Launching a Palestinian currency is no small change

Mohammed Zohdi Nashashibi reaches into his wallet, pulls out three bank notes, and squints at their portraits: Benjamin Franklin, Queen Elizabeth II, and Yitzhak Ben-Zvi, Israel's second president.

"Whose picture will appear on our currency?" Mr. Nashashibi, finance minister of the Palestinian Authority, asks rhetorically. "Who, if not Yasser Arafat?"

For Nashashibi and other financial planners, the countdown to issuing a currency for an independent Palestinian state is already under way.

The momentous step has raised both political and fiscal concerns: How will Palestinians, used to transactions in the Israeli shekel, the Jordanian dinar, or the US dollar, adapt to a new currency? Will the state that Mr. Arafat has vowed to declare by September - whether the peace process reaches conclusion or not - have viable governing institutions? What if there's a financial meltdown?

The currency's launch is not tied to the declaration and its timing will be weighed carefully, stresses Nashashibi. It will take another one to three years to prepare, depending on the time needed to build up foreign reserves and to establish effective supervision of banks, he says. Early this month, Nashashibi consulted with British officials about the currency.

Besides curbing inflation, Nashashibi says the state would also enjoy a degree of freedom from the vicissitudes of the Israeli economy, which accounts for the bulk of its trade. In 1997, Palestinian imports from Israel totalled $2.164 billion, and exports $380 million.

"What happens if one day Israeli inflation reaches 25 percent?" Nashashibi asks. "It is not healthy and sound that any inflation in Israel would reflect itself on us."

But critics doubt that change will be for the better. "Unless it's credible it could be a lame duck," says Hisham Awartani, an economist at the Center for Palestine Research and Studies in the West Bank city of Nablus. He says the public would opt for either shekels, dinars, or US dollars instead of the new currency. "This is not a place for experimentation. People may rebuff this currency. To have a currency not accepted by its own people would be a tremendous political slap in the face [for the state] in addition to being economically hazardous."

The current system, in which the shekel, dinar, and dollar are convertible currencies that circulate freely, is working well and no change is needed now, Awartani adds.

Azmi Shuabi, head of Finance and Budget Committee in the Palestinian Legislative Council, also urges caution. "This cannot be an isolated step. We have to know what the overall political situation is and what the relationship with the Israeli economy will be."

Israeli economic policymakers say they are wary of the problems a currency failure could bring. "A full neighbor is better than a hungry one, who is more easily encouraged to hostility," says Bari Bar-Zion, senior adviser in the Israeli Ministry of Finance.

Jordanian member of Parliament Jawad Anani, meanwhile, has advised Arafat against issuing an independent currency. He favors pegging it 1-1 to the Jordanian dinar. "This would allow for making the sovereignty symbol without overburdening the Palestinian Monetary Authority with the responsibility of protecting the currency against fluctuations," says Mr. Anani.

Nashashibi says there will be no pegging of the currency.

The International Monetary Fund said in a report issued last year that since the inception of the Palestinian Authority, "important preconditions for a successful currency introduction, such as firm fiscal expenditure control, sound fiscal management, effective banking supervision, and enforcement of regulations were not in place." The report added that if the authority opts to introduce a currency, "a fixed exchange rate under a strict currency board might be the best arrangement."

Dismissing the criticism, Nashashibi says, "We have the experience and we can build things very quickly. With a very wise monetary policy you can gain the confidence of the people."

(c) Copyright 2000. The Christian Science Publishing Society