Government Bans Sale of Foreign Currency

The free sale of foreign currency was banned by the government yesterday in an effort to stem a new rush on the Dollar. The move, announced by Finance Minister Yigal Cohen-Orgad in a television interview, reversed a six-year-old policy of the Likud government which liberalized foreign currency transactions when it first took office in 1977.

Effective as of midnight yesterday, local time, Israelis can no longer legally buy or sell foreign currencies. Individuals will be allowed purchases of up to $3,000 but only for the purpose of going abroad. Israelis may also continue to pay for imports with Dollars, but only indirectly and under close supervision.

The measure was promptly attacked by members of the Knesset Finance Committee. Opposition MKs took the government to task for waiting too long to impose the restrictions. Likud members warned that an immense black market will be created as a result of the ban.

Cohen-Orgad conceded that the Treasury was forced to take strong measures because it could no longer support the price of bank shares which were being liquidated to buy Dollars, and, at the same time, deplete the country’s foreign currency reserves to satisfy the public demand for “greenbacks.”

MEASURE FOLLOWS SERIOUS DISORDERS

“This measure was necessary following serious disorders in the monetary system,” the Finance Minister told the media yesterday.

“Israeli citizens, rather than use liquid assets carrying high interest, or assets which are linked to the index and the Dollar, preferred to use Dollars in cash. This caused damage and instability to the monetary system. It is an absurd state of affairs both from the point of view of the individual and the economy.”

The rush on the Dollar, which had subsided after the Shekel was devalued by 23 percent early last month, began anew last weekend. The heavy buying of Dollars was seen as a demonstration of mistrust in the government’s monetary policies. Since last month the Treasury has invested some quarter billion Dollars to maintain the value of bank shares, a once secure form of investment.

A question being asked today is where Israeli investors will turn now that they can no longer buy Dollars. The most logical investment would appear to be index-linked government bonds or shares traded on the stock exchange. But one economic commentator, Yitzhak Taub, said, “It could be that lack of confidence (in the government) will be justified and that those who keep their foreign currency under a floor tile will be proved right. Others will lose.”

Cohen-Orgad implicitly warned against foreign currency hoarding. “Assuming Israelis hold some $50-$70 million in cash at home, they are losing a 15 percent interest which the State could have deposited in banks overseas and gained interest,” he said.

An immediate effect of the government’s move was the revival of Lillienbaum Street, the thoroughfare in Tel Aviv known since the early days of the State as the center for black market currency transactions. Yesterday, black market money dealers were buying Dollars for 92 Shekels and selling them for 100 Shekels. The official exchange rate stands at 87 Shekels to the Dollar.

Likud MK Yitzhak Seiger, a member of the Finance Committee, warned that the foreign currency ban would create a “black market and black economy” of unprecedented size. “Rather than the Bank of Israel profiting from the increased value of the Dollar, the black market dealers will,” he said.

Adi Amoral, leader of the Labor Alignment faction on the Finance Committee, said the delay in imposing limits on foreign currency transactions cost the economy some $350million. He said the Finance Minister should have taken the measures when he first assumed office on October 18.

Mapam MK Naftali Feder said the economic policies of former Finance Minister Yoram Aridor cost the State $2 billion in two years and Cohen-Orgad, who replaced him has cost the State $350 million in seven days.

The new measure is in fact, the exact opposite of the policy advocated by Aridor shortly before he resigned which was to link Israel’s currency exclusively to the U.S. Dollar. Cohen-Orgad said yesterday that he hoped the restrictions would be temporary and promised that the ban would be lifted as soon as “the situation improved.”