The Bank of Israel costs double that of Singapore

When the original Bank of Israel Law was enacted, the legislator had no intention whatsoever of allowing the institution to manage policy independently. Monetary policy management lay entirely in the hands of government and the Bank of Israel's role was confined to two things: to act as the government's agent in borrowing, and as supervisor over the banking system.

The revolution in the Bank of Israel's status began in 1985, with the sweeping Economic Stabilization plan. Today the Bank of Israel is one of the most independent central banks in the world, though the main thrust of the Bank of Israel Law was never amended.

Specifically, the Bank of Israel's role in setting policy today contravenes the letter of the law.

The Bank of Israel Law states that the central bank must aspire to keep the Israeli currency stable through monetary means, in Israel and outside it; to sustain a high level of production, employment, national revenue and capital investment in Israel.

In practice, the Bank's monetary policy goal is to keep inflation within the range set by government.

Yet based on the central bank's own self-stated goals, its policy has been a dismal failure. The desirable range for inflation was set in 2000. Looking at the results from the start of 2001 to April 2007 we find that inflation was within the target range in only 13 of those months. Or, the central bank failed 83% of the time.

Yet lately the Bank of Israel has been in the news, not because of missing monetary targets, but of missing budgetary ones.

The budgets of many central banks around the world are not subject to government or legislative supervision, because these banks are profitable and therefore, their budgets are treated like budgets of business entities.

However, the Bank of Israel balance sheet as of December 31, 2006 shows an accrued loss of NIS 15.5 billion and a shareholders' equity deficit of NIS 11.5 billion. In five of the last ten years, the bank has operated at a loss.

Unlike a business, though, its losses can't reduce it to bankruptcy.  It can just keep borrowing from the public to finance its operations. That makes the Bank of Israel more like any other government office.

But wage levels at the central bank indicate that it is operating in utter obliviousness to the way it funds its deficits, which is the same way the government finances its deficits.

Under the circumstances, there is no choice but for the legislator to supervise the administrative costs of the Bank of Israel.

Wage costs at the Bank of Israel reached NIS 554 million in the year 2006.

The central bank of Singapore netted $2.5 billion in 2006. Its wage cost was half of that of the Bank of Israel, though the Singaporean standard of living is higher than Israel's.

I intend to initiate a law that aims to subject the Bank of Israel's annual administrative budget to supervision by the Knesset Finance Committee. That way, the Bank of Israel's independence regarding monetary policy would be preserved, but wage levels and benefits at the central bank would remain under control. 

The author is a member of Knesset, representing the Shas party.