Klein Warns of Gov't Losing Control of Economy

The shekel slumped against the major currencies yesterday after Bank of Israel governor David Klein warned that the government could lose control if the economy continues to decline.

Shinui MK Avraham Poraz on Friday accused Bank of Israel Governor David Klein of creating "unnecessary hysteria", in an interview to Israel Radio, following the central bank chief's warnings that the government could lose control if the economy continues to decline.

The shekel slumped against the major currencies Thursday after Klein said at the Ma'ariv banking conference that "Economic and social deterioration cannot continue.... The moment could come - nobody can pinpoint exactly when or why - when the government's ability to rule will become questionable." The shekel was already under pressure on intimations that a U.S.-Iraq war may be around the corner and after an internal treasury document revealed expectations of a massive deficit in February on top of the whopping January deficit of NIS 2.7 billion.

Minutes after Klein's speech, the dollar began to soar, climbing as high as NIS 4.94 after the representative rate had been set at NIS 4.894 - up 0.71 percent on Wednesday's rate. The euro also gained strongly, with its official rate up 1 percent from Wednesday's rate to NIS 5.269 and climbing to NIS 5.345 in late trade.

This is not the first time Klein's comments have caused a storm on the foreign currency markets.

Finance Ministry heads met with Prime Minister Ariel Sharon on Thursday to discuss the country's economic crisis and in particular the affect it was having on collecting taxes. Sharon said he was prepared to take the necessary harsh measures as long as they include significant measures to boost growth.

Earlier this month the treasury announced that the budget deficit for January, a traditional month of budget surpluses, had reached an extraordinary NIS 2.7 billion. According to an internal ministry document, February could be only slightly better with a deficit of NIS 2.5 billion. Treasury officials are aware tax revenues are far lower than forecast by the government in its budget for 2003.

Thursday's meeting lasted barely an hour. Treasury director-general Ohad Marani, Accountant General Nir Gilad and the heads of the tax departments were blunt and to the point. The drop in January's revenues was unexpected, they told Sharon, and February was likely to be almost as bad. If the situation continues throughout the year, the government will have no choice but to make massive cutbacks, including unprecedented layoffs and pay cuts in the public sector.