Israeli Shekel Devalued by 7.5%

The Bank of Israel, Israel’s central bank, today devalued the Israeli Shekel by 7.5 percent against the dollar, in a new indication that Israel was continuing to lose its battle against the economy’s galloping inflation.

The Shekel was being sold today by the Central Bank to commercial banks at 57.13 Shekels to the dollar, as against 53.14 yesterday.

The announcement came as the Ministerial Economic Committee continued its closed door meetings for a third day today in an effort to implement the Fin ance Ministry’s plan to cut Israel’s out-of-balance budget by drastically trimming the funds all government ministries may spend this year.

The committee is trying to formulate specific proposals which are expected to be adopted by the Cabinet on Sunday. Last Sunday the Cabinet failed to act on a proposal by Finance Minister Yorom Aridor that 55 billion Shekels be cut from the government budget, including a hefty 20 billion Shekel cut in the defense budget.

The devaluation today was denounced by Israel’s powerful union movement, the Histadrut, and received only a lukewarm welcome from manufacturers who called it “too little and too late.” Some exporters said the devaluation would help Israel’s urgent need to expand exports if accompanied by other fiscal measures, presumably meaning deep government budget cuts, and possibly reduce imports by increasing their prices.

Yisrael Keissar, deputy secretary-general of the Histadrut, warned that devaluation would not solve all of Israel’s economic problems and repeated the Histadrut’s opposition to any changes in the present arrangement which links wage hikes to inflation increases. But Eli Hurwitz, head of the Manufacturers Association, called the devaluation “a move in the right direction.”

EXPLANATION FOR THE DEVALUATION

Experts noted that the 7.5 percent devaluation was a sharp jump from the customary unofficial creeping devaluation of the Shekel which, until about two months ago, averaged about five percent a month. In recent weeks, the Central Bank accelerated the rate of devaluation and during the past 10 days, the Shekel lost 10 percent of its purchasing power.

The official explanation for the 7.5 percent devaluation was that the adjustment brought the Shekel closer into line with its “real value.” The immediate purpose of the devaluation was described as that of encouraging Israel exports, by making them cheaper on world markets, and discouraging imports, by making them more expensive.

The Central Bank announced today that it would continue to take steps to correct the exchange rate against the powerful American dollar and the basket of world currencies, made up of Western European currencies and the Japanese yen.

But Bank of Israel officials asserted that the latest devaluation was due mainly to international and not to local developments. They noted the American dollar has been at an all-time high relative to several European currencies in recent days.

The continued decline in the value of the French Franc, the Deutschemark, the Italian Lira and the Yen has made exports to those countries decreasingly less profitable to Israeli companies, though Western Europe remains a major market for Israeli products.

DEVALUATION CANNOT CURE AILMENTS

Economic experts agreed that devaluation alone cannot cure the ailments of the Israeli economy and that it could serve as another stimulus to Israel’s roaring inflation. These experts said devaluation must be accompanied by other economic measures to neutralize the negative effects of the devaluation. Specifically, the government must slash its budget and take other restraining measures.

Whatever the popular reaction, they said, the government must raise the prices of all subsidized goods and services soon and this time it will have to be more than the five percent jumps Israelis have experienced in recent months.

The experts declared that the prices of all imports will increase in step with the rate of devaluation, as will the prices of domestically-produced items, partly because of the costlier import components of such products, partly because of the inevitable rises in the costs of raw material, energy and, eventually, labor costs.