Bank of Israel Governor Stanley Fischer capped his final appearance at the Knesset Finance Committee on Monday with a call for Israel to become more "proactive" in trying to reach a peace agreement with the Palestinians.
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Fischer, who is due to step down at the end of the month, said that at a minimum of 5 percent of gross domestic product, defense spending was significantly burdening the Israeli economy.
"We must continue to provide ourselves adequate defense, but allocating more money to defense isn't the only solution. We must try to find other solutions and work to reach a peace agreement with our neighbors, including the Palestinians," Fischer said in a summary of remarks released by the Bank of Israel.
"The statement that 'there is no partner for peace' is a self-fulfilling one. Two are needed for an agreement, but if we don't want to seek out that partner, the current situation won’t change."
Fischer said that during peace negotiations, Israel might need to increase its military preparedness. "But in the long run, we would benefit from [peace], and there would be a positive impact in various areas," he said. "If so, we must act in a more proactive way to end a conflict that has lasted far too long."
Fischer has overseen a period of prosperity and price stability since arriving at the Bank of Israel in 2005, even after the developed world suffered its worst economic downturn in the post-World War II era. He cited figures showing that Israeli GDP grew at an average annual rate of 4.3% from 2005 to 2012, with per-capita GDP expanding 2.5%.
The unemployment rate is at its lowest in decades and among the lowest in the developed world. Inflation is comfortably inside the government's target of 1% to 3% annually, as are inflation forecasts by economists and those imputed from bond yields, Fischer noted.
"The public's long-term inflation expectations are close to the midpoint of the target, which means the public believes that the economy can continue growing without any fear of an outbreak of price rises," he said. "That's a very significant achievement that three years ago I wouldn't have believed possible."
Fischer avoided specific policy recommendations but said he opposes tougher rules on companies that hold both financial and nonfinancial businesses. He urged lawmakers not to tamper with the business concentration committee's recommendation that firms with turnover below NIS 6 billion be permitted to control financial institutions such as banks and insurers.
As other key challenges, Fischer cited bringing Israeli Arabs and ultra-Orthodox Jews into the workforce to reduce high poverty rates. The other is improving educational achievements; Fischer cited Israeli students' poor performance in international exams.
He added that Israel had to do more to make the economy more business friendly, pointing to the country's sinking ranking in the World Bank's Doing Business survey. Policymakers must also do more to increase labor productivity, which is 20% below the average for countries in the Organization for Economic Cooperation and Development, he said.
Over the last few weeks, Fischer has focused on weakening the shekel by lowering interest rates and intervening in foreign-currency trading. On Monday, however, he said little about his exchange-rate policy except that it was the inevitable outcome of Israel's strong economy.
"People want to live in a strong economy with a weak exchange rate, but such a situation rarely occurs," he said.
In separate remarks to the Knesset Science and Technology Committee on Monday, Fischer said the central bank estimated that revenues from Israel's offshore natural gas reserves would reach $126.2 billion over 25 years.
Of that, $72 billion would go into a sovereign wealth fund designed to prevent the shekel from appreciating and undermining other export industries. The rest would go to the annual state budget.
Avi Bar-Eli contributed to this report.