Recent Economic Developments, 77

01/02/1997
All Press Releases In Subject:
The Economy and Economic Activity
Recent Economic Developments, 77, July 1996 - December 1996


 Main Developments
  The Principal Industries
   The Labor Market
    The Balance of Payments
     Prices
      The Government
       The Money and Capital Markets



Previous Economic Developments 76


Main Developments

From July to December 1996 (the period reviewed) economic activity continued to grow at a slower pace than in previous years. After slowing in 1996:ll, there appears to have been further moderation in 1996:lV. Domestic demand continued to rise rapidly in 1996:lll, however, and appears to have slowed only in 1996:lV. The gap between the rates at which GDP and domestic demand rose led to an increase in the import surplus in 1996:lll, alongside real appreciation of the exchange rate and a fall in the national saving rate. Despite demand pressures at the beginning of the period reviewed, both prices and inflationary expectations rose more slowly in the second half of the year. This was due to contractionary monetary policy, which acted to raise the interest rate at the beginning of the period reviewed and reduce it later on, maintaining real interest at a high level throughout the period. It was also due to the gradual increase in the exchange rate and the cumulative effect of the slower rate at which world trade prices rose. Fiscal policy, on the other hand, was expansionary throughout the period reviewed, and the budget deficit expanded, diverging substantially from the deficit target as defined by law.

In 1996:lll GDP grew by 2.6 percent (annual terms), and business-sector product by 3.5 percent, after each had risen by 3.3 percent in 1996:ll. The moderate level of economic activity was reflected by imports of production inputs (excluding fuel and diamonds), which fell by a real 9.1 percent (annual terms) from 1996:ll to 1996:lll, after declining by 22 percent in 1996:ll. These falling trends appear to reflect expectations of slower growth. A slowdown was also evident in the labor market, with the unemployment rate remaining stable. During 1996 GDP grew by 4.4 percent and business-sector product by 5 percent, after higher growth rates - 7.1 and 8.9 percent respectively - in 1995.

Despite the more moderate increase in supply, domestic demand continued to rise, growing by a steep 5.7 percent in 1996:lll (annual rate), after increasing by 4.8 percent in 1996:ll. In order to meet domestic demand, the import surplus grew further in 1996:lll, after rising in the preceding quarter. The increase in domestic resource use was led by a 9.4 percent rise in private consumption, while public-sector consumption and investment grew more moderately in 1996:lll - by 1.6 and 2 percent respectively (annual terms). The by-industry distribution of product shows that the slowdown was not uniform. Industrial production rose by 5.4 percent in 1996:lll, while as an indicator of activity in construction, residential investment fell by 1.9 percent (annual terms), primarily because of the contraction of private construction. As an indication of activity in the tourist industry, bed-nights dropped by 22 percent.

According to preliminary indicators, the moderation in economic activity appears to have persisted in 1996:lV. The state-of-the-economy index was lower by an average of 3.1 percent in 1996:lV than in 1996:lll, the index of industrial production declined by 0.9 percent, and imports of intermediates continued to fall - by 9.6 percent (dollar terms). Furthermore, several indicators show that domestic demand slowed: the index of large-scale retail trade rose by 1.3 percent (annual terms) in 1996:lV, and consumer goods imports were down by 5.1 percent in 1996:lV from the average in 1995:lV. Preliminary estimates made by the Central Bureau of Statistics (CBS) for 1996:lV indicate that production continued at a moderate pace and demand slowed, and the Bank of Israel's survey of companies shows that industrial output and domestic sales fell steeply in 1996:lV while industrial exports remained stable, and that activity in construction and tourism continued to decline.

The balance of payments reflected economic activity: goods imports (excluding ships, planes, fuel, and diamonds) were 2.4 percent lower during the period reviewed than in the same period in 1995, largely because of the fall in imported inputs, while goods exports (excluding ships, planes, fuel, and diamonds) rose by 7.7 percent, mainly due to the increase in industrial production. Thus, the trade deficit was 17.5 percent lower in the period reviewed than in the same period in 1995, continuing the declining trend evident since 1996:ll. The current-account deficit, on the other hand, was 50 percent higher (dollar terms) in 1996:lll than in 1995:lll, because of the rise in the import surplus on services, especially in tourism, and the increase in unilateral transfers.

