Avi Simhon: Frontrunner for next BoI Governor

Prof. Avi Simhon Photo: Oriah Tadmor

The National Economic Council chairman favors increasing competition and opposes intervention in foreign exchange rates.

The list of candidates for Governor of the Bank of Israel is getting longer. The latest candidate to gain public attention is Prof. Avi Simhon, chairman of the is National Economic Council since December 2015. He is an expert on macroeconomics and the Israeli economy with a specialty in investigation of labor corruption. His academic research at the Hebrew University of Jerusalem in the Department of Agricultural Economics and at the University of Minnesota deal in economic growth, labor economy, sector structure of the economy, and public corruption.

Simhon favors increasing competition and opposes intervention in foreign exchange rates. He advocates measures for combating regulation, increasing productivity, and making it easier to do business. He opposes tax hikes and is favor of a moderate budget deficit - "A 3% deficit is accepted worldwide and does not put us at risk," he once said, a position in accordance with the views of Prime Minister Benjamin Netanyahu, who has the authority to appoint the governor of the Bank of Israel in consultation with Minister of Finance Moshe Kahlon, who shares similar views in the matter.

Netanyahu is looking for a Governor. As of now, he has not brought up a single woman as a candidate. He has set two preliminary conditions for himself and his staff: someone who is a professor and somebody that he already knows. The prime minister is insisting on a recognized figure, his associates say, for several reasons. First of all, someone who is not known to him and in general will create uncertainty, with the possibility of surprises, although every professor who is a candidate for such a post has already acted, spoken, and written dozens of articles, so that his or her views are more or less known.

Secondly, appointment of a governor who is not known to such a critical post near the prime minister requires a personal investment in studying the candidate, getting used to him or her, bending him or her to his will, and knowing how to begin and to end widely reported disagreements.

Another reason is exposure and its price. A recognized figure has already experienced the greatest fear of all: criticism and slander. These always come on the social networks, in the media, investigative reports, and from social organizations and political groups, from inside and outside, frequently involving the discovery and even the invention of skeletons in the closet. Vitriolic criticism against a candidate for a senior position is both personal and political. It also originates in the wish to destroy only because the candidates is appointed by Netanyahu or by a rightwing government, of course using excuses that appear logical, justified, and reasonable.

Simhon completely fulfills these conditions. He is a well-known and recognized professor who has never hidden his views even when they are irritating to important groups. He has already been working side by side with Netanyahu for three years. Before that, he was the economic advisor of then-Minister of Finance Yuval Steinitz, also with Netanyahu's blessing. He is well-known and has undergone a test of fire. His views aroused the ire of people with various opinions, who have called him a "hater of the poor," "lover of the rich," "alienated neoliberal," "capitalist pig," "no social conscience," and the like.

At the same time, there is one problem with appointing Simhon. His clear statements, although they have become more moderate with time, still create difficulties with the approaching election date and Netanyahu's wish to guarantee as broad a coalition as possible even before the elections.

One of the obstacles to Simhon's candidacy is an article he published in December 2011 under the title, "A family with eight children is a sin," in which he wrote, "The ability of a parent with eight children to supervise and help them is much less than that of a parent with three children." This aroused the leaders of the haredi (Jewish ultra-Orthdox) parties against his appointment as chairperson of the National Economic Council because he "spoke against poor people and families with many children."

Netanyahu promised then that Simhon was committed to the coalition agreements. Today, however, Deputy Minister of Health Yaakov Litzman (United Torah Judaism) is much stronger and threatening. He has already demonstrated his power over the prime minister by preventing under threat of withdrawal from the government the appointment of former Accountant General Michal Abadi-Boiangiu as civil service commissioner because of her supervisory actions involving the Ministry of Health and the granting of money to Hadassah Medical Center, at the head of which Litzman appointed his associate, Prof. Zeev Rotstein.

