Peres Confirms Receipt of Shultz Letter Saying He Would Not Support Israel’s Request for More U.S. a

Premier Shimon Peres confirmed today that he had received a letter from Secretary of State George Shultz making clear that he would not support Israel’s requests for increased U.S. economic aid unless and until the Israeli government produced a comprehensive economic recovery plan.

Peres, addressing Central Bureau of Statistics officials, said it should serve as a waming bell. He said that Shultz complimented the government for doing more to help the economy than its predecessors. But at the same time, the Secretary of State pointed to grave dangers close at hand “unless we act faster and do more,” Peres said.

Shultz’s letter had been the subject of media reports. According to the media, Shultz sent a three-page letter to the Premier after the first round of meetings of the Joint U.S.-Israel Economic Group in Washington at which Israel formally submitted its request for increased aid.

Israel is seeking $4.1 billion in U.S. military and economic aid for the fiscal year 1986, which begins next October 1. This is $1.5 billion more than the $2.6 billion Israel will receive during fiscal 1985, all of it in grants.

The media reports said Shultz’s letter advised Peres that his govermment would have to demonstrate that the increased aid will be put to good use and will not simply fuel inflation. American officials have been demanding a detailed economic plan from Israel to justify its new requests.

Haaretz reported that while Shultz acknowledged to Peres that the unity government has indeed slashed its budget, more remained to be pruned. He urged “structural changes” in the Israeli economy, Haaretz said, meaning apparently that the State must stop funding uneconomical businesses and projects.

According to Haaretz, Shultz counselled a steep drop in living standards in Israel and greater autonomy for the Bank of Israel, the country’s central bank, so that it could restrain the printing of money to cover budget deficits. The authority to print money presently rests with the Treasury.

Israel Radio reported today that official figures for 1984, slated to be published at the end of the year, would show an eight percent decline in living standards and a substantial narrowing of the balance of payments gap.

Haaretz, in its report, quoted an unnamed economist as saying that to follow Shultz’s formula would result in tens of thousands of Israelis unemployed. The Finance Ministry has expressed anger and astonishment that Shultz’s letter was leaked to the press.

FREEZE PACKAGE APPEARS TO BE PRODUCING RESULTS

So far the government has been moving slowly with economic reforms for fear of triggering high unemployment. But the three month wage-price freeze package instituted in November appears to be producing results.

Last Sunday, the Central Bureau of Statistics published, for the first time, an interim cost-of-living index covering the first two weeks in December. Normally, the c.o.l. index is published monthly and covers the entire economy. The interim report instead was a breakdown of the various components of living costs from which the monthly index is compiled.

It showed, according to economists, that the freeze is working satisfactorily. They noted that the c.o.l. increased by an average of 2.5 percent in the two-week period and that most of the rise was a carry-over from the pre-freeze period last month.

Food prices rose by only 0.6 percent. Clothing, footwear and household fumiture increased in price by about two percent. Education, recreation and entertainment costs rose by the same amount, far less than in the pre-freeze period.

While doctors raised their fees by seven percent despite the freeze, the cost of dental care dropped by about two percent in the two-week period. If no special price increases are allowed, economists believe that the c.o.l. index for December will increase by less than 10 percent, the first time this year that the inflation rate will be single digit.