Palestinian economy faces crisis amid clearing fund shortages and rising debt

The Palestinian economy is facing a severe structural crisis driven by the withholding of clearing funds by Israel and rising public debt. These funds, which consist of taxes and customs collected by Israel on behalf of the Palestinian Authority, account for approximately 68% of total public revenues. Following a near-total halt in transfers in 2025, the World Bank estimated a funding gap of roughly $1.3 billion for that year.

To manage the deficit, the Palestinian Authority has increased local borrowing, bringing public debt to approximately $4.8 billion by the end of 2025, including $3.3 billion owed to local banks. This has left the Palestinian banking sector highly exposed to sovereign risk, with total exposure to the public sector estimated at $5.3 billion, or about 42% of the sector.

The Palestinian Monetary Authority has warned that Israeli measures, including pressure on correspondent banking relationships, threaten to disrupt trade and essential services. Governor Yahya Shannar noted that Israeli correspondent banks processed approximately 51 billion shekels ($17.1 billion) in transactions during 2025. Restricting these channels could impede imports and exports, affecting the availability of food, medicine, fuel, and energy, as well as the operation of hospitals and basic services.