Anxious About the Strong Shekel, Manufacturers Seek a Tax on Forex Speculation

The proposal comes amid concerns that the Bank of Israel isn’t serious about reversing the currency’s appreciation

Avi Waksman
Avi Waksman
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Shraga Brosh, Israel’s Manufacturers Association CEO, at a conference in Tel Aviv, August 17, 2018.
Shraga Brosh, Israel’s Manufacturers Association CEO, at a conference in Tel Aviv, August 17, 2018.Credit: Tomer Appelbaum
Avi Waksman
Avi Waksman

The strength of the shekel and the damage it’s threatening to do to Israel’s export-oriented economy have revived calls for an unusually stiff tax on currency speculation.

Israel’s Manufacturers Association has put the tax at the center of a package of proposals aimed at reversing a sharp gain in the shekel against the dollar and other major currencies.

While a strong economy – including an influx of foreign investment and a current account surplus – have contributed to the shekel’s gains, the association contends that currency speculation has also been a major factor. It argues that financial institutions, mostly abroad, are betting that the shekel will continue to appreciate.

The strong shekel led Amir Yaron, the governor of the Bank of Israel, to make an unusual declaration Wednesday: For an “extended period,” no interest rate increases are planned. Until then, the central bank had been signalling that a rate hike was in store.

Yaron’s statement, however, had little impact on the shekel-dollar rate. The Israeli currency weakened the following day but resumed its gains on Friday to a representative rate of 3.5090. On Sunday it further appreciated to 3.4906.

Despite Yaron’s statement, the Manufacturers Association and others are skeptical that the new governor, who took over in December, is as concerned about the harm a strong shekel poses to the economy as his predecessor. Instead of relying on the Bank of Israel, these critics are hoping that the next government will take action.

The heart of their proposal is a steep 5% tax on all shekel purchases by banks, investment houses and other financial institutions not done in cash.

That’s a much higher rate than James Tobin, a Nobel laureate and the father of the idea of a forex tax, ever suggested in the so-called Tobin tax intended to penalize short-term round-trip excursions into another currency. He suggested about 0.5%.

In practice, countries that have considered such a tax have mulled even lower rates and have limited it to the purchases of financial assets by foreign residents.

In any case, the Manufacturers Association’s plan would exempt from the tax foreign investment in nonfinancial assets; for instance, acquisitions of high-tech companies.

Israeli manufacturers have a lot of complaints about high taxes, a lack of skilled workers and excessive regulation, but the shekel is by far the most urgent issue because it has an immediate impact.

“The decline in the exchange rate since the start of the year has not just reduced profits to nil and even less than nil,” said Shraga Brosh, the association’s CEO.

“This not only hurts exporters but businesses selling in the local market because imports are significantly cheaper. Never have so many manufacturers gotten in touch with me as they have in recent weeks to say ‘enough, we can’t go on like this.’”

Not everyone shares Brosh’s alarm over the strong shekel. Uriel Lynn, president of the Federation of Israeli Chambers of Commerce, which represents importers and retailers, said businesses and consumers were benefiting.

“You have to look at the situation in a balanced way,” he said. “There are advantages to a strong shekel. It effectively raises salaries for all workers, which can moderate demands in the public sector [for wage hikes]. It lowers the cost of imported inputs for exporters – and at least half of Israeli exports have imported inputs.”

While he said policy makers had to protect exports, there was no reason why the Bank of Israel had to intervene in the currency market as it has done in the past to try to reverse the shekel’s gain.

In fact, when the central bank embarked on an intervention policy in 2008, when a financial crisis was gripping the world economy, the bank promised that measures would not last long and that it was up to businesses to cut costs and improve competitiveness rather than rely on the Bank of Israel to buy dollars.

Intervention lasted years, during which the Bank of Israel amassed reserves topping $120 billion. But there is little evidence that Israeli manufacturers took the advice. Growth in Israeli merchandise exports has been slower than growth in world trade over the last several years. Service exports, on the other hand, have increased sharply and are now almost equal to merchandise exports.

Apart from the tax on forex speculation, the Manufacturers Association wants the government to set up a “forex absorption fund” that would require investment funds that do their business wholly in dollars, notably funds in high-tech, to buy foreign currency.

Other ideas are to allow exporters that collect revenues in foreign currency to pay their Israeli taxes in it as well, so they need to buy fewer shekels. The association proposes a lower capital gains tax on foreign investment to encourage more investors to put their money abroad.

The forex tax isn’t likely to happen for now. The association sought one in 2010 only to fail to win support from the government.

On the other hand, a year later Israel took other measures, among them ending an exemption on capital gains tax on foreign investors holding short-term government bonds and Bank of Israel short-term notes (Makams) – favorite places for speculators to park the shekels they buy.

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