The Palestinian economy is being squeezed on three fronts as Israeli banks prepare to cut ties

The Palestinian economy is being squeezed on three fronts at once: In the occupied West Bank, banks are drowning in cash they can’t offload, as two Israeli banks are preparing to sever the ties that let Palestinian lenders function at all. In Gaza, two-third of the population is on track for acute hunger by the end of the year as aid flows dry up.

An unwanted surplus: In the West Bank, banks are running out of vault space to store shekels, to the point where some businesses are refusing to accept banknotes, the Associated Press reports. The overflow is caused by a standoff between the Bank of Israel — which caps how much physical currency it takes to Israel from the West Bank — and the Palestinian Monetary Authority (PMA). Now, the cash-reliant West Bank is seeing more shekels flow in than Israel is allowing back out. The trapped surplus earns no interest and can’t be converted into electronic balances to pay suppliers or process transfers, creating a situation PMA Deputy Governor Mohammad Manasra calls “economic warfare.”

What little connective tissue remains is about to be cut: Israel Discount Bank will stop working with Palestinian lenders on 1 September and Bank Hapoalim will follow on 1 October, citing terrorism financing and money laundering risk, Reuters reports. Between them, the two banks process ILS 51 bn (USD 16.6 bn) a year in transactions for the ruling Palestinian Authority (PA), and some 90% of Palestinian trade passes through Israel.

The whole arrangement hangs on a waiver that Finance Minister Bezalel Smotrich — who has repeatedly withheld PA tax revenues and questioned its legitimacy — signs periodically. The waiver currently in plans runs only to the end of 2026.

And in Gaza, the endpoint of the squeeze is hunger. More than two thirds of Gazans could face acute hunger by December, the IPC hunger monitor warned, as agencies cut aid flows on funding shortfalls. While things had improved after the October 2025 ceasefire — which had allowed parts of Gaza to exit famine conditions — these improvements are now at risk of being reversed. Israel disputes the findings, saying it has facilitated more than 1.8 mn tons of food into the enclave since the ceasefire and accusing Hamas of looting aid.