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Palestinians to set currency regime this year, Al Wazir says

2011-01-23

Arabian Business (by Bloomberg): The Palestine Monetary Authority will in the coming months set the framework for issuing a new currency, a step in building the infrastructure needed for a state, Governor Jihad Al Wazir said. “This year will be one of deciding on the monetary regime for the Palestinian state,” Al Wazir said in an interview in his Ramallah, West Bank, office. Prime Minister Salam Fayyad has said institutions needed for a state must be ready in nine months. Peace talks aimed at creating a state collapsed in September when Israeli Prime Minister Benjamin Netanyahu refused to extend a partial freeze in West Bank settlement building. Palestinian Authority President Mahmoud Abbas has said he won’t negotiate while settlements are being built. The Palestinian Authority already has security forces in the West Bank, a judicial system and ministries dealing with everything from environmental regulation to foreign policy. The West Bank and Gaza Strip economies are forecast to have grown 8 percent last year, compared with 7.2 percent in the West Bank and 5.4 percent in Gaza in 2009, the International Monetary Fund said in September. Before the Palestine Pound can be issued, a fully independent central bank must be established and the financial system needs to be strong enough to maintain its own currency, Al Wazir said. The circulation of the new money may take place later than September. The Palestine Pound currency was last used in 1948, the year Israel was established. “Dollarisation is one option, as well as a fixed-exchange peg or an exchange-control regime,” said Al Wazir, whose foyer wall is lined with ancient coins and old bills. The decision must take into consideration the proximity of the $7bn Palestinian economy to the much larger economy of Israel, the Palestinians biggest trade partner. “From a pure economic perspective if you ask us, considering the structure of trade, a peg to the shekel is the most obvious choice, but that is a political issue,” he said. A basket of currencies including the shekel is also possible with the weights of the currencies changing as the structure of trade changes, he said. “We want to make sure, and I am confident we will, that once we cross the line into statehood the Palestinian economy and institutions that have been developed will be able to insure that this will be a robust economy,” Al Wazir said. To illustrate the possible pitfalls that central banks face, Al Wazir pulled out of a file a Zimbabwean 100 trillion dollar note. “I always carry this with me,” he said. Zimbabwe is recovering from a decade-long recession that saw inflation peak at 500 billion percent, forcing the government to abandon its own currency and adopt a multicurrency regime. The US dollar is the country’s most popular currency. Al Wazir said he’s consulting with experts in the region, Europe and the US, including Bank of Israel Governor Stanley Fischer, on the type of monetary regime best suited for the economy. Al Wazir joked that he told the staff at the US Treasury that they should issue him a security tag because he’s there so often. European Central Bank council member Erkki Liikanen is scheduled to visit January 20. It’s recognition of “how far we have advanced,” Al Wazir said.


 

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