BoI to continue foreign currency purchases

Karnit Flug
Karnit Flug

Bank of Israel exec Andrew Abir: Other central banks have stepped up their expansionary measures to weaken their currencies.

The Bank of Israel's policy of intervening in foreign currency trading is likely to continue as long as other important central banks persist in and extend their expansionist policies, according to senior Bank of Israel executives. Bank of Israel Marketing Operations director Andrew Abir told "Globes," "The Bank of Israel does not operate in a vacuum. The monetary policy of our main trading partners is very expansionist, and some of them, with an emphasis on the euro bloc, have recently stepped up their expansionary measures, including a negative interest rate and bond purchases, in order to weaken their currencies."

Abir's remarks stand out against a background of recent measures by the European Central Bank (ECB), which announced in December that it was extending its bond-buying program for another year until the end of 2018. The euro bloc is still the leading destination for Israeli exports of goods, accounting for 29% of all Israeli exports of goods (as of 2015). As a destination for Israeli exports of services, Europe is in second place with 34% of total service exports (compared with 37% for the US). Israel is not alone in finding the ECB's measures alarming; the new administration in the US of Donald Trump, who spoke this week in favor of dollar devaluation, shares the sentiment. A senior Trump administration official this week accused Germany of benefiting from an unfair trade advantage because the euro exchange rate was artificially low.

In contrast, there are many economists in Israel who object to the continuation of the Bank of Israel's policy of buying foreign currency, which has created a mountainous reserve that has reached an all-time record of $100 billion. In an interview published yesterday by the Bloomberg news agency, Barry Topf, Abir's predecessor at the Bank of Israel, said, "It is necessary to make it clear that monetary policy is close to reaching the point of diminishing returns. It is time for the government to take a more active approach."

The Bank of Israel said in response, "When it was decided to purchase foreign currency, few expected the exceptional situation that caused it would continue into 2017."

Considered the architect of the foreign currency purchasing policy in 2009, together with then-Governor of the Bank of Israel Stanley Fischer, Topf told Bloomberg, "If the Bank of Israel wants to continue using nonconventional tools to help Israeli exporters, alternatives to foreign currency purchases should be considered, including buying the bonds of exporting companies and giving credit on easy term, so that the cost of supporting exporters at the expense of importers will be more transparent."

Many economists argue that the Bank of Israel's foreign currency purchases are damaging the economy by distorting prices. They assert that this policy makes imports of goods to Israel unnecessarily expensive, and subsidizes industry, thereby causing entrepreneurs to invest in industrial concerns with no economic justification for their existence.

"We already learned in the 1980s about the damage caused by subsidies. Purchasing foreign currency is a temporary measure designed to buy time for industrialists in order to enable them to adapt themselves to the new situation," senior economists told "Globes." "Nine years is more than enough. Furthermore, to this day the Bank of Israel has not measured the cost of its foreign currency purchases against their benefit."

National Economic Council chairman Dr. Avi Simhon called a year ago for an end to intervention in the forex markets. As reported in "Globes," Simhon told the cabinet that even if halting the intervention comes at the painful cost of 20,000 layoffs in conventional industrial concerns, he believed that the benefit to the economy would exceed the damage, and the laid off workers would eventually find alternative jobs in sectors not dependent on the Bank of Israel's support for the exchange rate.

Published by Globes [online], Israel Business News - www.globes-online.com - on February 2, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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