Israel's Shekel Rate

State of Israel's 50th Independence Day will not herald any dramatic change in the Israeli shekel. Or for Israeli real estate sharks, or institutional investors or the man in the street. It will simply place an official seal of recognition on the existing situation, along with a possible promise of the further easing of four prevailing prohibitions. Bank of Israel is still not debating the extent of the concessions. Meanwhile, the Bank emphasizes, it is not promising any Independence Day declarations of new measures.

Following the sweeping August 2007 resolutions, the Israeli shekel recently can already be said to be convertible. Globes heard this from Bank of Israel chart currency trading department manager. People are waiting for May, but Independence Day decisions will be relevant to less material needs. The moment effectuation of August's measures is completed; the shekel will be, from a legal point of view, to all intents and purposes a convertible currency. It is preferable to pay attention, in the near future, to the anticipated implementation of the next stage in the reform announced in August 2007, which has yet to be applied in respect of foreign investors.

That portion of the reform that relates to foreign residents has not yet come into force. The last of the August measures relating to foreign residents are shortly due to take force, and will enable them to unrestrictedly conclude foreign currency future transactions. What is more important is what will happen after the last of the August measures comes into force, because these are very material measures. They enable foreign concerns to operate more freely in the Israeli foreign currency market.

And what will happen then? Market trading volumes may increase and the exchange rate may become more volatile. Some remarks of mine were construed to mean that there may be 30% devaluation. Peterson did not say that. Since the fluctuation band has a 30% span, he said the exchange rate may rise, and Bank of Israel is not obliged to intervene until the exchange rate reaches the upper limit. That must be taken into account with the approach of the next practical liberalization stage.

What will be the status of the fluctuation band after the shekel is officially declared a convertible currency in May? Will exchange rate control be modified?

Peterman: There are no decisions and no discussions on the subject. Bank of Israel's liberalization recommendations fall within an existing exchange rate regimen. There is no talk of changing the existing situation. The Bank will continue to hold dollar reserves, and the exchange rate will shift within the bounds of the slant mechanism. Experience shows that capital comes to Israel precisely in these circumstances. That is why volatility should be expected; and after the rise, there may be a fall.

Isn't proceeding as planned with liberalization measures now more dangerous, in view of the South-East Asian financial crisis? Peterman: We have all learned from experience about the need for a sound macro economic infrastructure, a solid, strong financial system and certain flexibility in the exchange rate mechanism.

Proceeding with liberalization will give us greater exposure to international upheavals, whereupon our behavior must be even better. Since the authorities are aware of this fact, it is a responsible step to continue progressing. One of the IMF's recommendations was that our markets become more open, because then, the authorities cannot behave irresponsibly. Openness creates a certain discipline, motivated by the desire not to lose rating.