Stop the Dollar, We Want to Get Off

The freeze on the dollar by big companies came about only after their attempts failed to pressure the Bank of Israel to intervene in foreign exchange markets and rein in the dollar.

April 2002 marked a major event in Israeli economic history. For the first time, many businesses decided to take the law into their own hands and ignore the Bank of Israel's official representative exchange rate for the dollar. The representative rate is set by interbank trading levels, and the companies decided once and for all to set dollar rates as they saw fit.

Of course, this happened when the dollar was soaring toward NIS 5 per greenback, and businesses found themselves with dollar-denominated commitments that were climbing daily, in the midst of a serious and drawn-out economic crisis in Israel.

So what did those companies do? They sent out unilateral declarations to their suppliers, and in very polite terms announced that they would meet all their dollar-based commitments, but with one small caveat. From now on they would determine the dollar exchange rate themselves.

And that is how, as the dollar cruised at levels around NIS 4.90, companies such as Yes and Pelephone informed suppliers that they would pay their debts at a dollar rate of NIS 4.25. The Channel 2 and Channel 10 franchisees were more generous; for them the dollar was worth NIS 4.30. A number of construction companies were really nice about it: They were willing to fork over NIS 4.4 per dollar at the same time the central bank said it was worth NIS 4.9.

Harried suppliers recognized an offer they could not refuse. In those tough times not a single supplier was willing to lose out on a major large customer, even if it meant taking a 15% hit on revenues. The freeze on the dollar by big companies came about only after their attempts failed to pressure the Bank of Israel to intervene in foreign exchange markets and rein in the dollar.

When the government does not intervene, the market is free to have its say, and creates solutions - such as those taken by the big companies. The central bank's trustworthiness was saved, as was the free market.

Since those days, when the dollar was sky high and looking like it would never fall, it has dropped 27% against the shekel. Yesterday it traded at NIS 3.64, which was actually up a bit from earlier in the week.

Many exporters would have loved to have the market power of those companies that froze the dollar where they wanted six years ago, but they cannot.

If an Israeli exporter announces to an overseas customer that he is raising prices, the customer is very likely to get by without his services and find other, cheaper suppliers.

Moreover, the current erosion of the dollar against the shekel is not at all an Israeli phenomenon, but a global one.

That is why the exporters are trying for the easy solution and calling on the cabinet and the Bank of Israel to intervene.

They want the state to fork over $2 billion in emergency aid, and are pressuring Stanley Fischer, the governor of the central bank, to lower Israeli interest rates. Exporters are praying that lower interest rates here, which would narrow the gap in rates between Israel and the U.S., would help slow the dollar's drop. They are even threatening that if nothing is done, they will be forced to fire workers.

The easier step is to lower interest rates, but this is also likely to raise fears of increased local prices, and once again the government may miss its annual inflation target.

The more problematic solution, also from an educational standpoint, is compensating exporters for their losses from the dollar's slide. These are exactly the same exporters who very much enjoyed the sharp depreciation of the shekel against the dollar just six years ago. Back then, they certainly did not offer us a share in their enlarged profits from the rising exchange rate, but put it all straight into their own pockets.

The exporters' cries of pain are real and reflect an honest fear for the viability of their businesses, and for damage to the Israeli economy. But the financial system provides protection against losses resulting from exchange-rate fluctuations. There is no reason that only half of all exporters insure themselves against the dollar's weakness.

It is hard to accept a situation where everything is going just fine, all the profits go to the exporters, and the state does not dare intervene in their business. But when the trouble starts, government intervention is suddenly critical.

It is good the cabinet did not intervene then, and good that it is not intervening now - at least for the time being.

Though the erosion of the dollar has stung exports, it has contributed greatly in other spheres. We should let the market fend for itself.