National Economic Council head Prof. Avi Simhon is calling on the Bank of Israel to immediately halt its purchases of dollars aimed at helping Israeli exports. At yesterday's cabinet meeting, Simhon surprised those present by severely attacking the Bank of Israel's intervention in the foreign currency market, which he said was damaging the economy and Israeli consumers. Simhon revealed to those attending that according to a model he had prepared, halting foreign currency purchases would lead to appreciation of the shekel against foreign currencies and 20,000 layoffs in export industries, but that these employees would quickly be hired in trade and service sectors whose economic activity makes a larger contribution to state tax revenues. Simhon asserted that the entire process would eventually enable the state to cut taxes.
According to those present at the meeting, Prime Minister Benjamin Netanyahu, who left the meeting while Simhon was speaking, returned towards the end, and after hearing Simhon talk about lowering taxes, announced that he supported the plan.
Simhon attacked the Bank of Israel's current policy, which had brought Israel's foreign currency reserves to a record level of over $90 billion. He argued that this amount was excessive, given the size of the Israeli economy, contributed almost nothing to the economy, and incurred costs and risks with practically no return. He added that the economy enjoyed a large surplus of exports over imports, amounting to 3% of GDP in recent years. According to Simhon, a sharp appreciation in the shekel will help increase the Israeli consumer's purchasing power, and be reflected in a further rise in private consumption, which currently constitutes the economy's growth engine.
Deputy Governor of the Bank of Israel Dr. Nadine Baudot-Trajtenberg, who represented the Bank of Israel at the cabinet meeting, did not respond to Simhon's criticism. In answer to an approach from "Globes", however, the Bank of Israel gave a long and detailed response to the remarks. "The argument that depreciation is bad for growth is an unusual one," the Bank of Israel wrote, adding that the economic idea represented by Simhon "ignores above all the fact that as a small and open economy, the Israeli economy cannot exploit its relative advantages on the basis of local industries that cannot produce and develop with the benefit of economies of scale."
The Bank of Israel further wrote, "The idea that policy should be conducted in such a way that growth leads to maximization of tax revenues in order to cut the tax rate, rather than according to a growth strategy that will exploit the economy's relative advantages, is not recognized in the literature or among policymakers. Even if the proposal for action to increase tax revenues in this manner is accepted, generating shekel appreciation leading to the above-mentioned change will increase demand for imports, thereby damaging not only the export sectors, but also import substitutes and tourism. It is therefore by no means clear that the employees discharged by the export sectors under the proposal (who enjoy high salaries, incidentally, and therefore pay high taxes) will really all be hired in local industries (in which income tax payments are lower).
"The assertion that foreign currency reserves incur costs for the economy does not take into account the great benefit they give the economy in stability and resilience in the event of a crisis, and is certainly illogical at a time when the return on the reserves is higher than the Bank of Israel interest rate."
Published by Globes [online], Israel business news - www.globes-online.com - on June 1, 2016
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