THE ISRAELI ECONOMY AT A GLANCE

June 1995

State of Israel

Ministry of Industry and Trade

P.O.B. 299, Jerusalem 91002, Israel

Tel.: 972-2-220220

Fax.: 972-2-245110

POLICY FOCUS: SELECTED ECONOMIC POLICY

PRIVATIZATION

In Israel, as with many young nations, it was originally the state which provided the initial impetus for the development of business creation of a national capability to compete in world markets. Moreover in Israel’s case, government intervention in the economy was heightened by its complex security situation and the need to develop a sophisticated military industrial complex. However. as it matured and the private sector developed, the government has sought to reduce its involvement in the economy.

Today, there is widespread cross-party support for privatization, which has ensured that the subject is not regarded as a contentious issue.

The Government has set out six key objectives for privatization policy:

1. To foster a greater degree of competition in the business reducing government involvement.

2. To both improve and modernize the efficiency of state owned monopoly companies.

3. To increase Israel’s economic integration into the world economy through attracting foreign investment.

4. To obtain appropriate financial remuneration for government assets sold, which can then be used towards reducing the internal debt.

5. To widen share ownership, especially among the company employees.

6. To further develop Israeli capital markets by encouraging entrance of new investors.

The government owns about 160 companies (including subsidiaries), of which 80 are termed commercial enterprises. Their aggregate total balance-sheet assets amount to approximately $17 billion. Furthermore these 80 companies account for more than 75% of the aggregate turnover and 86% of all personnel employed in government companies. The total sales of government companies accounts for roughly 18% Israel’s G.D.P.

The amounts of capital raised by sales of government holdings have been substantial in total over $3 billion had been raised by the beginning of 1995 with the some of the most important privatizations yet to completed.

FOREIGN CURRENCY LIBERALIZATION

The Government of Israel is progressively implementing a policy of full foreign currency convertibility. Since 1993 Israel formally accepted the obligations of Article VIII of the IMF’s Agreement, which prohibit exchange restrictions on payments and transfers for international current account transactions. Moreover, in August 1994 the Ministry of Finance announced a series of reforms that further increased Israel’s currency control regulations.

Exchange control is the responsibility of the Controller of Foreign Exchange in the Bank of Israel, in cooperation with the Ministry of Finance. Policy is carried out through authorized banks that are permitted to deal in foreign exchange. Other institutions, such as securities brokers and foreign exchange dealers may process a limited license to deal in foreign exchange.

The remaining restrictions are primarily on Israeli residents and corporations and in effect limit financial, as opposed to real investments overseas. Israeli companies can invest all of their paid up capital in overseas direct investment and exporters can deposit up to 10% of their annual proceeds abroad.

Residents face some limits on outward private transfers and relatively minor restrictions on tourist expenditure. Individuals may invest in foreign securities in recognized stock markets, provided they are deposited with a local bank. Foreign residents and corporations face no real restrictions provided they operate through authorized dealers.

ECONOMIC INFRASTRUCTURE INVESTMENT

In recent years the Government of Israel has promoted infrastructure development as an important means by which to facilitate economic growth. Investment in infrastructure raises productivity and lowers production costs. Consequently, the expansion of infrastructure capacity results in increased economic output.

By investing in the country’s physical infrastructure, the government has sought to enhance private sector efficiency and growth, which have been essential for encouraging immigrant absorption and increasing employment opportunities. Moreover, as the pace process progresses, Israel’s infrastructure expenditure should be seen as an investment in the region’s development as a whole.

Between 1991 and 1994, approximately $8 billion was spent on the country’s physical economic infrastructure. This scale of investment is unparalleled in Israel’s history. In 1995 alone total public sector infrastructure investment is expected to reach over $3 billion, as compared to under half that figure in 1991.

In 1995, government infrastructure expenditure will grow by an additional 10%. Investment in roads will reach $700 million, while industrial infrastructure will expand by 50% compared to 1994. Other infrastructure investment components include electricity and telecommunications, whose sources of finance are non-budgetary and are directed by public utility companies that operate in those areas.

FINANCIAL DEREGULATION

Since 1987 Israel has been engaged in a program of financial decentralization, a process designed to address specific characteristics of the Israeli financial system. The liberalization program aims to diffuse the concentrated nature of the financial system and stimulate competition, limiting government intervention and segmentation in the financial markets.

Specific reforms include the following:

* The reduction of mandatory investment requirements for pension plans, provident funds and insurance plans;

* Permitting of non financial firms to issue bonds;

* Reducing reserve requirements levels;

* Abolition of ceilings on domestic foreign exchange loans to residents and on guarantees that banks could issue on non bank loans;

* Special credit arrangements were terminated and the Bank of Israel reduced its involvement in determining the prices of financial services.

Among the measures being implemented in order to increase competition are:

1. Separating smaller viable units from the major banking groups,

2. Upgrading the licenses of existing financial institutions;

3. Privatizing the banks whose shares are still being held on the government’s behalf by trust companies.

In addition to all these steps the government has sought to reduce the banks’ potential conflicts of interest between their commercial bank activities and their provident funds and non financial sector holdings. Accordingly, the banks’ provident funds, which account for around 80% of all such funds in Israel, are not allowed to invest in their bank group shares and their decision-making authority has been separated from bank management. Banks which have substantial stakes in the non financial sector have also been required to reduce their holdings in these enterprises to no more than 25% within three years.