(photo credit: Bloomberg)
The value of any country’s currency shouldn’t be perceived as mirroring its
actual fiscal stamina and must never be regarded by a self-congratulating
populace as a source of national pride. Put plainly, a currency’s marketplace
worth doesn’t necessarily reflect the real economy. Least of all is it about
booking cheaper vacations overseas.
As with other currencies, so it is in
the case of the shekel. Its value determines whether we can collectively make
ends meet – manufacture and sell our goods abroad, while keeping our own
compatriots gainfully employed and contributing their share both as taxpayers
Foreign currency exchange rates are so crucial here,
indeed, that for the past two years the governor of the Bank of Israel, Stanley
Fischer, has been forced to intervene frequently in currency trading. He has
done so reluctantly by purchasing dollars to keep the shekel from appreciating
even more dramatically than it already has.
The outcome of his efforts
hasn’t been an unqualified success. Israel’s dollar reserves are bulging, but
the shekel steadily continues its upward climb. Presumably things would have
been worse still without Fischer’s move to impose moderate limitations on the
dollar glut. However, as is, an overvalued shekel renders Israeli exports
overpriced and less competitive abroad. This impedes growth by cutting deeply
into the exporters’ profits, to the point of destabilizing their operations and
Therefore, disinclined though Fischer is to escalate
the BoI’s intervention, the governor had no choice but to announce last week new
reporting requirements for currency transactions exceeding $10 million daily.
For now, this is being presented as a monitoring and analytical tool, to help
the BoI scrutinize market dynamics. There’s no doubt, however, that
reporting requirements could well be the prelude to levying taxes on these
IT MAY not be much at this point, but even introducing an
element of anxiety into the currency free-for-all is an eminently welcome move.
This is because, to our detriment, the shekel has become a manipulated currency.
It serves foreign speculators to dump dollars, which earn next to no interest,
and open shekel accounts which will get them a 2-percent yield (more, if they
purchase short term Israel government bonds – Makam). Levies, which will cut
into the proceeds of speculation, might somewhat even the odds.
clear: The shekel’s woes aren’t homemade. They originate in the
deliberate US policy of keeping dollar rates low in order to increase dollar
competitiveness and make American goods more exportable. The dollar’s value is
further eroded by gross overspending. And America isn’t the only power to
tinker with its currency. The cumulative effect of such machinations is a
de facto fiscal war. Other countries, Israel included, are being hurt in the
The upshot is that Israel has become exceedingly attractive to
international speculators. Hence the monthly currency trade volume here stands
at a whopping $100 billion – 60% of which is conducted by foreigners, whose
profiteering plainly damages our economy. We need to remember that
exports account for 40% of Israel’s GNP, taking this far beyond the problem of
specific economic sectors.
While non-intervention may generally be a most
laudable sentiment, occasions arise when it’s imprudent to adhere rigidly to
principle. Overseas speculators have taken control of our foreign currency
marketplace. As 2010 drew to a close, it was reported that 66% of all foreign
currency transactions were performed by foreign nonresidents.
worse. Foreigners were behind no less than 80% of swap-type transactions
(conditional conversion of one currency into another for fixed time frames). And
once foreign traders obtain shekels, they buy up Makams. At present, nearly a
third of all Makams are owned by foreigners. This is 30 times more than they
owned just 18 months ago. Foreign money, moreover, can be moved out quite
swiftly. In times of tension or war, sudden exits by speculators can be
The ramifications are that outsiders cast a dark and
overpowering shadow on our entire financial administration and on the ability to
keep our economy on an even keel. The shekel has been under relentless daily
assault since early 2008. Last week’s move amounted to a welcome warning by the
BoI that it is preparing a defense.