Economic Crisis Grips Israel; Program of Severe Austerity Announced

The government of Premier Yitzhak Shamir plunged headlong into the economic crisis within hours after it was approved by the Knesset yesterday. The newly sworn-in Cabinet emerged from an all night session this morning with a program of severe austerity, the first measure of which was a 23 percent devaluation of the Shekel, the second devaluation since the weekend.

The Shekel, which stood at an official rate of 69.27 to the U.S. Dollar yesterday, is now pegged at 82.53 to the Dollar.

Other measures announced by the Cabinet are a 50 percent hike in the prices of subsidized goods and services, including bread, milk and dairy products. Frozen meat prices were raised by 40 percent and fuel is up 23 percent to balance the devaluation of the Shekel. (See separate story on Panic Buying.)

The next round of increases will hit public services such as transportation, electricity and water. A third round to follow will up the prices of all imported goods. Locally produced items will be more expensive because of increased production costs.

Economists generally supported these measures today as the absolute minimum necessary to pull the national economy from the brink of disaster. They represent a sharp departure from the past policies of Finance Minister Yoram Aridor which were aimed primarily at fighting inflation.

GOVERNMENT, HISTADRUT ON COLLISION COURSE

Inflation is now expected to soar to an annual rate of 160-170 percent this year. Long term inflation prospects are hazy. This has put the Shamir government on a collision course with Histadrut and possibly with one of its coalition partners, Tami, which represents the low income Shephardic community.

A clash appears inevitable because the new government, for the first time, has stated its intention not to compensate wage-earners fully for the devaluation — the reduced buying power — of the national currency.

That means that the next cost-of-living increment — the traditional hedge against inflation for Israeli workers — will be lower than it ordinarily would have been. In the past, such moves have been made only with the agreement of Histadrut.

This time it is a unilateral government action to which the labor federation is hardly likely to agree. The Histadrut Central Committee was meeting in Tel Aviv today to decide its position on the new economic measures.

TAMI PARTY RENEWS ITS THREAT

Tami, which was on the verge of leaving the old Likud coalition, headed by Premier Menachem Begin, over economic policy, renewed its threat today. Tami MK BenZion Rubin who is Deputy Minister of Labor and Welfare demanded a 13 percent hike in welfare payments.

He insisted on full compensation for the poor with a gradual lessening of compensation for the better-off sections of society. If this is not done, “we shall simply get up and leave,” Rubin said, A defection by Tami would reduce Shamir’s 64 seat majority in the Knesset to 61.

Aridor, whose policies have been under heavy fire from Cabinet colleagues as well as the opposition described the new economic measures today as quantitative and qualitative. It was learned that he had proposed a more drastic 35 percent devaluation of the Shekel during last night’s stormy Cabinet session but was blocked by Energy Minister Yitzhak Modai who argued that the burden would be too heavy and unacceptable by the public.

BASIS FOR THE ECONOMIC CRISIS

Israel’s economic crisis has been long in the making. The country’s balance of payments deficit has been increasing steadily this past year. Its foreign currency reserves are dwindling fast. Its credit rating has deteriorated to a point where it is now ranked by the International Monetary Fund (IMF) among the poorest risks world-wide.

Those conditions were brought to a head by a sudden rush by the public to buy foreign currency in anticipation of further devaluations of the Shekel — despite government assurances as recently as last week that there would be no sharp devaluation. Investors cashed in their bank stocks, hitherto the safest form of investment, to buy Dollars and other foreign currencies.

Bank shares plummeted in value over the weekend, precipitating panic. The government took measures to shore them up. The sale of bank shares was suspended. The Tel Aviv stock exchange closed Sunday and was expected to remain closed for the rest of the week.

Shamir, in his Knesset speech yesterday, stressed that the country has been living beyond its means and would have to endure an austerity regime. He warned that there would be no more improvements in living standards until a healthy economy is achieved.

To do this, the new government must prune $1 billion from the national budget. Economists said today if it fails to neutralize a large part of the latest price increases, through the cost-of-living increments, and does not slash the budget, inflation will soar without limit and the economy will find itself once more in dire straits.