Jerusalem, 31 December 1999

Speech by Bank of Israel Gov. Frenkel
(Communicated by Bank of Israel Spokesman)

Following are excerpts from a speech given by outgoing Bank of Israel Governor Jacob Frenkel on (Friday) 31.12.99 at the 9th annual meeting of the Commerce and Industry Club in Tel Aviv:

The Israeli economy finds itself in the new and irreversible reality of global economic integration that present it with unprecedented challenges and opportunities. This is the result of a systematic and continuous process of liberalization, opening the economy and creating the necessary conditions to convert Israel into an attractive location for local and international investors. Israel’s rate of inflation has been reduced to its lowest level in decades and the inflationary environment is now close to Western rates; the foreign currency market has been successfully liberalized and controls been removed; the exchange rate has been made flexible; the financial and banking systems made secure; and the necessary conditions for renewed sustained growth have been created. As a result of these steps, the Israeli economy has won high status in international financial markets, and foreign investment has been increasing for several years. In addition, foreign banks have been steadily increasing their involvement in the Israeli economy. Since the second quarter of 1999, all sectors of the Israeli economy have been undergoing a significant recovery.

It is necessary to consistently continue the economic strategy of openness, increased competitiveness, price stability and adopting the accepted norms of the world’s developed economies. This will be done by carrying out long-term economic policies based on setting multi-year targets that strengthen the commitment to economic competitiveness, efficiency and flexibility and achieving fiscal and inflationary targets and implementing structural reform policies that will contribute to Israel’s full integration with the global economy and renewed economic growth. These steps will enable translating the current accelerating economic activity into sustained growth that will lead to constant improvement in employment. This is the proper key to solving the economy’s problem of unemployment.

In the past several years, thanks to the determination and consistency of the policies of liberalization and openness of the financial and capital markets, the Israeli economy has successfully passed important tests, even as Israel was committed to reducing inflation and budgetary restraint. In this context, it should be noted that the strategy of direct non-intervention by the Bank of Israel in the foreign currency market and its deep encouragement of this market, together with the flexibility of the exchange rate regime and use of interest rate policy to achieve the government’s inflation targets contributed decisively to the economy’ successful meeting these challenges, despite the effects of last year’s global financial crises. The liberalization of the foreign currency market was very successful, inflation has been markedly reduced, the foreign currency market operates properly with intervention by the Bank of Israel, and recently the economy has shown significant signs of recovery. It is now essential to implement structural reforms to reduce the tax burden, expand the tax base and liberalize tax rates. In addition, the issues of the pension funds has to be dealt with as part of essential reforms of the capital market.

As part of the economic strategy leading to successful integration with the global economy, it is necessary to amend the Bank of Israel Law to the accepted standards of the developed world as recommended by the Levin Committee Report. This will strengthen the basis for the Bank of Israel’s activities to enable the economy to meet the challenges of the 21st century in the manner of the world’s leading central banks. For this purpose, the new Bank of Israel Law must include the four principles recommended by the Levin Committee Report – principles that characterize central bank laws as a single package:

1)Defining the primary goal of the Bank as the achievement of price stability and maintaining it over time;
2) giving the Bank full independence to use the necessary tools to do so;
3) increasing the Bank’s transparency and reporting to the government, Knesset and the public; establishing a monetary committee headed by the Bank of Israel governor and whose members are experienced professionals in the relevant fields;
4) prevent conflict of interests and maintain impartiality in matters whose full and sole jurisdiction is the Bank of Israel.

Legislative proposals that are not fully consistent with these principles are dangerous and are a deviation from the successful economic strategy of globalization and the adoption of the accepted norms of developed markets.