During the period reviewed the Consumer Price Index (CPI) rose at annual rate of 6.8 percent, compared with 14.6 percent in the first half of the year. Most price indices showed a similar slowdown, especially in 1996:lll. The trend appears to have been due to the cumulative effect of the contractionary monetary policy adopted since May, the moderate depreciation in the currency-basket exchange rate during the period, and the slower rise of world trade prices. Inflationary expectations also moderated in the second half of the year, contributing to the slower rate at which prices rose. Especially noteworthy are housing prices, which fell by 6.3 percent in 1996:lll and rose by 15.6 percent in 1996:lV, mainly because of real developments in the housing market.

Fiscal policy was expansionary in the period reviewed, while monetary policy was contractionary. The government deficit increased by NIS 9.2 million, most of it in 1996:lV, and throughout the year stood at 4.7 percent of GDP - deviating by NIS 6.8 billion from the planned budget deficit path of 2.5 percent of GDP. The deviations during the year and in the period reviewed were due primarily to the shortfall in revenues while government expenditure did not depart significantly from its planned level. Deficit financing during the period reviewed was based mainly on government injection, which increased substantially, principally in December.

Because of the faster rise in prices in the first half of the year, the Bank of Israel adopted a contractionary monetary policy, raising the interest rate by 3 percentage points in May-July. In August-November, with the slowing of the rate at which prices and inflationary expectations increased, the interest rate was lowered by 2.3 percentage points. Despite the reduction of interest in the period reviewed, capital inflow persisted, exerting pressure for appreciation of the currency-basket exchange rate, so that it rose moderately, remaining near the lower level of the crawling band. From end-August to end-October the Bank of Israel had to intervene in the foreign-exchange market to prevent the currency-basket exchange rate from falling below the lower limit of the band. In order to avoid the immoderate expansion of the monetary base, the Bank partially offset the effect of the government injection and foreign-currency conversions by reducing the monetary (discount-window) auction (and cancelling the daily auction), and enabling commercial banks to deposit local currency in the Bank of Israel for three months at the interest rate set at the auction.

Figure 1. State-of-the-economy index (average 1994=100)
Figure 2. Industrial production (index, average 1994=100)
Figure 3. Housing starts and completions, and relative price


Table 1. Selected Economic Indicators, 1995-96
(Annual rates, seasonally adjusted)


1995
1996
Jul-Dec***
*

1995 1996 III IV I II III IV 1995 1996
Rates of change
(annual average, percent)
(compared with preceding quarter)**
Industrial production
(excl.diamonds)
7.9 5.4 4.0 5.2 7.3 2.9 5.4 -0.9 7.8 4.7 11
State-of-the-economy index 10.3 3.7 5.0 11.7 11.5 2.6 4.4 -3.1 8.3 0.6 12
Business-sector employment 5.5 2.9 11.2 -3.4 -1.4 9.8 8.3
5.0 3.1 9
Private building starts 7.7 -11.3 -29.1 18.7 -8.1 -54.4 69.9
-2.4 -4.1 9
Consumer Price Index
(CPI) (during the period)
8.1 10.6 10.1 12.3 11.6 17.6 4.4 9.2 11.2 6.8 12
CPI excl. housing, fruit and vegetables, controlled goods, clothing and footwear (during the period) 9.2 10.2 9.5 7.6 14.7 12.0 9.2 5.1 8.5 7.1 12
NIS/currency basket rate 4.6 3.5 -2.5 5.2 2.3 9.9 -5.4 9.9 3.0 3.4 12
NIS/$ exchange rate 0.0 5.9 3.5 6.8 7.6 15.0 -7.3 11.1 0.3 5.7 12
GDP 7.1 4.4' 1.7 1.5 8.6 3.3 2.6
6.0 4.0 9
Business-sector gross product 8.9 5.0' 1.3 5.0 7.8 3.3 3.5
7.4 4.9 9
Private consumption 7.3 6.1' 2.9 11.6 5.1 6.9 9.4
7.3 8.2 9
Levels (monthly average)
Unemployment rate (percent) 6.9 6.5 6.7 6.7 6.6 6.4 6.4


9
Immigrants ('000) 6.3 5.7 6.6 7.0 5.6 5.4 5.5 6.6 6.9 5.9 11
Domestic budget deficit
(percent of GDP)
3.5 4.7 6.3 3.5 4.1 3.0 4.1 7.7 4.9 5.9 12
Trade deficit
($ million)
675.3 677.7 689.1 784.1 795.8 700.1 652.3 562.7 736.6 607.5 12
Bank of Israel reserves at end of period ($ million) 8,158.3 11,420 8,838.6 8,158.3 9,697.3 8,887.1 10,230 11,420

12
Interest of monetary loan
(percent, average)
15.6 16.1 14.1 15.0 14.8 15.9 17.6 16.2 14.6 16.9 12
General share-price index 171.5 170.9 184.1 182.0 182.8 174.8 157.9 166.5 181.4 161.3 11

*
**
***
'
Source: based on Central Bureau of Statistics data.
Last month for which data are available.
Top section of table.
Compared with same period in preceding year.
Preliminary estimates.

