectiveness

and authority of the Palestinian Monetary Authority (PMA) to

regulate and police banks in Gaza. Israeli officials reject

the PA,s argument that denying banks the liquidity to pay PA

salaries in full bolsters the Hamas regime. While some

acknowledge the gains to Hamas from a weakened formal banking

sector in Gaza, they argue that such gains are small relative

to the cost of giving Hamas greater access to shekels or the

economic benefits they bring to Gazans. A USG policy that

encourages the GOI to review its present policies (as

requested by the Office of the Quartet Representative and the

PA) while pressing the Israelis to approve as much funding

each month as possible under security constraints, assisting

the PA to improve its regulatory regimes and due diligence

procedures, and continuing to foster direct dialogue between

officials of the GOI and PA on Gaza issues in the monthly

Joint Economic Commission meetings is our best bet for

minimizing economic/political gains to Hamas in Gaza.



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GAZA IS A HOSTILE ENTITY

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2.(C) While the GOI believes that maintaining the shekel as

the currency of the Palestinian Territories is in Israel,s

interests, it treats decisions regarding the amount of

shekels in circulation in Gaza as a security matter.

Requests by Palestinian banks to transfer shekels into Gaza

are ultimately approved, partially approved, or denied by the

National Security Council (NSC),an organ of the Israeli

security establishment, not by the Bank of Israel (BOI). As

part of their overall embargo plan against Gaza, Israeli

officials have confirmed to econoffs on multiple occasions

that they intend to keep the Gazan economy on the brink of

collapse without quite pushing it over the edge (see reftel

&D8). The PA's request to set an NIS 100 million floor on

monthly transfers to Gaza is being looked at, but no action

will be taken until after January 2009, when the

Palestinians' political situation becomes more clear.

Complicating the Gaza issue, and Palestinian banking as a

whole, is Bank Hapoalim,s recent decision to terminate its

correspondent banking relationship with the Palestinian

banking sector (see reftel &C8). Hapoalim remains

determined to stand by its objective to sever ties on

November 30, though observers have their doubts that Hapoalim

will follow through on the initiative (septel).



3.(SBU) The GOI's monetary policy towards Gaza is consistent

with its declaration that Gaza is a "hostile entity." Some

observers have told Emboffs that political pressure arising

from the issue of captured Israeli soldier, Gilad Shalit, may

have influenced high-level Israeli officials to tighten their

stance on monetary policy (see ref &A8). However, this has

not been raised or confirmed by any high-level GOI contacts.

The GOI position on cash to Gaza has remained negative since

the Knesset's declaration that it was a hostile entity.





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THE PAYROLL DILEMMA: WHO IS ACTUALLY RECEIVING PA PAYCHECKS

IN HAMAS-CONTROLLED GAZA?

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4.(S) The PA contends that Hamas, ability to pay its

workers, salaries each month combined with the inability of

the PA to do so causes further deterioration in support for

PA/Fatah relative to Hamas (reftel &I8). The GOI, on the

other hand, believes that many of the estimated 77,000 wage

earners on the PA's payroll may actually be Hamas members or

affiliates. Israeli security analysts argue that a

considerable portion of the civil service salaries that the

PA attempts to pay each month to its Gazan employees actually

find their way to Hamas or Hamas supporters (see reftel "D").

They have therefore determined that full coverage of the

payroll is contrary to Israel,s security interests, even if

Hamas gains some political advantage from being able to pay

its salaries in full. Whether money finds its way into the

territory by means of the PA payroll or the Hamas payroll,

says the GOI, Hamas experiences a net increase in its

funding. Israeli analysis suggests that it is best to deny

the terrorist regime a larger pool of funds in Gaza, no

matter the origin, preferring to minimize Hamas, ability to

purchase weapons or equipment for use against Israeli

civilians. Thus, they reject the PA,s argument that denying

banks the liquidity to pay PA salaries in full bolsters the

Hamas regime (see reftel &I8).



5.(S) Furthermore, GOI officials, while often praising the

credentials of PA technocrats, doubt the effectiveness and

authority of the Palestinian Monetary Authority (PMA) to

regulate and police Palestinian, and especially Gazan banks.

This double standard in the treatment of Gaza and the West

Bank by the GOI is yet another example of how Gaza is

becoming increasingly isolated from the West Bank, despite

the best efforts of the PA/Fatah to maintain unity. These

issues come to the fore at the end of every month when the PA

tries to make payment to its &employees8 in Gaza.



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HOW MUCH MONEY DOES GAZA ACTUALLY HAVE?

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6.(S) Observers speculate as to the amount of shekels

circulating in Gaza. The BOI has established a history of

routinely approving all requests from the Palestinian banks

to exchange spoiled shekel notes from Gaza for new notes.

This is not a security issue as it does not increase the

total number of shekels in circulation. In order to support

a minimal level of commerce and provide for minimal

necessities such as food, utilities, and medical supplies,

analysts agree that there must also be a certain outflow of

cash from the territory to Israel, the West Bank, or other

countries. The September 11, 2008 report of the

International Crisis Group Middle East Briefing estimates

this outflow as 30 percent of Gaza,s total shekel holdings

each month. Unfortunately, since Gaza tends more and more

towards a cash economy based upon movement of goods through

its tunnels to the Sinai, it becomes increasingly difficult

to estimate this amount with accuracy. Udi Levi (strictly

protect),a high-ranking official in the Israeli security

establishment, commented to Econcouns in October that at

least 1.8 billion shekels are currently unaccounted for in

Gaza.



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WHO APPROVES THE INTRODUCTION OF NEW CASH TO GAZA?

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7.(C) The NSC, an organ of the Israeli security and

intelligence community, ultimately has the final say in

permitting new liquidity into Gaza. When the PA or a

Palestinian commercial bank ask to move shekel bank notes

into Gaza, the request is usually submitted to the BOI. The

BOI defers to the NSC though it may act in an advisory

capacity to inform the NSC on the state of the Gazan economy

or possible consequences of action or failure to act. When

the NSC ultimately approves a particular amount, the IDF

routinely permits the cash to enter Gaza. In determining how

much new liquidity can enter Gaza at any given time, the NSC

considers several factors, including the humanitarian

situation in the territory. The NSC abides by the principal

that Gaza should receive just enough money for the basic

needs of the population but it is not interested in returning

the Gazan economy to a state of normal commerce and business.

The agency tries to approve a reasonable amount of new money

for entry into the territory each month; however, it will not

permit any large scale transfer of assets from Ramallah-based

banks to their branches in Gaza for fear of improving the

purchasing power of entities wishing to harm Israel. NSC

officials have been unable to advise econoffs of any

particular formula used in arriving at a figure, but the

fluid state of Gazan, PA, and Israeli politics make it

difficult to anticipate factors that might have a bearing on

the decision from month to month.



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SO WHAT SHOULD THE USG DO?

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8.(S) Embassy Tel Aviv has encouraged the GOI to review its

policy on Gaza liquidity, as requested by the Office of the

Quartet Representative and the PA. As noted above, we do not

expect that review to result in any changes until the

political situation between Hamas and Fatah becomes more

clear, presumably after January 9, 2009. In the meantime, we

believe the USG should continue to encourage the Israelis to

approve as much funding as possible each month, consistent

with our mutual political/security objectives in Gaza. We

should continue to assist the PA to improve its regulatory

regimes and due diligence. Finally, the USG should continue

to promote use of the Israeli-Palestinian Joint Economic

Committee as the appropriate venue for resolving Gaza

liquidity issues.



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