Opinion

Industrialists Should Focus on Building, Not Fearmongering

Shraga Brosh
Ofer Vaknin

Israelis are actually quite satisfied. The dropping value of the dollar and euro makes air tickets and overseas vacations, as well as cars and other imported items, cheaper. It also helps inflation remain very low, which increases the real value of wages and everyone’s standard of living.

But industrialists are angry. They are quite dissatisfied. They say industry is suffering, that exports are eroding and that soon they’ll have to shut down production lines and fire workers, leading to a rise in unemployment. Shraga Brosh, the president of the Manufacturers’ Association, says that the Governor of the Bank of Israel cannot remain idle, and that he has to intervene and buy dollars so as to raise the exchange rate. Brosh also wants the Finance Minister to give industrialists incentives and subsidies in order to increase their profitability.

There’s nothing new here. Every time the exchange rate drops significantly, industrialists abandon their lathes and start “working” on the government. They always warn of rising unemployment, which never actually materializes. However, this time they face a dual problem. The present finance minister, Moshe Kahlon, will apparently not remain in his job, so there’s no one to talk to about subsidies and incentives. In any case, the current government is a transitional one. The Bank of Israel has a new governor, Prof. Amir Yaron, who is not keen on intervening in the foreign currency market, unlike previous governors. Yaron believes the markets should determine the exchange rate.

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Bank of Israel Governor Amir Yaron presents annual report on Israel's economy, Jerusalem, March 31, 2019.
Emil Salman

Attempts by the Bank of Israel to intervene in order to prevent a drop in the exchange rates of the euro and dollar began in 2008, during the tenure of Governor Stanley Fischer. The global crisis brought this rate to a low of 3.20 shekels to the U.S. dollar, so that a temporary and limited intervention was justified. But when the global turmoil subsided, this intervention should have stopped. Yet the captains of industry started putting pressure on Fischer to continue buying dollars. Brosh even threatened to get legislation passed in the Knesset that would deprive the governor of the power to set interest rates.

Fischer yielded, turning a temporary policy into a permanent one. At first, he said that this policy was merely meant to increase reserves from 28 to 38 billion dollars, but in fact he continued to buy billions of dollars each month. His successor Karnit Flug, continued this policy, leading to the current astronomical and illogical amount of 120 billion dollars in the state’s coffers.

Nevertheless, despite this massive purchasing of dollars, the shekel continued to strengthen by 20 percent over the last decade, which proves that no one can overcome market forces, and that any attempt to influence the exchange rate over the long term is doomed to fail dismally.

This policy of intervening in exchange rates also inflicts great harm, causing the Bank of Israel to lose interest revenues and capital. This is why Yaron is right in wanting to stop such interference in the markets. Moreover, as soon as speculators realize the Bank is allowing exchanges rates to float, they’ll stop gambling against the shekel, thereby halting its rising value.

One should also understand that anyone hoarding reserves of 120 billion dollars harms our standard of living, by preventing us from buying imported goods on the cheap. One should therefore do the exact opposite: reduce tariffs on imported foods and agricultural products. This will increase the demand for foreign currency, leading to a new equilibrium in the market, in which imports are higher and exports reduced. The government should also embrace a host of reforms that will reduce costs for the business sector, which is the best kind of actual devaluation.

In any case, the dollar value will continue to drop in the coming years due to the discovery of natural gas. No intervention by the Bank of Israel, nor a tax on speculators, as Brosh proposes, will help. Industrialists should simply go back to their lathes, instead of devoting their attention to the government.