Report: Northern business in 'shock'

The 85,000 small- and medium-sized businesses in the North account for a majority of the region's employment.

Businesses in the North are in a state of "shock [which] necessitates immediate aid and attention," the Ministry of Industry, Trade and Labor said in a report released Monday. One out-of-four small- and medium-sized businesses in the North could be in danger of closing over the next two months "if economic solutions are not found and a variety of assistance is not provided," the report said, corroborating the estimate of business research group Dun & Bradstreet, earlier this month. "The bulk of revenues of a large part of businesses in the North are based on the months of July and August, meaning that economic paralysis during the summer months constitutes a cardinal impact on the overall business volume within the North's economy," according to the statement. The 85,000 small- and medium-sized businesses in the North account for the vast majority of the region's 90,000 total enterprises, as well as for the majority of employees in the region. "The closure of small- and medium-sized businesses in the North [therefore] translates into an economic burden on the welfare and economy of the State [as a whole] due to the high number of unemployed [that would result]," the ministry said. Migration of northern "refugees" to the Center aggravated the problem, since it led them to carry out large purchases of emergency necessities in central Israel instead of in their home region, harming the North's cash flow and savings. This, in turn, has had an impact on the region's purchasing power, which could take "many months" to recover, according to the report. Businesses among the Arabic-speaking and Circassian population groups in the North were hit particularly hard due to their relatively weak economic condition on the eve of the war. "That is not to say that the starting position in the Jewish sector was good, but rather that it was better [than the non-Jewish groups]," the ministry said. The report also found that the banks chose to implement government instructions from before the war to begin bouncing checks when clients' overdraft arrangements did not suffice, ignoring Banking Supervisor Yoav Lehman's later instruction to them, in which he requested that they apply flexibility to customers in the North as a measure of relief during the crisis. As a result, "suppliers and business owners that did not meet payments are not able to receive goods or services essential to their continued existence" leading to an expanding cycle of uncertainty, the ministry said. Furthermore, banks were found to be toughening loan conditions, despite the government's solution of State-guaranteed loans and in stark contrast to statements to the contrary by the banks' CEOs, the ministry stressed. Among solutions suggested in the report, it was proposed to extend the compensation deal whereby agricultural and tourist businesses receive 70% of their 2005 business volume to the general business sector, as well. The current arrangement, whereby a business would receive 135% of wage expenses is "not sufficient," and does not provide enough fluidity to allow business owners to even pay the wages, the report found, adding that businesses should receive a "uniform and fair" compensation model and not be divided into sectors. A committee would assess compensation in exceptional circumstances. The state guarantee portion within the loans offered by government initiative should be boosted beyond the current 70% level, the report suggested. The August agreement reached on Sunday will offered two compensation choices. The first would be similar to the July agreement, which compensated businesses on the basis of payment of salaries for the absence of workers but will provide the business with 145% of wages. The second choice cover businesses for lost proceeds during the fighting in August. Exempting businesses from VAT payments for a six-month period would expand their profits and should be "examined positively," though it would also potentially disturb the balance within the economy as a "discriminatory tax," the report went on to say. Discounts on municipal arnona taxes, as another potential means of boosting businesses' profits, should be accompanied by funding from the national level to compensate municipal governments for revenues that would be lost as a result, it added. Among other ideas in the report was a proposal to initiate special "Product from the North" labels to brand goods from the region and increase their demand among Israeli consumers. The report was submitted to Industry, Trade and Labor Minister Eli Yishai by Ehud Yatom, the ministry's emergency envoy to the region. Separately, the Finance Ministry said a newly-formed committee headed by ministry director-general Yosi Bachar visited the North on Monday. Established to formulate "economic tools" to assist the inhabitants and businesses in the region, the team met with northern businesses and organizations at Rosh Hanikra to hear about the obstacles they face and then met with the head of about 20 local authorities. The team's interlocutors also were asked to present their own ideas towards solving the North's problems. Meanwhile, Finance Committee Chairman MK Yaakov Litzman told Budget Supervisor Kobi Haber that the committee's vote on the shifting of NIS 2.2 billion from different parts of the budget to cover military costs of the war would take place Wednesday. The announcement comes following the latest in a series of postponements. Though Haber assured that he and the ministry's team would come to the session to explain further the changes proposed, the Finance Committee's spokesman said Monday that calls were mounting for Finance Minister Avraham Hirchson himself to "approach the committee to present clarifications prior to the voting." Litzman told the committee that Hirchson was summoned to the Wednesday session. "We are no one's suckers, and Shas will not support approval [of the changes] as long as [Hirchson] doesn't show up," said Shas MK Amnon Cohen, while Labor MK Orit Noked charged that "the Treasury has acted without transparency towards the committee." The parliamentarians were reacting to Hirchson's holding of a separate meeting on Sunday with three Labor "rebels" who oppose the budget changes - Noked, Avishai Braverman and Shelley Yachimovitch. The three told the committee that Hirchson revealed for the first time in the meeting that the Treasury has expanded budgetary spending this year by 4%, bringing the annual fiscal deficit to 2%, in order to fund war costs. The rebels called on the committee to have Hirchson explain the deviation from fiscal policy, while Braverman said he notified the Attorney General of the numbers. The budget was supposed to be limited to 1% annual growth - since updated to 1.7% - while the deficit target was 3% of GDP. Litzman joined in the accusations, charging that "the Treasury has acted against the law, and [Hirchson] must explain his moves to the committee." Bachar on Monday evening strongly rejected the claim of illegality in the Treasury's actions, saying that the claim was "incorrect and not supported by facts in reality." "Such a clear case does not require a legal statement, but rest assured that each step taken by the Treasury in the matter matches [legislation pertaining to the budget], and is of course also backed legally," Bachar said in a letter to Litzman. The Finance Ministry itself reported that at the meeting between Hirchson, Bachar and the "rebels," Hirchson reported that NIS 1.2 billion in leftover funds would be directed to the war costs, "minimizing damage to ministries' operations." Contrary to another figure presented by the rebels to the committee, Hirchson said he told them that expenses of the various ministries had not yet reached 100% of their allocation, and that - to their estimation - at least 2% likely would be left over by the end of the year. The Labor MKs were also told that, in addition to direct military costs and aid to northern local authorities in 2006, more than NIS 5b. would be needed to cover compensation awarded by the Israel Tax Authority, which only has NIS 3.5b. in the fund set aside to cover the payments, the ministry said. The rebels also were informed that the ministry's most recent forecast for the gross domestic product's annual growth rate was 4.3% above last year, down from 5.3% prior to the war. The lower GDP will lead to a loss of revenues of some NIS 2b. in 2006, the ministry said.