ECONOMY: Major Reforms

 

The Bank of Israel and government buildings (Photo: GPO)

 

INTRODUCTION | CHALLENGES & ACHIEVEMENTS | MAJOR REFORMS | NATIONAL ECONOMY | ECONOMIC PICTURE | ECONOMIC SECTORS

The rate of exchange of the shekel is now, after removal of all foreign currency restrictions, determined by the international money market. This was not always the case. As in all post-WWII economies, Israel’s currency exchange rate was a fixed one, changed (devalued) by government decision from time to time.

In 1948 the Israeli lira was equal to one pound sterling (then $4 US); it was devalued to $2.80 in 1949 together with the pound. Since then Israel’s currency has been devalued many times (e.g., to 1.80 lira per dollar in 1954, IL3 per dollar in 1962, IL4.20 in 1971 and IL6 in 1974). This, in accordance with the economic policy, aimed at narrowing the gap between the smaller exports and imports, and actually compensating foreign trade for the accumulated local inflation rate since the previous devaluation.

In 1975 Israel followed the change of trend in the OECD and embarked on a "creeping devaluation" (allowing up to 2% devaluation per month). This system lasted two years, until the first step of liberalization was carried out. Since then, the rate of exchange has been determined daily by the Bank of Israel, in accordance with market fluctuations. In 1980 IL10 were converted to 1 shekel and in 1985 1,000 shekels became a New Israeli Shekel (NIS). In July 2010 the NIS rate of exchange averaged $0.26.

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The unusual circumstances of Israel’s economic growth, most of which had to be instigated by the government during the first decade or two of statehood, placed it high on the list of countries with a large national budget compared to their GDP. There were instances when the budget was even higher than the GDP, but it was reduced to 95 percent in 1980, to 64 percent in 1990, to 49 percent in 2005, and around 43.6% in 2008 – about the OECD average.

During the 1990s emphasis was put on curtailing spending and reducing the deficit. The target was to bring down the deficit/GDP ratio to the rate prevailing in Western developed economies, a policy that was indeed successful in reducing it down to a quarter of what it was at the beginning of the decade. After it rose considerably in 2001, it was brought down to 6 percent in 2003, 5 percent in 2004, and by 2007 there was no significant budget deficit. The financial crisis necessitated a departure from the deficit reduction program, and the government approved a deficit ceiling of about 6% of GDP for the years 2009- 2010, but with a clear plan of reducing deficit levels once more after reaching economic stabilization.

The economic reform program embarked on by the government in 2003 continues to reduce the budget (as well as taxes) further and streamline the economy.

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Whereas the government is still obligated to encouraging economic initiatives, its policy succeeded – since the 1990s – in reducing its direct involvement in the economy. Thus, apart from almost eliminating subsidies supporting the prices of basic commodities and trimming down the entitlement for those directed at encouraging foreign investments and exports, it embarked on a major privatization campaign of selling the ownership of hundreds of public companies.

While during the first decade of this policy many smaller concerns were privatized, the process has been enhanced in the last couple of years, fetching an income of $3 billion from the sale of much larger enterprises like banks, El Al Israel Airlines, Zim (navigation), and Bezeq (communications), and much of the chemicals industry.