BoI Debates on Continuing Dollar Support Purchases

Governor of the Bank of Israel, Dr. Karnit Flug, favors the “managed float” of the shekel-dollar exchange rate. (Flash 90)
Governor of the Bank of Israel, Dr. Karnit Flug, favors the “managed float” of the shekel-dollar exchange rate. (Flash90)

The shekel has been hovering in the band of between NIS 3.80 and NIS 3.90 to the dollar for over a year, but it probably would be much stronger against the dollar without the Bank of Israel’s ongoing purchases of the American currency to bolster its value and keep the shekel weaker. Israel today has financial reserves of $96 billion – a third of which it has acquired in the past two years as part of its aggressive dollar-buying program.

The program’s strongest advocate has been Bank of Israel head Karnit Flug, who is keeping the shekel weak in order to make it easier for Israeli exporters to sell abroad. But not all are convinced that this is a good idea – and at the end of the month, the Bank will hold a symposium among those in the financial establishment to discuss the advantages and disadvantages of buying dollars.

Opposed to the program is Avi Simchon, chairman of the National Economic Council, who would rather see the shekel hit its natural high against the dollar – possibly under NIS 3/$1. That thousands of Israelis are likely to lose their jobs as exporters lose markets, since they cannot afford to compete on price and earn a profit, is preferable to the current situation, which could cause long-term damage to the Israeli economy.

According to Simchon, buying dollars indirectly subsidizes exports that are not properly priced or efficiently produced. On the other hand, a weak shekel makes foreign goods imported into Israel more expensive than they should be. A stronger shekel will allow for the import of more foreign goods, sparking an efficiency effort by Israeli companies which will now have to compete on an even playing field.

With that, the final call on the matter is Flug’s, and she is not expected to change her views on this. In a speech last week, Flug said that Israel really had no choice in the matter. The objective today, she said, is to win “the race to the bottom,” with countries doing everything possible to make their currencies as cheap as possible against other currencies. Buying excess dollars to boost their value versus the shekel was one of the few ways of doing this.

In a statement, the Bank of Israel said that it was “conducting ongoing discussions with experts on the matter. The Bank’s stance on the issue has not changed. We cannot ignore the crisis in the export industry, especially as compared to the needs of the modern economy.”