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The Bank of Israel lost NIS 5.3 billion in 2007, mainly because of unfavorable shekel-dollar exchange rates. In 2006, the Bank of Israel netted NIS 83 million.

The 2007 loss was caused by an NIS 7.1 billion loss on Israel's foreign currency reserves because of changes in the dollar's exchange rate from the year's start to its end. That caused the central bank's accrued deficit to reach an unprecedented NIS 20.8 billion at the end of 2007. To make it clear, the bank didn't accrue that deficit in 2007 alone: most of the amount derived from the years 1999 and 2000, because of heavy outlay on interest.

The central bank's balance sheet was about NIS 133 billion at year-end 2007, down 16% from NIS 158 billion at the end of 2006.

Most of the Bank of Israel's foreign currency reserves are in dollars, and last year the dollar weakened by a huge 9%. The shekel value of the central bank's "dollar portfolio" also fell. The central bank's foreign currency reserves are adjusted in the balance sheet to the representative rate, and it is also true that the huge loss on the balance sheet was offset to a degree by the Bank of Israel's NIS 1.4 billion income from its foreign currency deposits at foreign banks.

But possibly, if the Bank of Israel had been more skilled at managing the nation's roughly $28 billion to $29 billion in foreign currency reserves (despite the limitations imposed by the present Bank of Israel law), it could have cut its losses.

The national foreign currency reserves are the Bank of Israel's main asset, and they are high. Simply put, the central bank suffered a loss because its costs on managing the money ran higher than its income from it.

The Bank of Israel is not a regular commercial bank. Its raison d'etre is not to make a profit for shareholders. The law rules that its central goal is to keep inflation in check, and the government has set its target range for stable prices at inflation of 1% to 3%, no more. Achieving that, more or less, with slight deviations here or there, has been central to Israel's brisk economic growth.

Never mind that inflation ran at -0.1% in 2006, which is hardly within the target range: the central bank can claim credit for helping to support Israel's economy, which it cannot however reflect in its financial statement. And the fact that the Bank of Israel ran a profit, or loss, is immaterial to achieving its gains.

Yet whatever the central bank's "undercover achievements," operating at a deficit is bad for its reputation and credibility in the eyes of the general public.

So is the central bank's loss only a figment on paper? No. In the past, when the central bank ran a profit, it transferred the surplus to the state budget, in keeping with the Bank of Israel law. The government had more to spend.

Now that the bank has a howling loss of NIS 20.8 billion, it can't give the treasury a sou. And any profit the Bank of Israel makes in the foreseeable years to come will be used to offset that loss, not to build new classrooms or missile shelters in Sderot. That will continue until the entire loss is gone. For example, the NIS 83 million that the Bank of Israel netted in 2006 didn't go to the treasury. It was used entirely to offset its deficit.

The central bank finished compiling its financial statement for 2007 in the middle of February. For the first time, the person responsible for compiling it was Rafi Lancry, a lawyer and accountant by trade, and the strong-man at the bank.

Another juicy aspect of the central bank financial statement is, as always, wage costs. So: Its outlay in 2007 on current and retired employees amounted to NIS 424 million, roughly unchanged from 2006. In 2007 the bank had 745 employees, down from 754 the year before. Its pension provisions mushroomed from NIS 106 million in 2006 to NIS 145 million last year, after the bank updated - for the first time in decades - the average life span of its employees in the treasury's actuarial tables.

Certain sums were deducted from the central bank's pension provisions in keeping with the new collective employment agreement at the central bank, which had been achieved after long months of wrangling with treasury officials.