Jerusalem, 1 January 2003

Removal of Foreign Exchange Control
(Communicated by the Bank of Israel Spokesperson’s Office)

The Foreign Exchange Activity Department (formerly the Foreign Exchange Control Department) announces that effective from today the last foreign exchange control restriction, that relating to financial institutions’ overseas investments, is rescinded. This implements a decision made a year ago, and was one of several measures agreed with the government. The restriction had limited financial institutions’ investments abroad to 20 percent of their total assets. From today there is no Foreign Exchange Control, and the NIS becomes a fully convertible currency, like those of the world’s industrialized countries.

The process of liberalization, which started towards the end of the 1980s, included the gradual lifting of restrictions that hampered the financial activities of households and the business and financial sectors. Thus, for example, restrictions that prevented Israelis from holding foreign currency in cash, having foreign-currency accounts in Israel or abroad, transferring assets out of the country and purchasing more than a specified amount of foreign currency for travel abroad, all these restrictions were removed. The need to obtain permits from the Bank of Israel to carry out various business or personal financial activities was also abolished. With the completion of the liberalization process, all Israelis can freely perform transactions in foreign currency and with nonresidents, and nonresidents can perform transactions in NIS, unhindered and unrestricted as far as the Currency Control Law is concerned.

The completion of the liberalization process represents a milestone along the route of the adjustment of Israel’s economy to the internationally accepted standards of macroeconomic management, a condition for Israel’s continued integration into the global economy. The latest step yields significant benefits. On the macroeconomic side, it boosts the integration of Israel’s capital market into the world markets, and encourages competition and efficiency in that market. Regarding the public’s investment portfolio, the latest step improves portfolio diversification, lowers volatility and reduces exposure to fluctuations in the domestic capital market, which is markedly shallow considering the extent of the assets managed by institutional investors.

The completion of liberalization is consistent with parallel long-term developments taking place in the economy related to Israel’s integration into international marketstax cuts on trade and the gradual ending of tax discrimination between financial investment in domestic assets and that in foreign assets. The combined effect of these processes should be gradual changes in the assets and liabilities portfolios until optimal allocation is achieved, without the distortions that derive from administrative restrictions or discriminatory taxation. The completion of these process, however, does expose the economy more rigorously to shocks originating from the markets’ reactions to macroeconomic management.

As liberalization in foreign exchange proceeded, the exchange-rate regime was made more flexible, and over the last five years the exchange rate has been determined by market forces, with no central bank intervention. The change in the regime encouraged the creation of market instruments for hedging exchange-rate risks and helped create a growing foreign exchange market like those in leading world economies.