Top



The Principal Industries

The index of industrial production was 5.4 percent higher (annual terms) in 1996:lll than in 1996:ll, falling by 0.9 percent in October-November. In the first eleven months of 1996 industrial production rose by an annual 5.4 percent, compared with 7.9 percent in 1995. In real terms, industrial exports were also higher by a significant 6.7 percent in 1996:lll than in 1995:lll, after falling by a real 4.8 percent from 1995:ll to 1996:ll. The fluctuations in the figures for industrial production and exports in the second and third quarters may reflect temporary developments, and activity may have been more stable. The number of employees in industry also remained steady in 1996:lll, after rising slightly in 1996:ll. Production grew in 1996:ll, although the number of employees did not rise, because of an increase in man-hours and productivity per employee - by 1.3 and 0.5 percent respectively. The growth rates of different two-digit industries varied more in 1996:lll than in 1996:ll. The food industry remained stable, production rose by an average of 2 percent in light industry, construction-allied industry and plastics and chemicals, but fell by 2 percent in heavy industry.

In construction there was a sharp drop in sales in 1996:lll, apparently due to a fall in demand. Apartment sales by the ten major contractors fell by 27.2 percent, and by 25 percent in October-November. The number of mortgages taken up fell by 14 percent in 1996:lll, and by another 2 percent in October-November. The number of transactions registered in the land betterment and purchase tax offices declined by 17.6 percent in 1996:lll and rose by 13 percent in October. Despite the reduction in sales in 1996:lll, building starts rose by 13.6 percent, and completions by 11.2 percent. Labor input in construction was up by 5 percent in 1996:lll over 1996:ll, mainly because man-hours increased while the number of employees remained stable. After contracting by 25 percent in the first half of 1996, apparently reflecting the security situation and closure of the Autonomy and the administered areas during this period, cement sales rose by 1.9 percent in 1996:lll and by 0.4 percent in October-November.

In tourism the decline evident since March, as a result of the security situation and developments on the northern border, persisted in 1996:lll. Incoming tourism was 6.2 percent lower than in 1996:ll, and 15 percent lower than in 1995:lll. Bed-nights fell by a moderate 3 percent in July-August compared with the same period in 1995, mainly because of the sharp drop in incoming tourism, while bed-nights of Israeli tourists rose in this period. (The number of tourist bed-nights was particularly high in the summer of 1995 and, when compared with 1994, tourism increased in 1996.) The decline in activity led to a 14 percent drop in labor input in tourism.

According to the quarterly survey of companies of the Research Department of the Bank of Israel, after industrial output and exports remained stable in the first three quarters of 1996 (in contrast to the picture obtained from the index of industrial production), industrial output and domestic sales fell in 1996:lV (seasonally adjusted figures), as did both the number of employees and capital utilization. Exports remained at the same level, however. Companies also report that the contraction of construction activity that began in 1996:lll persisted in 1996:lV, and tourism contracted still further.

Companies traded on the Tel Aviv Stock Exchange reported a decline in the internally generated cash flow (as a percentage of income) in industry, commerce, and real estate from 1995:lll to 1996:lll. The decline is particularly evident in real estate. Before-tax profit also fell in all industries, while financing costs (as a percentage of income) were higher than in 1995:lll. After losses in 1995:lV, the hotel industry rallied to some extent.

