The economics and semantics of BoI chief

Is it true that it was proposed to outgoing Governor of the Bank of Israel Stanley Fischer that he become Israel’s next finance minister? Fischer, who on Wednesday gave his last Jerusalem Press Club briefing in his present capacity, at Mishkenot Sha’ananim, conceded that there were rumors to that effect.

Pressed as to whether there was truth in the rumors, Fischer replied: “I don’t like to talk about ‘four-eyed conversations,’” translating a Hebrew idiom that means “private conservations” into English in a particularly literal fashion.

Asked whether he was going to take a position similar to his current one elsewhere, Fischer, 69, responded that he had been told when he was 25 never to accept an offer that he’d never been given.

In reviewing the period of his tenure following a question to whether anything had surprised him after taking up his post in 2005, Fischer acknowledged that he had been surprised by the robustness of the Israel economy in its remarkable powers of recovery and shock absorption in the face of wars and other earthshattering events. He paid tribute to the hi-tech sector as an important factor in Israel’s ability to evade economic turbulence.

When Fischer was introduced by JPC Director Uri Dromi, the latter stated that Fischer was retiring, Fischer’s instant retort was that he was not retiring, he was stepping down, which led to instant speculation that he was moving on to something else, though he mumbled under his breath that it wouldn’t be at the World Bank, where he was vice president for development economics and then chief economist from 1988 to 1990.

Turning the subject away from himself and toward the economy, Fischer noted the difficulties that the incoming government will have to face when presenting the 2013 state budget.

This is a small economy, he said, although every now and again Israel has delusions of grandeur. Israel’s GDP, he noted, is only 1.5 percent of that of the United States.

The world economy that has been growing slowly since 2009, he said, will return to a more rapid growth in 2014, though forecasts still have some unclear areas.

Israel’s annual growth rate till 2011 was 5%, after which it fell to 3%, and the forecast for 2013 is 3.8%, though this still needs to be clarified, said Fischer. The anticipated gas from the offshore Tamar field should have a 1% positive impact on GDP, he said.

Notwithstanding media reports to the contrary, Fischer said that there was more or less full employment. The share of the population looking for work is rising rapidly, he said, but admitted that he did not know if the main factor in this rise could be attributed to the haredi and Arab sectors.

There has been a slight decrease in unemployment figures in the last quarter of 2012, he said, but was unable to determine whether this was a sign of real change or just random.

Israel does not have a problem with its balance of payments, and inflation, which is currently around 1.3%, is expected to rise to 2% in the coming year, Fischer said.

The exchange rate has been appreciating as other countries make their fiscal policies more expansionary.

Foreign investors have found it more profitable to invest their money in Israeli banks than in those in their home countries.

While real estate prices in the center of the country are rising, the opposite is true in the periphery, where according to Fischer, one can buy an apartment for less than it cost a year ago. He was almost amused by this because Israel’s peripheries “are among the closest of any country in the world,” and in many cases are as close as 20 kilometers from the Center.

Fischer was proud that Israel has a strong banking system and a tough supervision of the banking system.

Moving back to the budget, he said that the deficit for 2012 was targeted at 2% in 2010, but it was clear in 2012 that this wasn’t going to happen and that an adjustment would have to be made. The target was then raised to 3% but ultimately became 4.2%.

Most of the divergence, Fischer explained, was due to tax revenues being lower than expected.

Again correcting media reports, he said that the government is not cutting back on expenditure, but on what people expected it to spend.

In fact state expenditure will go up by 5% this year, although the anticipated increase was 10%.

The shortfall in state revenue, he added, will be around NIS 6 billion.

Although it was easy to criticize the government, Fischer declared, in his view, given that it was an election period, the government had taken a very courageous step toward reducing its budget problem by raising value-added tax and passing legislation for increased taxes.

These measures will make the current problem more manageable, he said.

In reference to talks about cuts in the defense budget, the heavyweight of the infrastructure budget, and cuts in child allotments which will have a serious impact on large families, Fischer pointed out that none of these policies, which are being worked on by both the Treasury and the Prime Minister’s Office, is by any means finalized. The composition of the new government will affect what is politically possible with regard to budgetary problems, he said.

Fischer was hopeful that more haredim will realize the need for secular education to prepare them for the workforce. There are signs in this direction he said, citing a figure of 6,000 haredim enrolled in colleges. Over the past decade, he said, the ultra-Orthodox sector had grown from 4% of the population to 10% and the Arab sector from 16% to 20%, while the non-haredi Jewish sector had declined from 80% to 70%.

Fischer was heartened by the number of Arab-run businesses and partnerships with Jewish entrepreneurs that were now flourishing in the Galilee.

Journalists were curious as to when Fischer had made his decision to step down.

He was quite candid about it. When he had initially wanted to step down and had been persuaded to stay, he had told himself that he would do so until he knew that the new Bank of Israel Law that took effect on June 1, 2010, was working.

Once he was satisfied that it was working, he proceeded with his decision to step down.