Analysis

Expect to Be Shocked by Prices on Your Next Vacation to Israel

A week at a top Israeli hotel costs more than in London, for which tourists can blame the strong shekel

Tourists walking up the Via Dolorosa in Jerusalem's Old City, December 2018.
Emil Salman

Imagine a scene like this at Ben-Gurion International Airport. In the arrivals section, smiling Israelis are streaming back from their vacations, suitcases filled from clothes, electronics and whatever they’ve picked up during shopping sprees in London and Berlin. There’s happy chatter about where they’re be flying next, maybe in a month or two during the High Holidays.

Over at departures, small numbers of bedraggled tourists from America and Europe are shuffling to check-in, shell-shocked by the cost of hotels and meals on their Israel vacation. To save money, they’re coming back without Dead Sea cosmetics for grandma or a tallis for the nephew about to be bar mitzva. Next summer, they’ll visit England or maybe just go to the beach for a week.

Record numbers of Israelis are vacationing abroad and shopping like mad. Since the Open Skies aviation reforms, airfares have plunged, the economy is strong and prices are lower in Europe and the U.S. than in Israel. The shekel has been strengthening, making prices overseas in shekel terms even lower.

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The departures scenario isn’t a reality just yet. A record 2.26 million tourists visited Israel in the first half of the year. But the strong shekel is making the cost of an Israel vacation steeper than ever.

Consider this:  If you’re thinking of enjoying next week at a top hotel you can book a deluxe double room at the King David Hotel in Jerusalem for six days next week for $4,833, or you can get a Superior Queen Room at the Savoy in London for $4,496.

Israel was no bargain even before the shekel’s latest climb. The World Economic Forum rated Israel 133rd of 136 countries for price competitiveness in 2017, when the shekel for the purpose of its calculations was 3.8406 to the dollar.

As of Wednesday, the official rate was 3.4990 shekels to the dollar, which represents a drop in the U.S. currency’s value of 7.5% since its most recent high on December 27. The euro has lost 9.8% to the shekel since its December 24 high. The pound sterling is at its lowest point since 1993: down 12% to 4.2583 shekels, it hasn’t been so weak since Boris Johnson was conjuring up outrageous EU stories from Brussels as a reporter for the Telegraph.

Israel is suffering an embarrassment of riches and the strong shekel is both our reward and our punishment. The economy has been growing for a prolonged period, we’re running big current account surpluses, foreign money is pouring into the high-tech sector and natural gas has reduced our energy imports. All of this adds up to demand for shekels.

The fundamentals are so good that the forex market is blithely ignoring the fact that the government is in paralysis because we’re having two elections in one year and that the second one may well produce a stalemate.

A general view of the King David Hotel in Jerusalem, June 19, 2018
\ AMMAR AWAD/ REUTERS

It doesn’t end there. Wednesday night the U.S. Federal Reserve lowered its key lending rate and signaled that more reductions were on the way. The European Central Bank is making noises of the same sort, and there’s talk of a currency war. The Bank of Israel, meanwhile, was acting as if it was on some other planet and has been signalling plans to raise rates.

A few hours before the Fed announcement on Wednesday, Governor Amir Yaron realized that just maybe he was sending the wrong message. The new one as of Wednesday afternoon is: “You know that interest rate hike we were talking about? Well, just don’t worry your little heads over it. It isn’t going to happen anytime soon.”

Yaron’s problem is that he doesn’t have much in his toolbag to counter the strong shekel. With its base rate at 0.25%, the Bank of Israel has no room to lower it without straying into negative-interest rate territory -- a risky and untested area. It could intervene in the forex market by buying dollars, but the history of central banks succeeding at that is pretty poor.

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Some populists like the strong shekel because it boosts the hard-pressed Israeli consumer’s spending power. But the general consensus is that it’s bad for the economy because Israel depends on exports (of which tourism is, technically speaking, one category). Businesses will struggle to stay price competitive in global markets.

The consensus view is probably out of date. That’s not to say Israel is bullet-proof, but a strong shekel is less of a problem than it was in the past.

Israel’s exports are heavily weighted to high-tech, which competes less on price and more on performance. Service exports account for a growing share of total exports and, despite the strong shekel, service exports rose 16% in the first five months of 2019 compared with the same period of the year before.

Israel’s goal shouldn’t be to encourage a weaker shekel, but to cut costs to stay globally competitive. With the exception of the high-tech elite, Israeli workers are relatively unskilled and less productive than most of their developed-country peers. Fixing that is a long-term undertaking, but Israel has the time. All it needs is the will.