Figure 4. Large-scale retail trade (average 1995=100)
Figure 5. Tourism (index, average 1989=100)


Table 2. Indicators of Business Activity, 1995-96
(All data in this table, excluding construction, are seasonally adjusted)


1995
1996
Jul-Dec**
*

1995 1996 III IV I II III IV 1995 1996
Rates of change (average annual rates, percent)
Industrial production
(excl. diamonds)
7.9 5.4 4.0 5.2 7.3 2.9 5.4 -0.9 7.8 4.7 11
Large-scale retail trade 8.9 12.4 4.6 13.9 24.2 8.6 5.1 1.7 10.0 11.1 12
Industrial demand
for electricity
6.5 2.2 -1.1 -2.3 13.2 -1.8 5.1 -14.6 4.1 3.0 11
Cement sales 25.1 -7.5 -20.1 10.1 -23.9 -7.9 2.2 0.4 19.9 -6.7 11
Levels ('000, during period) (percent)
 
Residential starts (percent) 62.6 37.1 14.3 12.0 12.1 11.4 13.6
14.7 -4.6 9
of which: Government-initiated 27.7 13.8 6.0 3.4 3.7 4.5 5.7
254.7 -5.1 9
Residential completions
38.5 34.3 9.4 13.1 12.2 10.9 11.2
12.3 19.3 9
of which: Government-initiated 7.3 10.6 1.7 2.2 3.3 3.0 4.3
-32.3 153.5 9
Tourist arrivals 2,215.5 1,768.7 580.0 580.0 615.0 499.0 491.0 162.0 23.4
10
*
**
Last month for which data are available.
Compared with same period in preceding year.

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The Labor Market

The labor market expanded slightly in 1996:lll. On the demand side, there was a 3.0 percent rise (annual terms) in the civilian labor force, reflecting the stability of the participation rate and a similar increase in the working-age population. The number of employed persons was also up by 3.3 percent, with a 2.4 percent increase in the number of Israelis employed, mainly in the public services. Hours worked per employee were down by 2.7 percent in 1996:lll from 1995:lll, so that the labor input of Israelis remained stable. The decline in hours worked, rather than in the number of persons employed, may indicate producers' expectations that the contraction in economic activity would be temporary. Similar rates of change in the labor force and employment kept the unemployment rate stable at 6.4 percent. In the first 9 months of the year the civilian labor force grew by 2.1 percent, more slowly than in the same period in 1995, and the number of employed persons rose by 2.8 percent, causing a 0.3 percentage point decline in the unemployment rate, mainly in 1996:ll.

The number of residents of the administered areas employed in Israel (and registered with the Employment Service) was 15.4 percent lower in 1996:lll than in 1995:lll. The labor input of these workers was affected by the security situation and the closure of the Autonomy and the administered areas in February and September. Because workers from these areas could not attend work regularly, the number of permits issued to foreign workers was enlarged in the first half of 1996, and remained stable during the period reviewed - at about 106,000, most in construction and some in agriculture.

The unemployment rate stayed low at 6.4 percent in 1996:lll, remaining steady for men and women—5.7 and 7.4 percent respectively. Data on the depth of unemployment show differing trends: the proportion of persons unemployed in the last twelve months rose, while that of persons seeking work for 27 weeks or more fell, and that of persons unemployed for less than eight weeks increased.

Real wages were 1.3 percent higher in July-October than in the equivalent period in 1995. In the business sector wages went up by 1.2 percent, while in the public services they rose by 1.7 percent. In the public services the wage increase in 1996:lll over 1995:lll is particularly notable, especially in the civil service and education - 2.6 and 2.4 percent respectively - while in the health services wages fell by 2.8 percent. Contrasting trends can be discerned with regard to the number of hours worked per employee in 1996:lll; in the civil service and education they fell by 2.3 and 8.3 percent respectively, while in the health services they remained stable. In the business sector wages rose by a marked 4.5 percent in agriculture, and a more moderate 1.8 percent in industry. In electricity and water, and in transport and communications, however, where in the past wages have been high and wage-hikes excessive because they are monopolies and have strong labor unions, wages fell in 1996:lll, by 4.4 and 3.5 percent respectively.

During the period reviewed 23,400 immigrants came to Israel. In 1996:lll, out of a total of 543,000 immigrants of working age who have reached Israel since 1990, 263,000 were employed, and they accounted for 13 percent of Israeli employed persons. The proportion of persons actively seeking work among the immigrants in 1996:lll was 9 percent, and they accounted for 16.5 percent of all the unem-ployed. Note that during 1996:lll the unemployment rate for immigrants who came in 1990 was 6 percent, lower than the general unemployment rate.

