Exporters Urging Gov't Reinstate Shekel-dollar Rate Boundaries

A group of exporters, bankers and high-tech entrepreneurs is seeking to persuade the government to reinstate the 'diagonal band' policy.

A group of exporters, bankers and high-tech entrepreneurs is seeking to persuade the government to reinstate the "diagonal band" policy, which aimed to keep the shekel-dollar exchange rate within certain boundaries.

Yesterday, the group convened at the offices of the Manufacturers Association to coordinate positions ahead of a meeting between Finance Ministry officials, employers and the Histadrut labor federation on the foreign-currency market. The meeting is supposed to take place when Finance Minister Yuval Steinitz returns from his visit to the United States.

A long list of top business figures attended yesterday's meeting, headed by Manufacturers Association president Shraga Brosh. Also present were the president of Motorola Israel, Elisha Yanay; serial technology entrepreneur Yehuda Zisapel; bankers Zadik Bino and Eli Yones; economists Victor Medina, Ephraim Zedaka and Michael Sarel; forex experts Adam Reuter and Yakov Harpaz; and industrialist Gad Propper.

Most agreed that manufacturers should press the treasury to meet their demand by presenting a grim picture of soaring unemployment should the treasury balk at controlling the shekel-dollar rate. The Bank of Israel and treasury should do everything in their power to fight speculation in the shekel, the businessmen agreed.

"The high-tech industry demands that the dollar-shekel rate be held steady," stated Yanay, adding that the best exchange rate would be NIS 4.20.

Stop the rain

However, the exporters and others may be wailing into a deaf ear. Omer Moav, economist and close adviser to Prime Minister Benjamin Netanyahu, thinks restoring the mobility band is a ludicrous idea, and there is no chance that either the treasury or the Bank of Israel will agree.

The exporters would love to stop the shekel from appreciating. They make their revenues in dollars, but since (by definition) they manufacture in Israel, their costs are in shekels. The higher the shekel climbs, the fewer shekels they get for the dollars they make abroad. But their proposal to force the shekel-dollar exchange rate to stay within a narrow band just shows they don't understand macroeconomics, argued Moav. "Categorically, the idea won't work," he said, because it is entirely devoid of economic logic.

Their goal is to set a limit on how much the shekel can strengthen against the dollar. That would be achieved, according to their vision, by the Bank of Israel intervening in the forex market. But setting a specific exchange rate would require subordinating monetary policy to the exchange rate, at the expense of controlling inflation, Moav explained.

"That is the most basic rule of monetary policy," he said. "You can't achieve two goals at the same time - protect the shekel exchange rate and prices, too. The price of a fixed exchange rate is inflation."

In short, the exporters are demanding a fundamental change in the Bank of Israel's role in order to achieve an impossible goal.

"What happened in Israel is the curse of success," Moav said. "Export volumes grew a lot, passing the volume of imports. The result is that more dollars came into Israel than left. That created a surplus of foreign currency."

The result was a no-brainer: The price of foreign currency dropped. That is how economics works, Moav observed.

"It's just like the market for tomatoes," he said. "When more tomatoes are grown, because farmers managed to increase their output, the price of tomatoes falls. Exporters think the shekel's exchange rate determines the scope of Israel's imports and exports. But the opposite is the case. The scope of imports and exports is what sets the shekel's rate."

As long as Israeli exports do well, and exceed the volume of imports, the shekel will continue to appreciate, Moav explained. There is nothing anybody can do about it.

"It's like talking about the weather," he said. "When it rains, everybody gets wet. But one doesn't ask the government to stop the clouds."