Fischer Sinks the Shekel

Tzvi Ben Gedalyahu

The shekel-dollar hit an 18-month high Tuesday after Bank of Israel chief Stanley Fischer announced that the government deficit will soar.

Fischer said the Bank will continue its policy of selling shekels and buying dollars, which props up the shekel-dollar rate and caused a nearly two percent jump Monday morning to NIS 4.15 to the dollar. The shekel was the king of all foreign currencies last year, the strongest currency in the world against the dollar. The rate had plummeted from NIS 4.72 to the dollar in mid-2006 to NIS 3.23 at the end of last May, a drop of more than 30 percent.

Last year's low rates raised a round of protests from exporters who complained their businesses were failing because of low income after dollars were converted to shekels at a low rate.

In today's topsy-turvy economic world, the golden shine of the shekel has turned to mud as the United States financial crisis spelled a sudden end to five years of unprecedented growth and near-zero inflation.

The Finance Ministry enjoyed a budget surplus of billions of shekels until late last year. The government now faces declining revenues from lower incomes and the decline in fuel prices, which has lowered value added tax (VAT) revenues.

On the other side of the ledger, government outlays are sharply higher because of the war against Gaza terror and rising unemployment payments.

"The deficit will be very high, about five percent of the gross domestic product (GDP)," Fischer told the Conference of Presidents of Major American Jewish Organizations in Jerusalem on Monday evening.

The projected budget deficit as percentage of GDP already is 20 percent higher than estimated only two weeks ago by the Bank of Israel. The difference of one percent is equivalent to approximately NIS 35 billion (nearly $9 billion) worth of red ink.

Fischer said the biggest challenge is to hold back government expenditures, a difficult test for Likud chairman Binyamin Netanyahu who may have to open the wallet to entice other parties to join a new coalition government.

"What will happen with fiscal policy depends on the next government, but there is not much room for fiscal expansion," the former Citibank chief executive said.

Fischer already has cut the interest rate sharply and suggested that "we can go to zero percent." He also revealed that the Bank plans to buy government bonds but ruled out the possibility of purchasing corporate bonds.

He has plenty of money to spend. The Bank began to aggressively buy greenbacks when the dollar was worth only NIS 3.40 and has made paper profits of billions of dollars as the rate rose more than 15 percent in less than a year.