Israeli government officials today reacted with disappointment to President Carter's decision to limit additional U.S. aid to Israel to $200 million, saying it will mean cuts in defense spending, increased borrowing and a greater balance of payments deficit.
Prime Minister Menachem Begin's government, which received the highest U.S. foreign aid per capita in the world last year, had been hoping for twice the proposed supplemental aid in addition to this year's regular $1.785 billion foreign aid package. Officials have predicted that the government will have to implement extraordinary belt-tightening measures to avoid a budget shortfall of $1.2 billion or more.
Even then, Israel will face the prospect of rapid devaluation of the Israeli pound, increased inflation, extensive layoffs in defense-related industries and a reduction of foreign currency reserves of possible hundreds of millions of dollars, some economists suggested.
It is possible that the strain on Israel's already shaky economy -- where the annual inflation rate exceeds 100 percent -- will cause political reverberations and further weaken Begin's rightist Likud coalition. One repercusion that political analysts have discussed could be more intense opposition to the government's costly program of building Jewish civilian settlement in the occupied territories on the West Bank and Gaza Strip.
Before Israeli Defense Minister Ezer Weizman returned from Washington yesterday, after presenting Israel's aid request to Carter, reports circulated here that Carter would ask Congress for an additional $400 million for Israel in special military aid.
Israel requested a total aid package of $3.45 billion, including $1.8 billion for defense. While cautious members of Begin's government did not expect a generous increase over last year's total $1.785 billion, which is equal to $510 for each person in Israel.
In an apparent effort not to appear unappreciative, officials kept their reaction studiously low-key, confining their comments to what steps the government will have to take to avoid economic catastrophe.
Finance Minister Yigael Hurvitz, who has begun making stringent cuts in government spending in an effort to reduce inflation, said he was grateful for the U.S. aid, but he said it will not satisfy Israel's military or civilian needs. He warned that Israel would have to find ways to cut imports and increase exports to reduce a balance of payments deficit that economists said could go as high as $5 billion this year.
"We will have to make a supreme effort of our own to face the new situation . . . The printing machine cannot be the source of money," Hurvitz said. Asked if a recession is inevitable, Hurvitz replied. "We have to be realistic and live within our means with what we can earn and obtain."
Economists said other effects of the shortfall of expected aid will include increased borrowing at short-term, high-interest rates; use of foreign exchange reserves to make arms purchases; reductions in production of Israeli-made combat aircraft and missiles, and cutbacks in Army exercises.
The alternative, economists said, would be possible price controls and import restrictions and a massive devaluation of the Israeli pound. It has been speculated that the dollar exchange rate could be 60 pounds by the end of the year, compared to the current rate of 35 pounds. The pound has already been devalued up from 20 pounds a year ago, but Israel says that arms purchases, for which the supplemental aid is intended, are transacted in foreign exchange, and that inflation more than offsets the devaluation.
But some economists suggested the aid limit may be the psychological shock that Israel needs to get out of the pattern of inflationary spending in both the private and public sector, and to increase productivity.
They said that while they were disappointed that Israel's effort toward achieving Middle East stability was not rated higher in Washington, Israel had to be jolted into more realistic economic policies.
At Hurvitz's insistance, the government recently has been reducing or eliminating costly subsidies in the private sector, and this week it made a major breakthrough by agreeing with the usually demanding workforce of the nationally airline, El Al, to make painful cuts, including 40 percent pay reductions for some eployes in order to keep the airline alive.
Hurvitz said that more such demonstrations of selflessness are necessary to salvage Israel's aid-dependent economy from ruin, and he has called on workers throughout the country to consider reductions in pay and improvements in productivity.