Litzman and Knesset Finance Committee chairperson MK Moshe Gafni (United Torah Judaism) are emerging as Netanyahu's coalition partners in the next government also, if and when he forms it. As of now, they are not involved in the affairs of the governor of the Bank of Israel. There are those, however, looking on from afar and waiting for the right moment to intervene. The reason is the important interests that the main haredi wheeler-dealers have in the view of the governor of the Bank of Israel concerning the future of supervision and the status of non-profit charity organizations, which transfer huge sums from one place to another in shekels and foreign currency.

The haredi MKs have an interest in making sure that the Bank of Israel continues to turn a blind eye and does not attempt to regulate and implement Israeli law on the flourishing system of shadow banking in the haredi sector. In addition to this concern, the Bank of Israel already fulfills what the haredi MKs regard as a negative function by taking the banks' side in the disputes between them and the charity funds, which deposit money in the banks, but refuse to report to the banks the source of the money. This friction is likely to escalate in the coming years in view of the international pressure being exerted on Israel to fully implement the reporting and transparency rules in the framework of the global campaign against tax evasion and money laundering.

The charity funds are the haredim's main source of oxygen. The financial regulators believe that the charity organizations are not serving solely as non-profit social institutions helping the needy. Many billions circulate through the charity sector, which consists of hundreds of institutions of various sizes. According to information in the hands of the law enforcement authorities, the largest charity funds not only grant loans; they also hold deposits, thereby functioning as banks for all intents and purposes.

The Bank of Israel Banking Supervision Department does not intervene in this sector and does not enforce the law, out of concern that the state will have to intervene if a large charity fund collapses, leaving thousands of families who use its services impoverished. The charity fund sector is meanwhile unregulated after plans to put it under the supervision of the Capital Market Authority or the Ministry of Justice were rejected.

In addition to the ongoing problem of an absence of supervision, another growing problem is surfacing stemming from the interface between the haredi shadow banking system and the "official" banking system supervised by the Bank of Israel. The tax authorities of foreign countries and international organization such as the OECD are exerting pressure on Israel to adapt its financial system to reporting rules designed to prevent money laundering and tax evasion.

The banks are being forced to report money deposited in them by the charity funds without the banks having any idea to whom the deposited money belongs. The initiative to enact a charity fund law ran aground because of opposition to the principle of the charity funds disclosing information about people using their services. A temporary two-year arrangement has meanwhile been devised that enables the banks to meet the tough reporting requirements of the US tax authorities under the Foreign Account Tax Compliance Act (FATCA), which have been applied to anyone with a link to the US, regardless of where he or she resides, lives, and works.

In the framework of this arrangement, the banks in Israel are reporting the charity funds' accounts as accounts of non-profit institutions. The charity funds, however, are complaining that the banks are creating difficulties for them and harassing them with questions - which the Israel Money Laundering Prohibition Authority requires every financial institution in Israel to answer. The banks are threatening to close the charity funds' accounts if basic information about the source of the money in the accounts is not provided.

The banks are claiming that these clarifications are essential because the banks' heads are exposed to criminal prosecution for violating the Prohibition on Money Laundering Law and other regulations. Gafni has led an initiative in this matter barring the banks from "asking unnecessary questions," an initiative opposed by the Bank of Israel. When the times approaches for appointing the next governor of the Bank of Israel, it can be assumed that Litzman and Gafni will clarify the candidate's views in this matter and will then intervene. They may even prevent a particular appointment if they think that the candidate is too independent in this matter.

Another problem with Simhon's candidacy is the fact that in October 2012, he announced his intention of running in the Likud primaries. He was put in 53rd place on the Likud-Yisrael Beitenu list. His candidacy for the Knesset and his selection by Netanyahu for the post of the chairperson of the National Economic Council are likely to create a "political affiliation" between him and Netanyahu.

In this case, he will have to demonstrate to the consultant committee for senior appointments, headed by Supreme Court Justice (ret.) Eliezer Goldberg unusual qualifications in his professionalism and capabilities.

Published by Globes [online], Israel business news - www.globes-online.com - on August 15, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Prof. Avi Simhon Photo: Oriah Tadmor
Prof. Avi Simhon Photo: Oriah Tadmor
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