Bank of Israel Warns Knesset: Avoid 'Election Economics'

Article Summary
Addressing the Knesset Finance Committee, the governor of the Bank of Israel warned that the elections might affect the economic stability of Israel and that the national deficit will be higher than expected. Gad Lior reports that in spite of some warnings, he gave a positive impression of the current government's economic policy.  

At a special meeting of the Knesset Finance Committee held Wednesday, May 2, Bank of Israel Governor Stanley Fischer cautioned against election economics, warning that it was liable to harm the currently stable Israeli market. Responding to the call made by the committee chairman, Knesset Member Moshe Gafni (United Torah Judaism), to "exert pressure on the banks to lower the interest rates and fees charged from private account owners," Fischer took the side of the banks, arguing that, to assure the stability of the banking system, it was necessary to allow the banks high-enough profitability.

At the meeting, Fischer reviewed the Israeli market performance in 2011 and outlined the forecasts for 2012. With reference to the banks' allegedly high profits, Fischer noted that "with the exception of one single bank, the banks [in Israel] are not making such huge profits. Indeed, they should be allowed to go on obtaining an adequate return on their capital to maintain stability. We should also exercise caution to avoid a credit squeeze. We have asked the banks to raise their capital adequacy ratios — to 10% for the major banks and to 9% for all other banks. However, it is not an easy thing to do. We are not interested in putting the banks at risk, the way it happened in the United States and Europe.

"If we tell the banks to drastically cut into their profits, it will impair the balance [of the financial system]. On the other hand, there is inefficiency in the system and hidden unemployment, and it is hard to take care of this problem. There is also the issue of high wages, not only of senior executives, and these all contribute to the high costs incurred by the banks. The banks should be encouraged to reduce fees, but it is no less important for the central bank to make sure that they do not take too high risks."

Summing up his review of 2011, Fischer noted that "it was a globally weak year, even in the emerging markets, where growth rates were low in comparison with previous years. Due to the globally low growth rates, the growth rate in Israel was only moderate. Israeli consumers spent less in 2011 compared with previous years." As to the forecasts for 2012, Fischer said that "there is uncertainty in Israel, as well as the world over, about future economic growth. If the trend of mild recession in Europe continues, we will be able to cope with it."

The Bank of Israel governor highlighted the government's "budgetary success," noting that it "managed to reach a deficit of 3%." At the same time, he added that "the deficit this year will apparently be around 3.5%, which would constitute a deviation from the target deficit. While governmental expenditures have not markedly increased, we are entering a period of elections now and it is of the utmost importance that we avoid election economics. Already, there are surplus commitments beyond the budget, totaling 6.6 billion shekels, and this is certainly a problem — in particular if we experience economic slowdown."

Referring to the housing situation, Fischer noted that "there has been an increase in the supply of apartments on the market, while housing prices have remained relatively stable." As to unemployment, Fischer said that "the unemployment rate in Israel as calculated prior to the change in the calculation method was the lowest in the Western world. However, even according to the new calculation method [adopted by the Organization for Economic Cooperation and Development], the unemployment rate in Israel — standing at less than 7% — is still rather low. With respect to the social issue, the Bank of Israel governor said: "It is not true that the government is escalating poverty levels. In fact, from 2009 to 2011, poverty levels declined slightly, although there is still much to be desired."

Found in: stanley fischer, netanyahu, israel, elections, economics, benjamin netanyahu, bank of israel

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