Israel announced a new set of far-reaching economic measures based on free-market principles yesterday, including a decision to let its currency "float" - that is, to find its own level on international exchanges.
Finance Minister Simcha Ehrlich said that a "floating" Israeli pound would probably be valued at about 15 to the dollar, a devaluation of 31 per cent compared with a 10.35 rate before yesterday's announcement.
The net effect of this, and a 50 per cent boost in value-added taxes, would be a drastic cut in consumption at home. These moves are also calculated to make foreign investment in Israel more attractive.
Banks will be closed on Sunday, a working day in Israel, and the floating pound and new value added tax - 12 per cent instead of 8 per cent - will take effect Monday.
At the same time, the government abandoned foreign currency controls of the kind that led to the resignation in December of former Prime Minister Yitzhak Rabin. He and his wife, Leah, had admitted to holding bank accounts in Washington, which was illegal under the old rules.
The program bore at least the partial imprint of American economist Milton Friedman, who had advised the government on a visit in July to abandon currency controls.
The measures validate the committment to a free market that the rightist Likud government of Prime Minister Menahem Begin had promised after nearly 30 years of the socialist-oriented Labor Party rule.
Predictably, socialist and Labor Party leaders reacted bitterly to the program, and promised to fight it. Yeruham Meshel, secretary general of Histadrut, the Israeli labor federation, said:
"it is a hard blow to the country's lower-income groups, while it provides a huge windfall profit to speculators and the owners of dollar accounts."
The cheaper pound means that imports will cost more for Israeli buyers. It is the latest in a series of belt-tightening moves that include a 25 per cent rise in fuel prices only 48 hours ago, and reductions in food subsidies that are expected to raise food costs 30 per cent within the next few months.
The currency controls are not to be completely abandoned. As explained by Ehrlich, Israelis - for the first time since the Jewish state was founded - will be able to hold up to $3,000 in foreign currencies abroad, an unlimited amount at home, and to freely convert the Israeli pound to other currencies.The Rabins had more than $3,000 on deposit in their Washington accounts.
Opposition leader Shimon Peres said, bitterly that "whoever has dollars and capital willbe richer. Overnight, we will have new millionaires, perhaps even billionaires."
Ehrlich said the new program, "a revolution in thought as well as execution, "would attract badly needed investment into Israel. He predicted that while the new package might cause an initial price rise of 10 per cent, the opportunity for new investment by both foreign and domestic companies would provide a new impetus for the economy.
Ehrlich said the sharp drop in the value of the Israeli pound would bring it in line with its real value, and that the floating of the pound and abandonment of currency controls would make Israel into a "major international financial center."
Currently, the currency control system and a monthly devaluation up to 2 per cent a month, have resulted in a triple exchange rate system - one for exports, one for Israelis buying foreign currency for trips abroad, and one for tourists. Now, there will be one rate, set by market fluctuations.
The austerity measures will be offset to some extent by discontinuing three existing measures: premiums for exports, a 15 per cent tax on imports, and a nearly-punitive tax on travel abroad. According to government estimates, when these offsets are taken into account, the real depreciation of the value of the pound wille in the area of 25 per cent.
To cushion the social shock caused by the combination of the devalued pound, higher taxes, and reduced food subsidies, the government said it would increase payments to the poor by 12 per cent.
Another cushion, Central Bank sources hinted, would be intervention to prevent erratic changes in the exchange rate. In effect, Israel appears to be ready to run a "managed float," comparable to those operated by most major nations.