Terra Incognita: A Palestinian DInar

A question of the Palestinian dinar
By SETH J. FRANTZMAN
Jerusalem Post
http://www.jpost.com/Opinion/Columnists/Article.aspx?id=225997
06/21/2011 23:54

Terra Incognita: What currency will the Palestinians use in the wake of their quest to seek recognition for a state in September?

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There is a Facebook page circulating that purports to show an unofficial Palestinian passport stamp designed by an artist named Kahled Jarrar. But Jarrar’s homemade stamp is less important than another pressing issue: What currency will the Palestinians use in the wake of their quest to seek recognition for their state in September?

It isn’t a simple matter, as history will show. After the US declared independence in 1776, it was 10 years before Congress actually approved the use of the dollar as the official currency. And it wasn’t until 1792 that the first US mint, sanctioned by the government to print money, was inaugurated in Philadelphia (then the American capital).

By the time of the Civil War, the question of currency had gained more urgency. Only a month after the Confederate States of America had been formed, it began to issue its own currency in April 1861. As is well known, the Confederate dollar quickly depreciated, since it was not backed by assets, and became virtually worthless by 1864.

To examine the successes and failures of new national currencies, it is worth looking at several examples.

East Timor seems to be a prime case. Slightly smaller than Israel, East Timor is at the end of the Indonesia archipelago. In 1975 its colonial occupier, Portugal, decided to withdraw, and the Timorese declared independence in November of that year. However, only a month later, it was invaded by Indonesia in a campaign of massacre that began 25 years of brutal rule. The UN never recognized Indonesian sovereignty, and declared the country a “non-self governing territory under Portuguese administration.”

In 1999, after Indonesian human rights violations became widely known, a UN-sponsored referendum resulted in the territory becoming independent.

The Timorese got rid of the hated Indonesian rupiah, but instead of adopting their own currency, they began using the US dollar. The imposition of the dollar on the Timorese was completely a product of the UN’s semi-colonial administration that ran the country in 2000, and whose tentacles have never been completely removed. For a brief period, the UN National Consultative Council favored using the Portuguese escudo, but that idea was scratched when it became clear that the Portuguese were embracing the euro. The rupiah couldn’t be retained, not only because it was disliked, but because it was an unstable currency, and it meant East Timor’s future would be tied to the Indonesian economy.

Luis Valdivieso, head of the IMF office in East Timor, said: “I think the main consideration has been one of pragmatic consideration given the fact that t is urgent now [in 2000] to receive the payments on execution of the budget.” Yet the local people wanted their own currency. A coalition of former resistance leaders noted: “We believe the national currency should be an affirmation of independence and sovereignty.”

To no avail; the East Timorese continue to be honorary Americans, in the economic sense.

Kosovo is another case in point. Kosovo became part of the Ottoman Empire in the 14th century, when the Turkish sultan overran what was then part of the Kingdom of Serbia. While it was once part of Serbia or Yugoslavia, a 1999 rebellion by Kosovo Albanians resulted in a bombing campaign by NATO and the occupation of the province by the UN. That year, the UN adopted the German mark as a replacement for the Serbian dinar. Use of the mark led directly to the imposition of the euro when the country declared independence in 2008. Yet, like East Timor, Kosovo remains in many ways a colony of the UN and various NGOs and international organizations. Because Kosovo hopes to join the EU one day, it has been using the euro rather than adopting the Albanian lek, the currency of its ethnically related neighbor.

Somaliland presents a more unique story. A large and sparsely populated country on the horn of Africa, Somaliland was initially colonized by the British. In 1960, after a few days of independence, it joined with Italian Somaliland to form modern-day Somalia. After years of misgovernment and a long running civil war, the territory decided to seek independence, which it declared in 1991. In 1994, Muhammad Haji Ibrahim Egal inaugurated a new currency, called the Somaliland shilling. The currency was briefly minted in England at the Pobjoy Mint, which prints money for 37 small countries and overseas territories. It doesn’t seem that the currency has been very successful, and it isn’t currently being minted.

Another breakaway republic, Western Sahara, was governed by its colonizer, Spain, until decolonization in 1975, when Morocco and Mauritania occupied the country.

The local independence movement briefly attempted to create its own currency called the Sahwari paseta, pegged to the old Spanish paseta.

Other countries have successfully established currencies. The post-Soviet states that gained independence in 1990 have mostly created their own currencies. Latvia, for instance, re-instituted the lats – once used in 1922 – to replace the ruble.

Perhaps it is interesting to look at Israeli history to see how a new currency can be created. The British invaded Palestine in 1917, but continued to use the Ottoman lira alongside the Egyptian pound until 1927.

In that year the Palestinian pound was introduced, and was pegged to the British pound. After independence, it took Israel four years to fully adopt the Israeli lira. By contrast, the Jordanians adopted the dinar in 1949. The Palestinian pound continued to circulate in the West Bank until 1950, when it was replaced by the Jordanian dinar, and in Gaza until 1951, when it was replaced by the Egyptian pound.

What do the Palestinians think they will use as a currency? On May 31, The Washington Post reported that there was some discussion about replacing the shekel, which is used in Gaza and the West Bank.

Jihad al-Wazir, governor of the Palestinian monetary authority, has noted that “all options are open.”

Some argue for bringing back the Palestinian pound. Others prefer a closer connection to the Jordanian dinar. One Palestinian woman with whom I spoke dismissed my confusion: “Won’t it be a Palestinian lira?”

The writer has a PhD from Hebrew University, and is a fellow at the Jerusalem Institute for Market Studies.