May.30, 2010, Source: Washington Post

RAMALLAH -- Negotiations on a future Palestinian state might be stuck in neutral. But Jihad al-Wazir, the closest thing to a Palestinian Federal Reserve board chairman, is planning one key aspect of statehood: what the money will be.

Since the creation of Israel in 1948, Palestinians have mainly used the Israeli shekel for commerce. Now they're quietly considering reissuing the defunct Palestine pound, an example of which is displayed in a museum-like Lucite case outside Wazir's office, alongside coins from the time of Alexander the Great.

Quiet talk in the West Bank of a new Palestinian currency comes amid a push by Prime Minister Salam Fayyad to ensure the Palestinians can function independently of Israel if they gain sovereignty through peace talks or issue a unilateral declaration in two years if negotiations fail. Fayyad has been working to reform government institutions, professionalize the police force and establish mundane bodies such as a statistics bureau.

Wazir, a well-regarded economist who Stanley Fischer, governor of the Bank of Israel, counts as a friend, has at the same time been working on creating Palestinian economic independence.

A central banker without a bank, he can't employ the traditional monetary policy tools of changing interest rates or issuing Treasury bills. Instead, Wazir has busied himself since 2008 with strengthening private bank supervision, combating money laundering and setting up mechanisms to spot bounced checks. Establishing a currency -- one of the surest signs of sovereignty -- is the next logical step.

"All options are open, as far as we're concerned -- issuing our own currency is one," Wazir said in an interview, adding that the Palestinians are exploring linking the future currency to the dollar or the euro -- or perhaps adopting one of them instead of the shekel.

Even with that caveat, all signs show the Palestinians are at least getting ready to issue their own dough. Bulldozers recently broke ground on a new Palestine Central Bank building that will include specialized vaults.

The notion of a Palestinian currency has long been a matter of controversy with Israel, whose 20-times-larger economy the Palestinians have depended on for decades. At the outset of the Oslo peace process in the early 1990s, negotiators set aside the idea amid Israeli concerns that it would be too bold a sign of independence and fiscally foolish.

By 2000, the last time Israelis and Palestinians engaged in serious peace talks, a committee of Israelis and Palestinians blessed the idea before the talks collapsed. Yet, despite recent economic reforms welcomed by the World Bank and others, Israeli officials remain skeptical that the Palestinians can abandon the shekel.

"Their economy is too small,'' an Israeli official said. "It will need something to sustain the currency. Currency is not like a stamp or an international dialing code, which they have. . . . But to have a currency of your own, it's a whole other ballgame. They don't have what it takes.''

Arie Arnon, an Israeli economics professor who participates in an international working group researching economic aspects of the conflict, says a Palestinian currency is one of the most symbolic items on the diplomatic agenda.

"The Israelis will say it will increase the instability of the Palestinian economy. But I would argue, if I were Palestinian, that the damage to the Palestinian economy from security measures and blockades is more severe than any dangers from currency," he said. "What it will do to the economy depends on how the Palestinians will manage it. They are ready. The problem is that Israel is not ready, politically."

In the meantime, a committee quietly mulls what images to put on a new Palestine pound. The late Palestinian leader Yasser Arafat is a possibility, Wazir acknowledged, along with scientists, poets and artists.

"We're bringing something back to life,'' he said. "Hopefully, the politics will catch up.'’