Just Ahead of The Crisis: Policies Designed to Plunge The West Bank Into Debt

Iyad Riyahi and Nahed Samara

By the end of 2007, the Palestine Monetary Authority (PMA) announced a series of measures to reform the banking system. These included a promotion of local credit and strengthening of linkages with the real economy by reducing the size of foreign private investment. Accordingly, a cautious lending policy has receded. Promotional campaigns have flourished, encouraging individuals to access banks for soft and long-term loans with a view to reduce cash surplus, which banks are required to release into the local market. In a few years, the new lending policy has led to soaring household and personal debt to record levels (over US$ 3 billion). Before openness to lending, household and personal debt did not exceed US$ 70 million.  Loans offered to people are of a consumer type. These loans are often used to purchase imported products. In addition to economists, current and former CEOs of three major banks in the occupied Palestinian territory (oPt) highlight risks associated with existing lending policies. The majority of loans are channeled to consumption, but do not contribute to developing the economy. These funds are not prudently invested to be injected back into the local economy.

Therefore, loans pose a burden on people. Both economists and CEOs stress the need for a shift from this pattern of lending to financing investment enterprises, which contribute to creating new employment opportunities.  Consumer loans may later transform into a tool of deprivation and dispossession. When they have access to lending,  people soon pile up debt, but suddenly find themselves subject to ever increasing interest rates. Therefore, they declare bankruptcy and are forced to sell assets, with the value of latter decreasing. A case in point is the real estate market in the USA. Usually, borrowers are the most vulnerable group in the society.

According to this paper, the fact that personal debt creates multiple effects is logical. Most importantly, personal loans help maintain the current system, which provides employment opportunities that enable individuals to pay their debt obligations. In addition to compromising rights of future generations, government debt is prone to surge in light of an incapability of repayment. Further financial burdens will affect the PA as a result of late interest charges and interests. Political consequences are at work as well. Countries that fall short of repaying foreign debt have traditionally been more vulnerable to political blackmail. This paper recommends that a balance must be stricken between consumer loans and production and investment loans. Channelling funds into investment enterprises generates employment opportunities, ultimately benefiting the Palestinian economy. To approve disadvantages of loans and consumer life patterns requires that the PMA provide more restrictions on the lending policy. At least, a balance should be in place with other sectors. Hence, new lending policies need to be implemented with a view to create new employment opportunities and reduce poverty rates. This necessarily implies the need for a review of the policy of imports either from Israel or the rest of the world. A revision should also address PA policies which, according to PA national development plans, promote competitiveness at the expense of local production support as well as individualism at the expense of community action. Capital structure of the system will be overridden by new mechanisms designed to deliver needed resources to people for re-production. Taking account of public, rather than capital, needs, resources will also be delivered to institution, which provide housing and construct residential neighbourhoods. 

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2014