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Dollar$ and $en$e

Byline: Miriam Shaviv

Date: Friday, January 25, 2002

Publication: The Jerusalem Post


With the shekel falling to a record low against the dollar this week, Miriam Shaviv hears from financial experts why it is time for the Israeli economy to finally unlink itself completely from the American currency

In late 1983, with inflation approaching 200 percent, the economy was close

to collapse.    To the Israeli public, it seemed that the Treasury had no

more answers: the shekel was losing value daily, and the country was rocked

by scandal when the commercial banks' shares crashed.


Then, in the middle of November that year, Yediot Aharonot exposed finance minister Yoram Aridor's last-ditch plan to revive the economy:

'dollarization.' Under the top- secret plan, which had been leaked to the

Hebrew daily by a member of Aridor's staff, the dollar would to all intents

and purposes replace the shekel as the national currency. Although Israelis

would still formally trade in shekels, all wages, prices and the budget

would be presented in dollar terms. Presumably, by linking the Israeli

economy to the almighty dollar, the Israeli economy would finally gain

stability. 'This is a courageous plan which will save the economy,' Aridor

said grandly.


The scheme, however, was not well received by Israelis, who perceived it as unpatriotic.


'First they turn the shekels into dollars, then they'll give up the flag and

after that the national anthem,' one man told The Jerusalem Post.


Aridor, already under pressure to resign because of the dire state of the

economy, gave in his notice the next day. Months later, however, he was

still insisting that adopting the dollar was inevitable, because it would

solve Israel's financial woes. 'People who criticized and laughed at my

so-called dollarization program are now beginning to consider it more

seriously,' he said hopefully in January 1984.


The plan, of course, was never formally instituted. But 17 years later,

Israelis still have a fatal attraction to the dollar. Many Israeli

industries have voluntarily linked themselves to the American currency,

presenting their prices in dollars while allowing their customers to pay the

equivalent in shekels. Because the income of so many local businesses is

affected by the dollar's level against the shekel, the front pages of

Israel's dailies have slavishly followed the shekel's weakening against the

dollar in the past few weeks. European countries rarely bestow such

attention on the exchange rate.


Try booking a wedding hall and reserving a caterer in Israel.


'The price of a meal portion in a morning event ranges between $15 and $23,'

says Shlomo Nizri, owner of the Gates of the City function hall in the

entrance to Jerusalem.


Why does he charge in dollars? 'That's the way my whole industry works. I

suppose it looks cheaper in dollars,' he says.


Computer equipment, overseas flights and package tours, Internet surfing

rates, and lawyers' fees are also usually advertised in dollars. Most

notoriously, it is almost impossible to rent an apartment unless the

contract specifies a dollar sum.


'There is no real justification for the real estate market to function in

dollars,' admits Meir Nachshon, managing director of Anglo Saxon real estate

in Israel. 'Two-thirds of the expenses of contractors are in shekels, and

landlords have no expenses in dollars.'


While 'dollarization' was once held as a possible solution for Israel's

economic woes, today it has become a problem: consumers are left vulnerable

because prices of common items are likely to fluctuate wildly depending on

the exchange rate. In recent weeks, for example, the shekel has lost much of

its value, up to 7.7 percent in the last month alone. By this Wednesday the

shekel had closed at NIS 4.60 to the dollar, an all-time low. As a result, a

$100 flight which cost NIS 430 in mid-December cost some NIS 460 in

mid-January, although salaries - earned in shekels - did not increase.


For those paying rent in dollars, the result can be devastating.


'I feel very weary about the dollar situation,' says Cathy Chipkin, a South

African immigrant who rents a room in Jerusalem's Katamon neighborhood for

$200 a month. 'I'm on a tight budget and only planned to spend NIS 800 on my

apartment. Now I'm spending NIS 900 and who knows how much higher it will

go. I've already had to restructure my budget and will have to speak to my

landlord about reducing my rent, but I don't think he'll agree.'


For Deutsche Bank economist Victor Shohet, 'being linked to the dollar is

one of the biggest sicknesses afflicting this country. People have to start

realizing it's their right to pay in shekels.'


ISRAELIS first started to link to the dollar in the early 1970s, when

inflation started rising into double- digits, says Yoram Gabbai, general

manager of the Pe'elim group and former Finance Ministry state revenue



At that time, prices began changing more and more quickly, making it hard

for consumers to keep track of what items were worth.


'If prices change every day, there is no meaning to the shekel, or as it was

then, the lira,' he explains. 'It was much easier to think in terms of

dollars, which were more stable.'


As inflation worsened in the early 1980s, eventually reaching 300% and 400%

a year, most prices and contracts, even those drawn up by the government,

were dollar- denominated. At a time when the price of a loaf of bread in

shekels could double or triple between 8 a.m. and noon, Israelis also tried

to keep their hard cash in dollars.


'People did not understand what a shekel was,' says Gabbai. 'You could not

talk in terms of shekels.'


Conditions changed in 1985, when finance minister Yitzhak Moda'i and prime

minister Shimon Peres devised an economic stabilization plan that severely

curtailed hyperinflation. One of its elements was the introduction of the

New Shekel, a fresh, homegrown currency which the government encouraged

Israelis to use. Most industries, such as car importers, made the changeover

successfully by the early 1990s, leaving the dollar for the New Shekel.


Today, says Hebrew University economist Eitan Sheshinski, there is no reason

for most industries to conduct their business in any currency but shekels

(though he makes an exception for export-oriented businesses).


