Israeli Treasury Takes Measures to Cut Inflation, Reform Economy

Israel’s Treasury has announced a number of new economic measures aimed at reducing inflation and “Westernizing” the economy.

The measures indicated that, at least in the short run, the government has given greater priority to cutting inflation than to fighting unemployment.

Jacob Frenkel, governor of the central Bank of Israel, declared that the new proposals would turn the Israeli economy into a “Western” economy, with a lower rate of inflation and one clear cut exchange rate for the shekel.

The main measures include a de-facto devaluation of the shekel by roughly 2 percent, abolishing certain export incentives, reducing import taxes by 2 percent and freezing plans for tax reform.

The proposals were announced here Saturday night by Frenkel and Finance Minister Avraham Shohat.

Although some of the measures appeared contradictory, economic experts explained that one should treat the new policies as a package whose overall effect would be to push the economy in the right direction.

Thus, for example, the immediate 2 percent devaluation of the shekel was expected to be followed during the remainder of the year by a further, gradual devaluation of the shekel.

According to Treasury officials, this will contribute to cutting the annual rate of inflation from 10 percent to 8 percent. (The inflation rate for the first six months of 1993 was 5.8 percent.)

The devaluation would also compensate exporters for the loss of special incentives given to exports.

ONE EXCHANGE RATE

The government explained that it had no choice but to remove those export incentives, due to pressures from the United States and European countries.

Removal of the export incentives has created a situation in which, for the first time, only one de facto exchange rate for the dollar will exist.

After the economy adjusts to the new measures, the Bank of Israel intends to drop commercial interest rates, as yet another measure of curbing inflation.

The devaluation of the shekel is not to take effect immediately due to the complicated method chosen to carry it out: The plan is for the government and the Bank of Israel to announce a middle exchange rate of “an international basket of currencies.”

The Treasury and the Bank of Israel can fluctuate the daily exchange rate within a range of 3 percent under and above the middle or base rate.

That base rate was raised over the weekend by 2 percent.

The exact rate of the devaluation as a result of that change was expected to be determined Monday, when trade in foreign exchange resumes after the weekend.

By and large, it was believed that the change would lead to an immediate 2 percent devaluation of the shekel, but that subsequent devaluations would be more moderate than those made in the past.

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