Figure 6. Employment and unemployment (thousands)
Figure 7. Immigrants arrivals (thousands, monthly average per quarter)
Figure 8. Real wage per employee post (index average 1994=100)


Table 3. Indicators of Developments in the Labor Market
1995-96

(All data in this table, excluding wages, are seasonally adjusted)


1995
1996
Jul-Dec**
*

1995 1996 III IV I II III IV 1995 1996
Labor force
participants
('000)
2,108.9 2,153.5 2,115.6 2,122.4 2,119.8 2,161.7 2,179.1
3.8 3.0 9
Employed persons ('000) 1,964.1 2,014.0 1,974.3 1,980.2 1,978.7 2,022.9 2,039.5
4.9 3.3 9
of which: Business sector***
1,399.6 1,440.1 1,425.6 1,413.2 1,408.3 1,441.6 1,470.5
5.0 3.1 9
             Public sector*** 564.4 573.9 548.7 567.0 571.4 581.3 569.0
4.7 3.7 9
Israeli labor input in business sector
(rate of annual change over preceding quarter)
5.2 2.2 22.6 -17.3 16.3 -4.5 11.7


9
Unemployment rate (percent) 6.9 6.5 6.7 6.7 6.6 6.4 6.4


9
Claims for unemployment benefit ('000) 68.6 74.7 72.7 70.4 70.7 70.9 77.8 81.6 12.1 10.5 11
Job applicants ('000) 71.3 83.8 74.0 72.9 73.6 74.4 79.5 119.7 12.8 29.7 11
Real wage per employee post***
(deflated by CPI, quarterly rate)
2,2 1.0 3.1 0.0 1.9 0.6 0.5 1.2 1.8 1.3 10
of which: Business sector 0.5 0.6 2.4 0.6 1.7 0.9 0.5 -0.5 2.0 1.2 10
*
**
***
Last month for which data are available.
Compared with same period in preceding year.
Not seasonally adjusted.

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The Balance of Payments

During the period reviewed the average monthly trade deficit (excluding ships, planes, fuel and diamonds) was $ 608 million, 17.5 percent lower than in the equivalent period in 1995. This decline has persisted since 1996:ll, after reaching a peak in 1996:l. The decline in the trade deficit was due to a 2.4 percent fall in imports (excluding ships, planes, fuel and diamonds) alongside a 7.7 percent rise in exports (excluding fuel and diamonds), continuing the import and export trends evident since the beginning of the year. The growth of imports reflected a 2.5 percent rise over the equivalent period in 1995 in consumer goods (because of the increase in consumer nondurables), a 1.4 percent increase in consumer durables, and a 5 percent drop in raw materials, which account for over half of imports. The growth of exports reflected an increase of 6.7 percent in industrial products, of 8.6 in agricultural products, and of 12.8 percent in other products, most prominent among these being computer software.

Prices of imported goods were 4.8 percent lower in 1996:lll than in 1995:lll. The prices of exported goods also fell, but by less - 2.2 percent. The decline in the prices of imported and exported goods continued the downward trend of the three preceding quarters, after sharp increases in 1995. Thus, the terms of trade improved by 2.3 percent over 1995. Excluding diamonds, prices of imports and exports remained stable in 1996:lll, and the terms of trade were up by 2 percent in 1996:lll over 1995:lll. Volume imports and exports were substantially higher in 1996:lll than in 1995:lll - up by 8.9 and 8.7 percent respectively.

Imported services were 20 percent higher in 1996:lll than in 1995:lll, while exported services rose by only 4 percent. Imports from the Autonomy and the administered areas fell by 20 percent, while exports to these areas rose by 7 percent. Imports of goods and services, especially tourist services, as well as trade with the Autonomy and the administered areas, were severely affected by political and security events and by military activities on the northern border early in the year. Unilateral transfers, mainly by the private sector, rose by 6 percent during the period reviewed. Thus, the current-account deficit was 50 percent higher in 1996:lll than in 1995:lll, all the increase being due to the larger private-sector deficit.

The growth in the current-account deficit in 1996:lll was financed by long- and medium-term capital imports, which increased substantially, mainly because of the public sector. Short-term capital imports by the nonfinancial private sector also continued, inter alia because yield gaps persisted between Israel and foreign markets; in 1996:lll this sector imported $ 500 million - $ 1.7 billion since the beginning of the year - compared with capital imports of $ 1.8 billion in 1995. Thus, despite the increase in the current-account deficit, the reserves had risen to $ 11,420 million by the end of 1996.

