Israel shekels, November 25, 2008
Israeli currency, November 25, 2008. Photo by Bloomberg
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As part of preparations for the creation of an internationally recognized state, the Palestinian Authority is replacing the Israeli shekel with a newly launched currency of its own, according to a U.S. press report Sunday.

There is quiet talk in the West Bank of a new Palestinian currency amid a push by Prime Minister Salam Fayyad to ensure the Palestinians can function independently if they gain sovereignty – either through peace talks by declaring independence unilaterally, according to a Washington Post report.

"All options are open, as far as we're concerned - issuing our own currency is one," said Jihad al-Wazir, the closest thing to a Palestinian Federal Reserve board chairman.

Wazir added that the Palestinians are exploring pegging a future currency to the dollar or the euro - or perhaps adopting one of them instead of the shekel.

A central banker with no bank, Wazir has since 2008 busied himself supervising private banks and fighting fraud. Establishing a currency - one of the surest signs of sovereignty - is the next logical step.

The notion of a Palestinian currency has long been a matter of controversy with Israel, on whose economy the Palestinians' have depended for decades. At the outset of the Oslo peace process in the early 1990s, negotiators shelved the idea amid Israeli fears that it would be too bold a move, both fiscally and politically.

At the last serious Israeli-Palestinians peace talks in 2000, a committee of Israelis and Palestinians endorsed the idea. 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 researches 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 is considering images to put on a new Palestine pound. The late Palestinian leader Yasser Arafat is a possibility, Wazir said, along with scientists, poets and artists.