What is Israel’s economic outlook for 1987?
Barring unforeseen events, some encouraging growth can be expected during the year ahead, although problems will remain. Much will depend on the success of gaining approval of the Finance Ministry’s new economic plan, which has been under heavy fire from labor, the business community and Cabinet Ministers ranging from Defense Minister Yitzhak Rabin (Labor) to Housing Minister David Levy (Likud-Herut).
The plan was formulated by Finance Minister Moshe Nissim and Michael Bruno, the Governor of the Bank of Israel. The embattled plan is undergoing scrutiny by two ad hoc ministerial committees.
The extent of the opposition to the plan, which requires continued sacrifices from trade unions, manufacturers and government ministries, underscores one fundamental fact: despite Israel’s spectacular progress in beating back inflation and its success in maintaining the value of the Shekel in the international currency market, the people of Israel must tighten their belts still further if the nation is to make further progress on the road to economic independence.
The gains made in the past year offer solid reason to voice confidence in Israel’s economic future. Inflation plunged from 285 percent in 1985 to 18 percent in 1986. Exports rose, the government budget was cut and unemployment remained stable at 7 percent — the same rate as in the United States.
Especially significant: there were few strikes in cither the public or private sector last year. At the same time, the nation’s foreign currency reserves rose by $1 billion (to $4 billion), their highest level since 1983.
FROM STABILITY TO GROWTH
In 1987 Israel is likely to move from stability to growth. Here is my forecast:
Despite the hardships required, the new economic plan will be adopted, with some revisions, by the government. The proposal would ease foreign currency restrictions and calls for an overhaul of the country’s capital market and for tax reductions. There would also be further cuts in government spending, wages would remain at present levels and there would be no devaluation of the currency.
The rate of inflation in 1987 will be in the 9 to 12 percent range.
Unemployment will remain at about 7 percent.
Israel’s worldwide exports will rise 7 to 10 percent over the 1986 figure, helped in part by increases in Black Africa — Cameroon, Ivory Coast, Liberia, Nigeria, Togo and Zaire. These and other African countries are expected to open their markets to Israeli products. New export opportunities may also develop in the People’s Republic of China and Japan.
Export to the U.S. will keep climbing. In 1985, Israel for the first time exported more goods and services to the U.S. than it imported. While end-of-the-year figures are not yet available, the first half of 1986 showed the balance of trade even more favorable to Israel than in 1985.
Foreign investments will expand as a result of the Free Trade Agreement between the U.S. and Israel.
Washington will provide some $3 billion in economic aid to Israel. On the other hand, it is unlikely that Israel will received the $1.5 billion in emergency grants that the United States made in 1985 and 1986.
Israel will start receiving additional orders from the U.S. for research in the Strategic Defense Initiative (“Star Wars”) program. Agreements for the first $10 million in research by Israel have already been signed by the two governments.
More Israeli firms will come to Wall Street for financing. Over the last 18 months, Israeli companies raised about $200 million here through public stock offerings and the issuance of debentures.
Israel’s trade balance will get a boost from the fact that prices on imports from Europe will drop in 1987 in accordance with regulations of the European Economic Community, of which Israel is an associate member. The same will apply to imports from the U.S. under the terms of the Free Trade Agreement. These savings will be passed on to Israeli consumers by the government, rather than increase the purchase tax on foreign goods.
Jerusalem will mount a major drive to persuade American Jewish organizations to bring their members to Israel to celebrate the 40th anniversary of the Jewish State and the 20th anniversary of the unification of Jerusalem. This drive is expected to increase U.S. tourism to Israel — a major source of revenue that fell drastically in 1986 — as early as next month.
More American consumers will be buying Israeli-made products in a widening network of retail outlets throughout the U.S.
Israel will benefit significantly from the recent approval by President Reagan of a plan to reduce the interest rate Israel pays on outstanding military loans from the U.S. (Egypt is another beneficiary of this plan.) Over the next four years, Israel will save more than $1 billion in interest on outstanding loans from the U.S. of some $5.5 billion.
A DOWN SIDE ITEM
About the only item on the down side is that Israel’s program to sell government-owned companies to private entrepreneurs is likely to make only minimal progress in 1987. That’s unfortunate, because economists are unanimous in urging that the government rid itself of the burden of operating so many industrial and other enterprises that would be far better off in private hands.
All in all, however, 1987 should be a good year for Israel’s economy. This outlook could of course be adversely affected by political upheaval in Israel, military attack against the country or harmful new findings in the Iran-Contra affair. Otherwise, Israel’s economy can be expected to grow moderately stronger in the year ahead.
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