Publications"; $toptitle1a="Foreign Currency Department Annual Reports"; $toptitle2="Foreign Currency Department Annual Report, 2006"; ?>
Investment of the Foreign Exchange Reserves

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The average level of the Bank of Israel's foreign exchange reserves in 2006 was about $28 billion, equal to 4.8 months' worth of imports, and constituting about 75 percent of Israel's short-term foreign debt (a fall of 0.2 months and 4 percentage points, respectively, on 2005).

There was no change to the framework of the management of the reserves, which was based on the possible uses of the reserves and their benefit to the economy. The management framework was under review in 2006, a process which continues into 2007.

The holding period rate of return on the reserves in terms of the numeraire in 2006 was 3.8 percent, up from 2.6 percent in 2005. The return reflected the rise in yields to maturity in the capital markets in which the reserves were invested during the year, where rising interest income was accompanied by capital losses.

In 2006 the holding period rate of return on the reserves was 12 basis points higher than that of the neutral benchmark, a spread that reflects the contribution of active management of the portfolio. As in previous years, most of the incremental yield derived from asset selection.

The exposure of the reserves to the world banking system averaged 32 percent of the reserves this year. This exposure is managed under a system of quotas and rules, which plays a central role in credit-risk management of the portfolio.

The reserves have a very high liquidity: about 92 percent of the portfolio is invested in liquid assets, and the rest in assets with lower liquidity.