We can't have it all ways on the shekel

Dr. Yishai Ashlag

With the Bank of Israel running out of ammunition to fight the shekel's appreciation, the government must make some tough, clear-cut decisions.

The appreciation of the shekel cannot be halted by monetary means. The Bank of Israel has less than 1% on the interest rate left as ammunition, alongside a respiration machine in the form of dollar purchases.

The effect of both is diminishing.

The shekel is continuing to appreciate mainly as a result of the gas discoveries, and this is because of two things that affect Israel's balance of payments: on the one hand, a drop in imports of coal and fuel oil that send dollars out, and, on the other, the expectation of gas exports, that bring them in.

Thus, as gas exports grow, and the stream of incoming dollars gathers pace, the shekel will strengthen.

Those who will suffer are the exporters and the technology industries that pay their expenses in shekels but receive their revenue in dollars. They are already suffering. This is evident in the growing number of layoffs in high-tech.

The Bank of Israel continues to conduct the battle with dollar purchases. But at the end of the day, the surplus supply of dollars and market forces, with a following wind from the gas revenues, will overpower the bank, which is buying and buying with its last monetary strength.

In order to win, other weapons need to be deployed, non-financial weapons that will boost the flow of exiting foreign currency. The ability to make such moves lies with the Ministry of Finance, which has tools for encouraging investment overseas, and not with the Bank of Israel and its monetary tools.

Two non-financial weapons

One such weapon is to oblige the pension funds to invest more overseas. This would mean an outflow of foreign currency that would stabilize the shekel in the foreign exchange market.

It would also have an additional, indirect positive effect: diversifying the national pension savings portfolio and spreading risk, which at present is concentrated in the domestic economy.

Another possible step that the Ministry of Finance could take would be to encourage imports by cutting taxes. For example, an immediate, drastic cut in import duty on food products and agricultural produce. This would give a boost to imports that could amount to $3 billion a year, reducing the excess supply of dollars and stabilizing the shekel exchange rate.

This measure too would have a positive side effect: cutting duties would mean lower food prices, saving every family hundreds of shekels a year. What's wrong with that?

Friendly fire

Another measure that has been considered as a means of stabilizing the shekel is imposing a tax on foreign investors in bonds.

This would do more harm than good.

Let's start with the good: The foreigners' holdings are small, 3-5% of all the bonds on the market, or $3.5-5.5 billion. Probably only some of them would sell and get out because of the tax, so this measure would have a one-time, minor effect.

The benefit is small, and the damage is liable to be great.

If the two import-encouraging measures proposed above have positive side effects, imposing a tax on foreign bond investors amounts to opening fire on ourselves. This is because of the effect on Israel's image in the international investment community.

Most foreign investors are not "speculators"; they are overseas pension funds and managers of real money. Imposing a tax would lead to a loss of faith in our market, and when the day comes that we have need of the foreign investors, we will rue that greatly.

Having our cake and eating it

It's impossible to cut energy imports, export gas, prevent investment overseas, restrict food imports to protect certain industries, and also expect the shekel not to be affected and export industries not be hurt.

A strategic decision has to be made: what do we give up? The government needs to decide what it will promote, which industries it will encourage, and which not; whether it wants to protect our export industries and reduce the cost of living in Israel, or to remain in the present situation.

At this point, not deciding is also a decision. The way it looks right now, the government and the Ministry of Finance prefer a quiet life (people laid off by technology companies go quietly) to the furor that will ensue if the economy is opened up to record imports affecting other industries.

The author holds a PhD in Economics and is a senior partner at international consulting firm Goldratt Consulting

Published by Globes [online], Israel business news - www.globes-online.com - on December 17, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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