The State of Israel is at a critical economic crossroads: After living beyond its means for most of its existence, it now must deal with the reality of a hyperinflation that is running over 400 percent, and in a few days may be measured at the incomprehensible level of more than 1,000 percent a year.
To make that number more meaningful, it represents the 25 percent rate of inflation for September that is expected to be announced on Monday compounded for a year.
Theoretically, Israeli indexation is supposed to keep pace with prices. But indexation never catches up completely -- wages are indexed at only 85 percent of inflation -- and at these astronomical levels, this overwhelms the system.
Moreover, wages are adjusted only every three or six months, which means that as inflation soars, real wages drop sharply, then jump up -- and promptly begin to go down again. Although everybody got used to the system at lower levels of inflation, "the pain is now greater," as MIT economist Stanley Fischer has observed.
Israelis anticipate that October and November will be bad months for prices, but are hoping that inflation will recede a bit, keeping them out of quadruple digits. There's a joke in Israel that goes this way: When former prime minister Menachem Begin promised to do away with double-digit inflation, he didn't say he'd do it by generating triple-digit inflation.
To slow a panicky unloading of Israeli shekels for dollars at black-market prices and reduce an adverse current account balance running about $4 billion a year, the new unity government recently cut in half the amount of currency Israeli citizens can take abroad, and slapped a six-month ban on the importation of cars, liquor and other luxury items. These are mere Band-Aids, temporary stop-gaps.
Israeli government sources say that foreign exchange reserves have plunged from about $3.7 billion at midyear to about $2 billion, the lowest level in 10 years. That's equivalent to only about six week's worth of imports. This is the single most worrisome part of the current grim picture.
Thus, it is not surprising that Prime Minister Shimon Peres and Foreign Minister Yitzhak Shamir were in Washington last week talking hopefully about getting emergency economic aid -- and even economic advice -- from their U.S. partners. The private message they got from the Reagan administration was simple: no more American help until they come up with their own plan to straighten out the economy.
So far, the Peres-Shamir government has not been able to make a serious and coordinated effort to stem the economic decline. The steps needed will be painful: a sharp reduction in the budget deficit -- which now runs 12 percent to 15 percent of the Israeli GNP -- by trimming not only military outlays, but by making additional reductions in civilian subsidies, including food subsidies. A significant drop in the military budget depends importantly on termination of the ill-starred adventure in Lebanon.
For years, Israel has survived despite huge annual budget deficits, while maintaining one of the most fully employed economies in the world: For a decade, the unemployment rate never topped 6 percent, and at the moment is about 5.5 percent.
But American officials, trying to walk a fine line between telling Israel what it should be doing, and seeing it sink into an economic morass, want the Israelis to take an austerity route -- now. "We are not under any pressure from the United States," an authoritative Israeli source says assuringly. "But our friends, the United States government, are consulting with us."
Peres struck a note of hope in the talks with State Department officials, contending that, with bridge financing and Israel's new stress on fast-growing high-tech industries that have great export potential, the situation can be turned around. They fear that too much crunching of the economy would be counterproductive.
But privately, some American experts on the Israeli economy think that the Israeli government will have to go further to deflate the economy by sharp cuts in spending -- including its long-standing food subsidies -- than it might like to. The Americans see no signs that the Histadrut, the Israeli labor organization, will cooperate voluntarily with Israel's unity government to reduce wages.
"They'll have to take the subsidies off, and let bread and other prices burst. For a while, that will guarantee a wild inflation rate. Then, you have to hope that their political system will stand the strain, and that the pressures will subside," an American adviser said.
Israeli political leaders know that the time has come for action, and that they must be tough. But they're not sure they can withstand unemployment rates at the double-digit levels that have depressed some major industrial nations in recent years. There is no arguing the severity of the problem, but as one Israeli leader said here this week: "There is a limit on what you can impose in a democracy."
It comes as a bit of a shock to look at a list of the major debtor countries, and find that the Jewish State is the eighth biggest. Last year's external debt was $24.2 billion -- in the same ballpark with the Philippines at $24.6 billion and Indonesia at $25 billion.
Even taking into account that foreign assets held by Israeli banks bring the net debt figure down to about $19 billion, it still is a burdensome amount, especially on a per-capita basis. It costs about $3.5 billion annually to service the debt, an amount roughly equal to two-thirds of the military budget.
So far, Israel has scrupulously met its schedules for payment of principal and interest, but some people are questioning whether some rescheduling can be avoided.
"I hope we don't have to do that," an Israeli leader said. "We would prefer to meet our commitments; we will work more and consume less." On the brighter side of the debt problem, it is spread out over long periods of time, and much of it is in friendly hands here.
According to projections by debt specialist William R. Cline of the Institute for International Economics, the Israeli gross debt will rise to more than $43 billion by 1987, which then would give Israel the unenviable distinction of being the fifth-largest debtor country, behind only Brazil, Mexico, Argentina and Indonesia. Israelis dismiss this as an unlikely scenario.
Nevertheless, the ravaged state of the economy in Israel appears to be as big a threat to its survival as the combined weight of the Arab states on its borders: For years, Israel has had to commit such a large share of its wealth to defense that only huge loans and gifts from the American government and by Jews living outside of Israel have kept it alive.
A high Israeli official concedes that the monetary cost of the war in Lebanon over the past two years is approaching $1 billion, and that, since the Yom Kippur war in 1973, the total cost for military operations and support comes close to $10 billion.
In conversations this week, Peres said that, "In the last 10 years, between two wars Yom Kippur and Lebanon and one peace, we've spent $17 billion to $18 billion." The grim reference to peace was, of course, to the agreement with Egypt, involving the return of the Sinai and its huge economic resources.
"We can find ways of overcoming our inflation" and other economic problems, an Israeli official said last week. "It has to be a decision acceptable to all sectors of our society -- the trade unions, the organizations of employers, the government -- to lower the standards of living and to change the system of general indexation that exists in our country."
His guess: It will take a minimum of one to two years to show results.