Lower Debt Today So We Can Borrow Tomorrow, Governor Explains

Fischer: Recessions is inevitable: economies are cyclical

Explaining the obvious, but possibly not to all, Bank of Israel governor Stanley Fischer clarified that recession will recur in Israel. It has to, one day, because economies have cycles.

In the long term, Fischer explained, a recession is therefore likely. But what that means is that Israel should be prepared, and that sources of financing outside Israel would be key to pulling out of it.  And that means that Israel has to groom its attractions while times are good, to maintain its allure when the downturn comes.

Delivering the central bank's report on 2006 to the Knesset Finance Committee, Fischer said, "It would be very bad if we should find ourselves like in 2002-2003 without external financing. It will be impossible to jump-start the economy because markets abroad will not be prepared to finance our expenses."

Fischer deems it essential "to roll back the burden of debt on GDP to insulate the economy from disruptions, to make space for other important needs of the economy, and to allow the government to implement an anti-cyclical policy in time of need."

The central bank commented after the meeting that the governor was not making a forecast but rather describing the global situation. It noted that all business cycles endure recessions after several years of growth.

The central bank governor advised exploiting the economic good times to begin reducing debt steadily to the levels more acceptable worldwide, around 60 percent of GDP.

Fischer stressed "2006 was one of the Israeli economy's most successful years in recent times." He pointed to rapid growth, lower unemployment and an impressive surplus in the balance of payments. Likewise stable prices and finances characterized the economy. He noted the global growth provided a tail wind for the local economy, "and all this despite a year in which there was a war in Lebanon."

Despite the positive news, Fischer reminded the committee of three areas still in need of work. "The level of unemployment is still relatively high. The weight of public debt on GDP is still heavy, and the level of poverty is still high." He called for macroeconomic policy to focus on its main target of retaining rapid growth.

Sustaining Israel's economic success this year depends on three factors, says the governor: "Developments in the global economy over which we have no influence, the geopolitical situation over which we have partial influence, and preserving the economic strategy the government has used in recent years, over which we have full control."

He added every time he talks with investors or analysts from abroad, they ask him how the economy can be so good despite all the political problems. "My answer is the global economy is growing at an impressive rate. The government succeeds in continuing to preserve budgetary discipline, and the Bank of Israel keeps its finger on the pulse and tries to meet the inflationary goal while contributing to economic growth and supporting financial stability."

He dodged questions about whether or not Israel will be joining the OECD next week, saying only that the organization in in the process of deciding about whether or not to add new members, and whom. He did confirm that the BoI is pushing to add Israel to the OECD. (So is everybody else in government.)

Fischer reiterated his position that the central bank will not buy dollars to shore up the shekel. He declined to comment whether it might hike interest soon, but smiled that he probably would do so before the end of his term in three years. Is he hinting that if offered Paul Wolfowitz's job as leader of the World Bank, he'd turn it down?