As Dollar Slides, Ministers Consider Taxing Speculators

The plan that would cancel the capital gains tax exemption for foreign investors in short-term government bonds in order to make the shekel less attractive to speculators.

As the dollar continues losing ground against the shekel, the Ministerial Committee for Legislation is scheduled to discuss a plan to make the local currency less attractive to speculators. The ministers are scheduled to discuss a plan that would cancel the capital gains tax exemption for foreign investors in short-term government bonds.

The Finance Ministry believes that speculators are responsible for the dollar's fall. A strong shekel is bad for the country's exporters, who have to either raise their prices or accept lower revenue in shekel terms.

The dollar's downward fall began a week and a half ago, when Bank of Israel Governor Stanley Fischer shocked the market with his announcement that interest rates would be increasing 0.5% for April, to 3%. This makes Israel's interest rate significantly higher than many in the West.

The dollar continued its descent yesterday, closing down 0.3% for the day at NIS 3.451. It has fallen a total of 3% in the week and a half since Fischer's announcement. The euro closed down 0.5% yesterday, at NIS 4.925.

The ministers are scheduled to discuss a proposal cancelling the capital gains tax exemption from sales of short-term government bonds. The tax is generally between 15% and 20%. Currently, speculators can make short-term investments in the shekel by buying these short-term bonds. They do so in order to take advantage of the interest-rate gaps between the shekel and other major currencies, namely the dollar.

These investments are all the more attractive because foreign residents are exempt from paying capital gains tax on securities sold on Israel's exchange.

In the bill's preamble, the Finance Ministry writes that Israel has been seeing a large influx of foreign money, much of which is intended to book short-term gains based on interest rate gaps. The high demand for the shekel is causing Israel's currency to appreciate, which could damage the country's long-term competitiveness.

Due to its suspicions that foreign investors are taking advantage of the tax exemption to book short-term profits through government bonds, the treasury suggests canceling the exemption on bonds issued within a year of when they mature.

In the first two months of the year, foreign investors poured another $16.7 billion into short-term government bonds, and accounted for 36% of the bond market, up from 28% at the end of 2010.

Meanwhile, the Bank of Israel's foreign currency reserves hit a new high at the end of March, with a valuation of $74.5 billion. This is an increase of $737 million since the end of February.

The central bank has been sopping up foreign currency in an effort to push down the exchange rate. When it buys foreign currency, it floods the market with shekels, thus increasing supply.