Analysis / Trying to head off a financial crisis
Despite the festive summit meeting between the prime minister, the finance minister and the governor of the Bank of Israel, and despite the prime minister's statements on "restoring stability to the economy," and despite the promise to cut a further NIS 2 billion from the state budget, the dollar failed to calm down.
Despite the festive summit meeting between the prime minister, the finance minister and the governor of the Bank of Israel, and despite the prime minister's statements on "restoring stability to the economy," and despite the promise to cut a further NIS 2 billion from the state budget, the dollar failed to calm down on Friday, dropping only slightly in a symbolic gesture.
Friday also saw the publication of the May consumer price index, which proved to all remaining doubters that we have taken a step up in inflation to a rate of 1 percent a month (4.9 percent in five months) - a furiously fast and dangerous pace. From 1999 to 2001 inflation averaged 0.9 percent a year. In other words, the rise in a single month of this year equals the annual rate for the past three years.
Prime Minister Ariel Sharon has realized that this time things are serious and a financial crisis is looming. During his entire stay in Washington last week, he received concerned calls from Israel on the subject of the dollar.
He decided, therefore, to convene the three-way meeting immediately on his return, and to come out of it with immediate decisions.
Each of the warring parties, Silvan Shalom and David Klein, tried to win Sharon's heart.
Meeting with him before the trip to the United States, Klein laid out his plan for restoring stability to the economy - a NIS 10 billion cut to the budget, with half of this sum returned to the budget for infrastructure to boost growth.
Klein told Sharon there is a need to slash some NIS 3 billion from defense, and another NIS 7 billion or so from the wages of public sector employees through a package deal with the Histadrut labor federation, with the small change to come from an additional cut in the transfer payments.
Shalom met Sharon on Thursday before the three-way summit and knowing already he would have to make more cuts in the budget. Sharon surprised him by agreeing for the first time to a cut in defense spending (without so much as a word to Defense Minister Benjamin Ben-Eliezer). The two also agreed to an additional cut in the National Insurance Institute allowances. When Shalom told Sharon the director-general of the NII, Yohanan Stasman, was opposed to imposing criteria on the payment of allowances, Sharon retorted angrily "So fire him!"
The tripartite meeting that took place that same night began with a long lecture from Klein on why there was a need for an additional cut to the budget, and then Shalom suggested slashing NIS 2 billion. The object of this cut is to allow 2002 to end with a deficit of 3.9 percent, and to lower the planned deficit for 2003 to 3 percent (instead of 3.5 percent).
So now the big question is whether this cut will be enough to restore stability to the economy.
First, the entire NIS 2 million may not be cut this year because the treasury wants to take half the sum for infrastructure projects. Second, it remains to be seen what the cabinet and Knesset do to the proposal. And furthermore, in light of the deepening recession and the drastic fall-off in revenues from taxes, it is no sure bet that such a cut will be enough to achieve a deficit of 3 percent in 2003.
In addition, the political-security situation is certainly having a negative effect on the economy, on the investor confidence, on consumption, on the fact that money is going abroad - and so, on the recession and depreciation.
During the summit meeting Thursday, Sharon inquired about the likelihood of a financial crisis, asking how the dollar could be reined in so as not to pass the NIS 5 mark. He even urged the governor to raise the interest rate that same evening in the hope that it would be the right answer. In a rare moment of cooperation, Klein and Shalom cooled the prime minister's enthusiasm.
The crisis of confidence between the public and the government cannot be ended with festive announcements on cooperation, nor with a promise of a NIS 2 billion cut to the budget. Confidence in the economy and the shekel can be restored only by means of a drastic measure - a far deeper cut to the budget that would prove to everyone that the agenda has really been altered.
The public is fed up with promises too. It wants to see moves on the ground - in other words, in the Knesset - before it starts believing anything. After all, Sharon surely knows there are such financial crises that always end in the toppling of governments.