The OECD has sharply criticized the Bank of Israel's actions in the foreign currency market, according to a report obtained by "Globes". The report examines the strengths and weaknesses of the Israeli economy ahead of Israel's ascension to the OECD. Besides the foreign currency market, the report examines Israel's new tax policies and recommends changes in capital market supervision.
The OECD believes that Governor of the Bank of Israel Prof. Stanley Fischer's policy of buying dollars has fulfilled its purpose, and that he should stop the massive interventions in the market in order to avoid damaging his credibility.
The OECD states, "The build-up of international reserves proved useful, attenuating external vulnerabilities when concerns about the downturn were at their greatest. However, reserves are now more than adequate and hence a “clean float” should be readopted as soon as possible, since foreign-exchange intervention is fundamentally inconsistent with inflation targeting."
The Bank of Israel has more than doubled its foreign currency reserves from $28.5 billion in February to $61 billion today.
Until 2008, the Bank of Israel followed an orthodox approach of non-intervention in the foreign currency market. It changed this policy in March 2008, announcing daily dollar purchases at fixed amounts, saying that the strong shekel had created an ideal opportunity for building up Israel's foreign currency reserves. However, the intervention continued even after the stated target amount was reached, and Bank of Israel announcements increasingly mentioned concerns about the exchange rate.
The Bank of Israel stopped its daily dollar purchases in early August, but Fischer announced discretionary interventions would continue under special circumstances. "Markets now consider there is a 'dirty float' policy on the exchange rate and speculate as to what the Bank’s intervention price is," says the OECD.
The OECD's second important recommendation is to take the Ministry of Finance's supervision of the capital markets out of its hands as quickly as possible, and transfer it to an independent agency. The Bank of Israel argued last year that the Capital Markets, Insurance and Savings Supervision Department should be consolidated with its own Banking Supervision Department under Bank of Israel control. The OECD believes that the best option is transfer of the Capital Markets Supervision Division to a more independent agency.
"At a minimum, the supervisory duties directly carried out from within the Ministry of Finance should be transferred to a more independent body; such direct ministerial supervision is unusual," says the OECD drily.
The third OECD recommendation is to change the multiyear fiscal target. Instead of the spending cap on government spending, it recommends a multiyear debt-to-GDP ratio target. The OECD says, "While the current budgeting rule that limits real public spending increases to 1.7% per year has played an important and constructive role in fiscal control, it should be replaced in the not-too-distant future."
The OECD adds, "With annual population growth also at around 1.7% and only marginal decline in prospect, increases in GDP per capita of any substance imply public spending as a share of GDP will be continually eroded. The alternative rules currently being discussed that anchor spending increases to a debt-to-GDP goal and accommodate cyclical considerations would certainly be an improvement."
Published by Globes [online], Israel business news - www.globes-online.com - on November 10, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009