Abolition of Currency Regulations and Other Sweeping Measures Are Introduced to Create a Free Econom
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Abolition of Currency Regulations and Other Sweeping Measures Are Introduced to Create a Free Econom

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Israel was plunged into a new economic era Friday when the government announced the abolition of currency regulations and other sweeping measures aimed at creating a free economy that it claimed would stimulate investments, foreign and domestic, re-vitalize exports, reduce imports and put the nation on the road to self-sufficiency and fiscal solvency.

The first move was to establish a free-floating currency. The Israel Pound which stood at IL 10.36 to $1 last week is expected to drop to IL 15 to $1 when the banks reopen tomorrow. The banks remained closed today to prepare for the major readjustment and allow the populace time to absorb the implications of the change.

Shops were open, however, and the predictable wave of panic buying ensued as thousands of consumers rushed to stock up on all manner of items before prices soar to record highs. Prices began an upward spiral last week when the government announced a sharp reduction in subsidies for basic food items and other commodities and services.


The immediate reaction of most Israelis to the new economic order was stunned confusion. The plan, adapted by Finance Minister Simcha Ehrlich from the theories of the conservative and controversial American economist, Dr. Milton Friedman, had been fermenting in absolute secrecy almost from the day the Likud government was installed in office last June. It was approved by the Cabinet at an unprecedented Friday meeting with one dissenting vote and one abstention.

It was immediately castigated by Labor Alignment and Histadrut leaders as a plan calculated to benefit the wealthy, especially the holders of large foreign currency accounts which up to now have been illegal, while imposing severe hard-ships on the mass of wage earners and the poor. The announcement touched off a wave of wildcat strikes and work stoppages in various parts of the country and calls on Histadrut to take swift counteraction. (See separate story.)

The new economic order was ardently defended by Ehrlich and by Premier Menachem Begin who went on the air last night to urge the public to remain calm and delivered a bitter polemic against the previous Labor-led governments which had maintained a planned and regulated economy since Israel was founded nearly 30 years ago.


Under the new economic policy, Israeli citizens will be allowed to hold unlimited amounts of foreign currency in Israeli banks. They will also be permitted to keep up to $3000 cash and another $3000 in personal accounts in foreign banks. The 15 percent surcharge that Israelis have been paying for foreign currency to travel abroad or to purchase imports will be abolished. But the costs of imports will soar, stimulating Israelis, at least in theory, to produce at home more of the goods they now buy abroad.

The value added tax (VAT) will be raised from 8 to 12 percent beginning Tuesday and the “creeping devaluation” of the Pound which had permitted depreciations of up to 2 percent every 30 days, has been abolished.

The immediate impact on the average Israeli family will be severe. Economists, estimated today that they will lose about IL 1000 per month in buying power. According to the economists, the average family spent about IL 7535 in September for necessities, including housing. In January, 1978 they will have to spend IL 8500 for the same goods and services.


A quarter of the family budget goes for food. The subsidy cuts announced on Friday raised the prices of basic foods by 15 percent and food items not subject to government price supports are expected to increase in price by a greater margin. A family that has spent IL 1870 for food per month will have to increase its budget by IL 280. Family expenditures for transportation and communications now stand at IL 806 per month. The 25 percent increase in gasoline prices, the 15 percent hike in public transportation and increased postal and telephone costs will take an additional IL 160 out of the monthly budget.

The present cost for domestic electricity and heating is about IL 230 per month and IL 40 for water. The projected increase for these items is IL 60. Clothing and shoes absorb IL 1170 at present. Increases of 15-20 percent in the cost of imported items will mean an additional IL 200 will have to be spent for personal apparel. Housing costs, now about IL 1600 per month, are expected to go up by IL 50 and the costs of education and entertainment will rise by IL 170 per month.

The only immediate compensation for the average family will be a 12 percent increase in the child allowance. A family with two children will receive a monthly allowance of IL 396 compared to the present IL 354. The economists pointed out that this amounts to an increase of IL 40 per month to cover a deficit of IL 1000.


Nevertheless, Ehrlich insisted that his plan would benefit all Israelis in the long run. After making his dramatic announcement Friday, the Finance Minister held a press conference here flanked by Minister of Commerce, Industry and Tourism Yigal Hurvitz, Deputy Finance Minister Yechezkel Flumin and Attorney General Aharon Barak. He hinted that Israel has been assured of sufficient foreign currency reserves to enable the government and the Bank of Israel to stabilize the exchange rate if that should prove necessary.

Ehrlich noted that the International Monetary Fund (IMF) has been urging Israel for some time to abolish its multiple exchange rate system and the system of export incentives. He said his sweeping currency reforms would stabilize the economy, at- tract investments from abroad and stimulate the manufacture of substitutes for exports. Ehrlich also said it would provide an incentive for those persons who hold hitherto illegal foreign currency accounts abroad to repatriate their money–which he estimated at $3 billion–and would remove the motive for others to violate the law.

Ehrlich said he was aware that the government has taken a grave risk and that a period of adjustment would be required, not free from uncertainties and difficulties. But he said the government weighed the risks against the benefits and concluded that the drastic measures were necessary to rehabilitate Israel’s lagging economy. Ehrlich predicted that overall living costs would increase by 10 percent by the end of the year. He said that families with children and social welfare cases would be compensated in the amount of 12 percent but rejected compensation to others in order to minimize inflation.

There was at least one strong dissenter in the Cabinet. Absorption Minister David Levi told the Jewish Telegraphic Agency today that he voted against the Ehrlich plan because it failed to provide adequate compensation for the poor. Minister of Religious Affairs Aharon Abu Hatzeira abstained.


The JTA also learned today of the extreme lengths Ehrlich went to maintain secrecy–a modus operandi that has become a familiar feature of the Likud government. He began drafting his economic new order three days after taking office last June. But until its unveiling Friday it was unknown to any other members of the Cabinet apart from Ehrlich himself, Begin and Commerce and Industry Minister Hurvitz.

Only top officials in the Finance Ministry were “in the picture” and Attorney General Barak, who was consulted in the early stages on the legal aspects of the reforms. Barak reportedly was responsible for modifying Ehrlich’s original intention to allow Israelis to hold foreign currency in amounts up to $50,000.

The JTA learned that all correspondence related to the economic plan was written by hand to avoid the use of secretaries and other lower echelon ministry staff. Barak’s opinion was handwritten and seen by no one but Ehrlich and his closest advisors. When U.S. Secretary of the Treasury W. Michael Blumenthal visited Israel last week, Ehrlich found it necessary to inform him of the impending economic revolution in Israel.

The Finance Minister reportedly considered relating the plan to Blumenthal in Yiddish so that members of the American entourage would not learn of it. Whether he did or not is not known but it is believed that U.S. Ambassador Samuel Lewis was not informed in advance.

Meanwhile, Israelis are waiting to see what happens when the banks reopen tomorrow and the Tel Aviv stock exchange reopens Tuesday. For the first time in 38 years, the exchange rate for the national currency will no longer be fixed administratively. Currency regulation was introduced by the outbreak of World War II and maintained by the successive governments of Israel over the last three decades. Tomorrow, however, the value of the Israel Pound will be determined by supply and demand.

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