Rising shekel may cost thousands of jobs

Economists and businesses warn of repercussions should the shekel continue its breakneck advance when measured against the dollar.

By MATTHEW KRIEGER
May 4, 2007 03:39
3 minute read.

Even as many Israelis cheer the increased buying power afforded by the surging shekel, economists and businesses are warning of a number of economic repercussions should the currency continue its breakneck advance when measured against the dollar. "If the dollar continues its freefall, we won't be able to escape without having to fire thousands of workers," said Shraga Brosh, president of the Manufacturers Association of Israel, who estimates that some 35,000 workers may be let go due to rising costs stemming from a combination of the current weakness of the dollar and strength of the shekel. The dollar has declined approximately 11 percent against the shekel over the last year. Brosh estimates that since the beginning of 2007, Israeli exporters have lost some NIS 1 billion and he predicts losses totalling some NIS 10b. for the remainder of the year if the dollar does not halt its slide. "If the shekel is stronger, like it currently is, it means the Israeli economy, which is heavily reliant upon the amount of exports and imports, cannot be as competitive in the global marketplace," Avia Spivak, professor of economics at Ben-Gurion University, told The Jerusalem Post. "Companies still have to pay their workers the same wages and now, because so much of our economy is tied to the dollar, it means that wages that once cost the manufacturer 22 cents now cost 25 cents." An increase in the cost of wages leads to increased production costs, which ultimately leaves exporters with a couple of options - either raising the prices of products that are shipped abroad, which is not a reality as Israel must remain competitive with the weaker economies of other nations who conduct foreign trade at lower prices, or cutting costs at home, which may ultimately translate into the loss jobs. "Over the next few months, we may see manufacturers closing their operations here because they can't bear the high-currency rate and moving to locations such as southeast Asia or Egypt," said Shlomo Maoz, chief economist at Excellence Nessuah. He believes this may begin happening in the next six months, and once these manufacturers shut their factories in Israel, he said, they will be shut forever. "What will be hurt the most are those businesses with operations in development towns," he said. The country's tourism industry will also suffer from an extended period of shekel strength and dollar weakness, he added, as many Israelis will take vacations outside of the country, particularly in the US, and fewer tourists will visit the country because of their limited spending power here. The Bank of Israel, concerned about the possible effects that a too-strong shekel may have on Israel's long-term economic outlook, has been cutting interest rates, however, these cuts have not achieved their goal of weakening the shekel. "In order for the rate cuts to be effective, Bank of Israel Governor Stanley Fischer needs to make more noise with his cuts - he should be cutting rates twice a month," said Maoz. Fischer hopes that by slashing interest rates people will be forced to reconsider their shekel-portfolios once they realize that the shekel has less to offer, as well as to try to raise the inflation rate to the central bank's target range of 1-3 percent, which Fischer believes is the optimum level to promote economic growth. Last year the Central Bank considerably missed this number, when inflation ran at minus 0.1%. There are benefits to a strong shekel, however, stressed Roby Nathanson, director of the Macro-Economic Center for Political Economics, who said it provides Israeli citizens with increased purchasing power when it comes to items produced abroad, as well as the chance to travel overseas at reduced rates. Maoz, however, sees no benefits in the current strength of the shekel, despite the increase of foreign investment in Israel. "I am looking for productive money," he said, "Investments today are not productive monies."


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