After 22 years, the shekel has finally ousted the dollar
The conversion from price listings in dollars to listings in shekels should have occurred in Israel long ago. That it did not was mainly due to habit, which can be hard to change. People simply became used to certain prices being set in dollars. It was a fact of life.
Habits play an important part in maintaining stability in economic systems. Thus without a shock that results in heavy losses for at least some, habits are difficult to change.
But there have been plenty of losses. This week we learned that the price Tnuva's sellers (the kibbutzim and moshavim) received for the company was NIS 330 million lower than they had expected. The reason? The deal was drawn up ten months ago in dollars, whose exchange rate against the shekel has since eroded by 9.8%. According to another report this week, 60% of all new apartment rental contracts are based on rental fees linked to the cost-of-living index rather than the dollar, because apartment owners who have been hurt by the falling dollar exchange rate are no longer willing to be exposed to currency exchange risk.
Prices are like shop windows. The price of a product is the first piece of information available to us. Let us say that a person approaches two lawyers and requests an estimate for legal services. If lawyer A names a price of NIS 500 per hour and lawyer B asks an hourly fee of NIS 1,500, we will initially conclude that lawyer B must be better and more experienced. After all, why else would he charge such exorbitant fees?
Because pricing contains both overt and hidden messages, it is very difficult to change without good reason. Merely changing the law - as was done in 2002, when an amendment to the Consumer Protection Law directed businesses to present prices in shekels only - is not always enough.
Changes of habit have become possible in recent years only by virtue of the shock that the dollar has undergone - its great weakness against other currencies worldwide, including the shekel. People suddenly understood that linkage to the dollar could cost them dearly. They also understood that anyone who calculates his costs in shekels and his revenues in dollars is taking an unnecessary risk. And when that risk materializes and becomes a large loss, they suddenly become willing to change deeply ingrained habit.
In the big picture, the move from dollar to shekel prices is good news for the Israeli economy. It will create uniformity and increase the ability to compare prices for products and services. Such uniformity is a natural efficiency mechanism, much like the one Europe benefited from with the advent of the euro currency. Cancelation of dollar linkages will also help stabilize inflation rates during periods of shekel devaluation.
The change is also good news from the point of view of consumers and businesses. In most transactions, it will save the parties unnecessary risk.
Israel has already accustomed itself to currency changes in the past. The Israeli lira was taken out of circulation in the 1980s and replaced by the "old" shekel (when the shekel equaled 10 lira). The new shekel was introduced in 1985 as part of the economic stabilization program, and its value was 1,000 old shekels. The currency replacement was meant to instill a new scale of prices in the public consciousness and to help stabilize prices. Now, it seems, events have come full circle. Twenty-two years after the new shekel appeared in our wallets and bank accounts, it has managed to push the dollar out of its last strongholds and truly become the official currency, accepted by all Israeli residents.