From 450 to 1 Per-cent

Published: December 20th 2010
in Economics » Israel

World map showing inflation

An island of stability


"Look at this island of financial stability in an ocean of economic chaos", said a senior European economist recently when he spoke about positive world economies and how Europe should learn from those economies in order to heal its own.


For almost ten years, Israel's financial policy has been to reduce its debts in terms of GDP (Gross Domestic Product), and to do as much as it can to reduce the public expenses, so that the government's deficit will not exceed over 3 per-cent of the GDP.


The scary 1980s


To many Israelis, the current inflation of 1-3 per-cent per annum seems normal. Only few remember that in 1984 the inflation pace was nearly 450 per-cent per annum and the country was facing bankruptcy. The government lost control on its expenses and morning prices were not relevant to afternoon prices.


Israel changed its currency twice; from the Israeli Lira (IL) to the Israeli Shekel (IS) and from the Israeli Shekel to the New Israeli Shekel (NIS).


It was in mid 1985, when Prime Minister Shimon Peres, Treasury minister Yitzhak Moda'I and the Histadrut leader Mr. Israel Caesar had reached an agreement that stabilized the economy. The inflation pace dropped sharply from 450 per cent to 20 per cent per annum in only two years.


The 1990s and the 21st century


During the 1990s the inflation in Israel dropped to the zone of 10 per-cent per annum. In the beginning of the 21st century the inflation was fully stabilized and the Consumer Price Index (CPI) in the country was normal and was similar to most western economies. Israel learned well the lesson of the 1980s and whenever the government revenues from tax income dropped, it immediately cut its expenses in order to keep the budget deficit as low as possible.


A proud and responsible economy


Ever since the notorious 1980s, Israel has jumped many steps forward. It's a member of the OECD respectful club. Its bonds that had "Garbage" rating in the past are rated A by Fitch. The high rating makes it easier for Israel to get international loans and at relatively low interest rates. In the beginning of the 1980s the American military and civil support to Israel was around 15 per cent of Israel's GDP. In 2010 the American support is around 2 per cent of the country's GDP. Israel is becoming more independent as its economy keeps growing. The CPI in Israel for November 2010, was as low as 0.1 per-cent. Lower than most analysts' initial estimations.


Person of the Year


Because it is considered an island of stability, foreign capital keeps coming into Israel's capital markets. The result of that coming foreign flow is a pressure on the Israeli Shekel (NIS).


In order to keep the Israeli export attractive, Professor Stanley Fischer, the Governor of the Central Bank is intervening for the last two years in the Forex market and keeps buying US Dollars on a regular basis. The countries estimated Forex reserves are nearly $70 billion.


Prof. Stanley Fischer was elected "Person of the Year" by Globes, an Israeli financial magazine, for its unique contribution to Israel's economy in those difficult times.


Prof. Stanley Fischer was Ben-Bernanke's Professor and he is considered as one of the best economists in the world. We can all be proud that this person is the Governor of the Central Bank of the Jewish State.

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