Few of the industries which conduct business in dollars really have any

dollar expenses, he says.


Moreover, the conditions which originally sparked the dollar-rush have

disappeared. Inflation for 2001 was 1.4%, and 0% in 2000, figures which are

lower than the inflation in most Western countries, including the US where

inflation last year was 3.4%.


'When inflation is at such levels, it doesn't make a difference whether

prices are in dollars or shekels,' Sheshinski says. 'Prices will change very



The shekel, he says, is also currently 'very strong' - to the extent that

some regard it as one of the strongest currencies in the world. While the

euro lost 25% since it was launched January 1, 1999, the shekel has lost

just 10% so far. In the last five years, some overseas investors have

actually bought shekels rather than dollars, because the interest rate on

the shekel tended to be much better.


So why do so many industries still insist on being linked to the dollar?

Most experts agree the reasons are psychological and historical, rather than



According to Dr. Shlomi Reznik, a sociology lecturer at Bar-Ilan University,

the collective memory of the economic fiasco in the early 1980s is

overpowering, and has left Israelis with a chronic sense of uncertainty

about their financial future. Back then, the crisis was largely blamed on

government mismanagement, and Israelis fear there is no guarantee that it

will not be repeated.


'Shekels are wonderful today, but what will happen tomorrow?' Reznik asks.

'Israelis want to use a hard currency.'


THE FEARS, while unlikely to come to pass, are reinforced by the current

economic predicament, says Gabbai.


'We have a large deficit and are in the midst of a budgetary crisis, where

the haredim and the residents of the Negev are pressuring the government to

give them funds, but there is no one to finance their demands. These things

change quickly - Argentina also looked very strong two years ago.'


Michael Shalev, chairman of the department of Sociology and Anthropology at

The Hebrew University, prefers to connect the dollarization to force of



'Once you have set out on a certain course, it is very hard to change the

rules of the game,' he says, adding that people are so accepting of the

status quo that they will stick with it even if it hurts them.


'When the rent situation gets out of line, like now, for example, people

will squeal, and try to renegotiate with their landlord,' he says. 'But if

the landlord refuses to make any changes, they will accept the dollar

linkage as a quaint fact of life. Expenses associated with buying or renting

an apartment are so random anyway, they will take it as one more spin of the

roulette wheel and live with it.'


The inertia, however, can have serious economic consequences.


'There is nothing good about being linked to the dollar,' says Shohet.


Dollar linking inevitably weakens the importance of the shekel. It can also

affect inflation, and economic sources in Jerusalem complain that these two

factors together make it much harder for decision makers at the Treasury and

the Bank of Israel to plan and implement a proper economic policy.


Unnecessary inefficiencies are also introduced into the market. Prices,

which should be dictated by issues of supply and demand, fluctuate according

to the exchange rate, interfering with the normal running of the economy.


Then there's the risk.


'If business owners have to pay their production costs, labor costs,

electricity and water in shekels, but then price their product in dollars,

what will they do if the dollar suddenly falls?' asks the economic source.

'They might find that they cannot cover their costs, or that their product

is much too expensive, for no reason other than the exchange rate.'


When a business has paid most of their expenses in dollars, however, and

then charges in dollars, much of the currency risk is rolled onto the

client, who will end up paying extra if the shekel weakens.


'In any normal country, currency fluctuations are simply the price of doing

business,' says Shohet. 'Computer importers in England don't price their

products in dollars, it's unheard of.'


IN MANY cases, says Shohet, clients simply do not realize the risk they are

taking by signing a dollar- denominated contract, especially when it comes

to rent.


For example, some landlords include provisions that protect them if the

shekel strengthens too much, but leave their tenants high and dry if the

shekel weakens. Indeed, business owners have learned to take advantage of

their clients' naivete when it comes to dollar pricing in a myriad of ways,

says the spokeswoman of the Israeli Consumer Council Orna Biber.


Some take advantage of the different dollar exchange rates and use the one

which benefits them most, when they should be using the representative rate.


Others, she says, take the opportunity to increase their prices by an

additional 1% to 2%, when the dollar strengthens. Another favorite trick is

to use shekel prices for some products, and dollar prices for others, on



'This fuzziness makes it harder for the customers to judge prices,' she

says. 'We have received many complaints on this matter.'


Some, like Sheshinski, hope that businessmen who do not have many dollar

expenses will revert back to the shekel naturally, with time.


'It takes a long time to get used to the fact that we have European or

US-rate inflation,' he says. According to Sheshinski, there are signs that

Israelis' attachment to the dollar has continuously weakened. In recent

years, for example, both saving plans and banking credit have dropped dollar



A complete changeover, he says, would have no negative inflationary affects,

or harm the economy in any other way. The main problem, he says, would be to

figure out what to do with existing contracts which are drawn up in dollars.


The Ministry of Trade and Industry is not waiting. It is heavily promoting a

draft bill which would ban advertising in dollars, except in the duty-free

and flight prices, which the ministry deems overwhelmingly affected by

services the airlines must buy overseas.


According to Meron Hacohen, the ministry's chief legal advisor, the ministry

does not expect much opposition when the bill is presented for its second

and third readings in the coming weeks.


'This bill will pass,' he says. 'It is supported both by the government and

all the consumer associations. If the Americans buy in Japan, do they price

their products in yen? The shekel is the Israeli currency. It is time we

start running the market in our local currency, just like in they do in the

rest of the world.'

© 2010 Miriam Shaviv | Design by Danny Bermant