Gas exports could give Israel Dutch Disease

March 17, 2011 22:35
1 minute read.

The Israeli economy will come down with a case of Dutch Disease if it becomes a natural gas exporter, warned Bank of Israel economists in a new study published on Thursday.

Domestic natural gas has enabled Israel to reduce imports of energy goods in recent years, which increased the current accounts surplus and caused the shekel to appreciate in real terms. This appreciation, which is liable to harm exports by other industries, is known in the literature as “Dutch Disease.”

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The study shows a clear correlation between a rise in natural gas exports and real exchange rates.

Due to uncertainty about the amount of future gas exports, the economists said that the effect of such a scenario on the exchange rate cannot be quantified at this time. However, if more large natural gas discoveries are made, “Israel will presumably become a natural gas exporter.”

The economists recommended establishing a sovereign wealth fund for fiscal saving purposes.

They believe that such a fund could offset the effects of Dutch Disease and help in passing on profits from oil and gas to future generations.

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