Bank of Israel to continue buying forex in 2021 to stem shekel rise, chief says

Rapid appreciation of Israeli currency may make it harder for economy to recover from crisis, central bank governor warns

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Bank of Israel Governor Amir Yaron, speaking at the Eli Hurvitz Conference on Economy and Society organized by the Israel Democracy Institute, December 17, 2019 (Michal Fattal)
Bank of Israel Governor Amir Yaron, speaking at the Eli Hurvitz Conference on Economy and Society organized by the Israel Democracy Institute, December 17, 2019 (Michal Fattal)

The Bank of Israel plans to continue buying foreign currency in 2021 to curb the strength of the shekel, its governor Amir Yaron said at a conference on Monday, as the appreciation of the Israeli currency hurts exports and could hinder the economy’s recovery from the blow dealt it by the coronavirus pandemic. The shekel is currently hovering near a 12-year low against the dollar.

“The Bank of Israel intends to continue the policy in the foreign exchange market in 2021 as well and to purchase foreign currency necessary to prevent the appreciation from continuing,” Yaron said at the Eli Hurvitz Conference on Economics and Society for 2020, organized by the Israel Democracy Institute.

A rapid appreciation of the shekel may hurt exports, Yaron said. This makes it “difficult for the economy to recover from the crisis. This concern is intensifying in light of the state of world trade and the increase in the percentage of companies reporting shortages of export orders.”

The Bank of Israel has bought, from the start of the year until November, some $17 billion worth of foreign currency, he said, “curbing the rate of appreciation.” Even so, the shekel’s representative rate was NIS 3.254 to the dollar on December 11, close to its low of NIS 3.23 to the dollar set in January 2008.

Dollars and shekels (photo credit: Olivier Fitoussi/Flash90)
Dollars and shekels (photo credit: Olivier Fitoussi/Flash90)

The shekel’s strength is mainly due to the fact that the dollar has declined against currencies globally, but it is also due to the greater surplus in Israel’s current account this year, due to a contraction in imports and a fall in energy prices, Yaron said, which add to years of current account surpluses and capital inflows, as investors have poured money into the Israeli economy and foreign investors have increased their holdings in Israeli bonds.

Yaron also called for the passing of the 2021 budget “as soon as possible.”

“The early approval of the budget for 2021 of great importance, this is the economic work plan of the government,” he said.

Israel has not passed the 2020 or the 2021 budgets due to a political stalemate between Prime Minister Benjamin Netanyahu and his coalition partner Benny Gantz. Accordingly, government ministries are operating under a so-called “continuing budget” – based on 2019’s budget, which was approved during 2018.

Defense Minister Benny Gantz, left, and Prime Minister Benjamin Netanyahu seen during a vote at the Knesset, in Jerusalem on August 24, 2020. (Oren Ben Hakoon/Flash90)

This continuing budget is in practice “5.5% lower in real terms” than a budget that would have been passed at the right time, Yaron said.

“This may lead to fiscal restraint for unwanted reasons and at an inappropriate time, and this has implications for the activities of government ministries as well as a variety of bodies and associations. An approved budget allows them to operate with a budget-based work plan that addresses the needs of the population.”

“In addition, since the 2019 budget was approved, the economy has undergone many upheavals, and the budget needs to be adjusted to changing needs, and a reassignment of part of the budget by shifting budgetary resources between different government goals and programs is required.”

Warning of long-lasting unemployment

Yaron warned that unemployment could become structural, i.e., long-lasting.

“The unemployment rates are very high,” he said. They could reach 14% this year in a worst-case scenario, projections have indicated, and even if the pandemic is curbed soon the rate would stand at 8%.

Reasons for long-lasting unemployment could stem from businesses that shut down during the crisis failing to reopen, or alternatively employers finding ways to streamline manpower. It is also possible that the uncertainty in the economy temporarily inhibits employers from recruit workers during this period, he said.

“Another sign of a concern” regarding the unemployment becoming structural is the fact that some 200,000 people have been unemployed for four months, and it may be “particularly difficult for these unemployed to return to the employment cycle,” Yaron said. The longer workers stay jobless, the more their abilities erode and the more difficult it becomes for them to find work, he said.

Newly appointed Bank of Israel Governor Karnit Flug gives a statement to the media outside the Bank of Israel building in Jerusalem October 20, 2013. (Yonatan Sindel/Flash90)

The Israel Democracy Institute’s Eli Hurvitz’s Conference on Economics and Society opened on Monday in Jerusalem with a session on “From Recession to Growth: Macroeconomic Policy,” which focused on ways to accelerate the Israeli economy. The panel was overseen by conference co-chairs Eugene Kandel, CEO of Start-Up Nation Central, and Karnit Flug, vice president for Research and the William Davidson senior fellow for Economic Policy at IDI and the former Governor of the Bank of Israel.

At the conference, Finance Minister Israel Katz said that should the 2021 budget not pass for political reasons, then the government would work with the continuous budget of 2019, in parallel with a coronavirus budget to address the needs stemming from the pandemic.

Yarom Ariav, however, a former director general at the Finance Ministry, said he was alarmed by the fact that there would be two budgets working in parallel — with the coronavirus budget not subject to curbs in a year that will likely see elections. This could lead to a “bribing of voters,” he warned, in the shape of populist spending of that budget.

Meanwhile, Ron Tomer, president of the New Israel Manufacturers Association and chairman of the Israel Chamber of Independent Organizations and Businesses, warned that in the current environment of a strong shekel and low profitability industries may decide to move their operations abroad, at a time when the pandemic has emphasized the importance of having local manufacturing operations.

“I visited the UAE last week and saw their desire for us to export the industry and not our produce,” he said. “The business environment there is much more advanced than in Israel and much less bureaucratic.”

The government should immediately implement programs to boost employment and worker training programs, lower regulation and bureaucracy, lower taxes and the cost of labor, he said. He also called on the government to implement a plan to encourage consumers to buy “Made in Israel” as opposed to imported goods.

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