The Bank of Israel has reported a profit of NIS 17.1 billion on exchange rate differentials, mostly on the revaluation of its foreign exchange reserves. However, only NIS 500 million will be included in the statement of operations, as NIS 16.6 billion of the profit was unrealized exchange rate differential, which was allocated to the revaluation accounts on the balance sheet, in accordance with generally accepted accounting rules for central banks, and was not recorded in the statement of operations.
For this reason, the Bank of Israel posted a loss of NIS 3.4 billion, compared with a loss of NIS 17.9 billion in 2010.
Under the old Bank of Israel Law, the Bank of Israel's profits were transferred to the Ministry of Finance to help cover the deficit. Under the new Bank of Israel Law (5770-2010), the Bank of Israel only transfers the profit if its shareholders' equity is positive. The Bank of Israel's current shareholders' equity is minus NIS 37 billion.
Therefore, were the Bank of Israel to record its paper profit from the exchange rate differentials on its foreign currency portfolio, it would have reported a profit of NIS 14 billion.
Most of the loss in 2011 was due to a higher interest expense, including interest expenditures to commercial banks and the public, to NIS 6.2 billion in 2011 from NIS 3.5 billion in 2010.
The Bank of Israel's salaries expense rose 3% to NIS 275 million in 2011, and spending on pensions and severance pay expenses almost doubled to NIS 341 million from NIS 182 million. Most of the increase was due to revised actuarial calculations for pension and severance pay liabilities, which increased the present value of future pension payments.
The Bank of Israel's balance sheet total rose 12.5% to NIS 308 billion at the end of 2011 from NIS 274 billion a year earlier. On the assets side, the increase derived primarily from the increase in the Bank's foreign currency assets (the purchase of $4 billion), and on the liabilities and equity side, it was mostly the result of increases in the revaluation accounts and in net monetary instruments - makam (short term bills issued by the Bank of Israel) and term deposits.
The Bank of Israel has invested most of its foreign currency reserves in the US, UK, and Germany. 60% of the reserves are invested in government bonds. A third of the reserves are in denominated dollars, a third in euros, and 9% are invested in emerging markets. The Bank of Israel has closed its position in crisis-hit European countries, and its foreign currencies were therefore unaffected. It also liquidated its bank deposits.
Governor of the Bank of Israel Prof. Stanley Fischer has set the desirable level of Israel's foreign currency reserves at $65-90 billion.
Israel's foreign currency increased by $4 billion during 2011 to $74.9 billion by the end of the year, after increasing by $10 billion in 2010. The growth was due to $4.6 billion in purchases of foreign currency. In shekel terms, the foreign currency reserves increased by NSI 34 billion to NIS 287 billion at the end of 2011 from NIS 252 billion a year earlier.
Published by Globes [online], Israel business news - www.globes-online.com - on April 1, 2012
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