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(photo credit: Ariel Jerozlimski [file])
In one week earlier this month the dollar dropped by a full 5 percent vis-Ã -vis the shekel, and in the course of May's first three weeks it slipped back 7%. On May 22 alone, the dollar lost nearly 3% of its value in Israeli foreign exchange -"forex" - trading.
To be sure, the growing value of the shekel was evident before the earliest hints of the economic tsunami which swept the world last September. Well ahead of the global credit crunch, unrealistic exchange rates - in local terms - had already threatened to cause the failure of thriving businesses and set off a substantial rise in joblessness.
Despite an almost laissez faire attitude among many of our economy's leading lights, Bank of Israel Governor Stanley Fischer dared last spring, in defiance of vocal critics of direct state intervention, to begin buying as much as $100 million a day to prevent the artificial and highly detrimental soaring of the shekel's value. At the time, in March 2008, there were $28 billion in Israel's foreign currency reserves and Fischer announced the intention to raise this to $35b.-$40b.
Currently, reserves exceed $45b. Yet last week Fischer not only announced his intention to keep on purchasing dollars, but also, if the situation warrants, to go on a veritable shopping spree and buy as much as $400m.-500m. daily.
This is not some gratuitous violation of free enterprise; rather, it is a wise policy without which Israel would have been in deep depression rather than the present manageable recession. It is one of the reasons that Israel isn't now as badly off as other developed nations.
While Israel is undoubtedly impacted by the global crisis, it is a secondary contagion here. Fischer has himself underscored the difference between Israel and most other Western economies: The Israeli bank to suffer least from the credit crunch and attendant losses is, he has noted, the one bank which specializes in mortgages (Mizrahi-Tefahot). Our problems, essentially, spring from different sources yet are aggravated by worldwide conditions.
That's precisely why Fischer is right to continue his interventions and why we encourage him to stay the course. Hard times, if anything, mandate a rigorous hands-on approach. The shekel mustn't be left subject to uncontrolled vicissitudes. Israelis can do nothing about the value of the dollar internationally, but the value of the shekel is hardly the singular function of investors banging on Israel's doors. Concerted manipulation by international currency speculators is also at play. The forces at work are not necessarily constructive and free-market oriented, but out to exploit and skew our marketplace.
THE VALUE of money, like any commodity, is determined by supply and demand. When an excess of dollars is imported to purchase shekels, the price of the dollar falls and that of the shekel rises. An expensive shekel lowers exporters' income. For each dollar they make abroad, they earn fewer shekels. Resultant losses can cause businesses to either shut down or drastically reduce operations. Payroll expenses become increasingly unaffordable, making layoffs inevitable.
At a time when the business climate worldwide is already unstable - limiting demand and stifling trade - the last thing we want is to saddle already struggling firms with an inordinately expensive shekel. Israel's economy cannot put up with conditions that would contribute to a further rise in unemployment. As it is, joblessness stands at 7.6%, the highest in almost two years. Of course, boosting the dollar also helps those living here on American pensions and immigrants purchasing homes with dollars earned abroad.
Hence it's not really important how many dollars have already accrued in Israel's national currency reserves. Fischer isn't stocking up on dollars to make sure the reserves are adequate but to keep the value of the shekel down, thus protecting an already hurting economy.
Most foreign governments are providing subsidies of one kind or another to boost their exports. The least Israel can do is to prevent the overvaluing of the shekel so that our exporters can stay in the game. Keep on doing what you're doing, Governor Fischer.