Figure 9. Foreign trade ($million per month)

Table 4. Foreign Trade and Reserves, 1995-96
(Excluding ships, aircraft, diamonds, and fuel)


1995
1996
Jul-Dec
*

1995 1996 III IV I II III IV 1995 1996
Monthly averages ($ million, current prices, seasonally adjusted)
Trade deficit 675 678 689 784 796 700 652 563 737 608 12
Goods imports 1,774 1,858 1,783 1,923 1,937 1,877 1,853 1,766 1,853 1,809 12
of which: Consumer goods 304 328 299 332 343 322 334 313 316 324 12
             Capital goods 389 422 385 430 437 425 421 404 407 413 12
             Intermediates 1,081 1,108 1,039 1,161 1,157 1,129 1,097 1,049 1,130 1,073 12
Goods exports 1,099 1,180 1,094 1,138 1,142 1,177 1,200 1,203 1,116 1,202 12
of which: Industrial
1,012 1,075 1,016 1,039 1,053 1,055 1,093 1,100 1,027 1,096 12
Bank of Israel reserves,
at end of period
8,158 11,420 8,839 8,158 9,697 8,887 10,230 11,420

12
*
Last month for which data are available.

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Prices

In the second half of 1996 the CPI rose by 6.8 percent, after increasing by 14.5 percent in the first half of the year and by 11.2 percent in the equivalent period in 1995. The slowdown in the rate at which prices rose (evident since June) was apparent in most price indices. The CPI excluding housing, clothing and footwear, fruit and vegetables, and controlled goods, reflecting underlying inflation, rose by 7.1 percent in the second half of the year, compared with 13.4 percent in the first. The wholesale price index went up by 3.8 percent, compared with 10.3 percent in the first half of the year. The slowing of the rate of increase was notable in 1996:lll, when the CPI rose at a moderate annual rate of 4.4. percent, while in 1996:lV it rose by only 9.2 percent. The rate at which prices rose slowed in the second half of the year, even though domestic demand increased faster than GDP in 1996:ll and 1996:lll. This apparently reflects the cumulative effect of the contractionary monetary policy adopted since May in order to keep down the increase in the inflation rate evident in the middle of the year (see the section on the money and capital markets, below), the slow depreciation of the currency-basket exchange rate - by 1.3 percent during the period reviewed - and the slower rate at which Israel's import and export prices rose. Real developments in the housing market, which plays a large part in the CPI and in inflationary expectations, also had an effect. Together with monetary restraint, the slower rate of inflation appears to have led to the 4 percentage point reduction in inflationary expectations in the second half of the year, and the latter also contributed to the slower rate at which prices rose. Nevertheless, despite this slowdown in the second half of 1996, the CPI rose by 10.6 percent in 1996 as a whole - overshooting the annual inflation target of 8-10 percent.

The more moderate price increase in the second half of the year was evident for most consumer goods except for the seasonal category, clothing and footwear. Particularly noteworthy is the slower rise in prices of apartments, which went up by an annual rate of 4.1 percent in the second half of the year, compared with 23.1 percent in the first half. The turning-point in these prices came in 1996:lll when, after a 31.8 percent rise in annual terms in 1996:ll, they fell by an annual rate of 6.3 percent. In 1996:lV the decline stopped, and housing prices rose, giving an annual increase of 15.6 percent. The trend of housing prices reflects real developments in the housing market, monetary policy, and the depreciation of the dollar, which affects housing prices in the short run. The rate at which prices rose in other industries also reflects demand pressures in 1996:lll: price increases moderated in industry and the services, but accelerated in the other industries.

Figure 10. Estimated inflationary expectations for the next 12 months

Table 5. Selected Price Indicies, 1995-96
(Annual rates of change during period, percent)


1995
1996
Jul-Dec
*

1995 1996 III IV I II III IV 1995 1996
Consumer price index (CPI) 8.1 10.6 10.1 12.3 11.6 17.6 4.4 9.2 11.2 6.8 12
CPI excl. housing, fruit and vegetables, controlled goods, clothing and footwear 9.2 10.2 9.5 7.6 14.7 12.0 9.2 5.1 8.5 7.1 12
Index of housing prices 13.6 10.2 17.1 18.9 15.1 31.8 -6.3 15.6 18.0 4.1 12
CPI excl. housing, fruit and vegetables 8.8 10.1 6.9 10.7 9.7 15.0 7.2 8.7 8.8 7.9 12
Wholesale price index 10.0 7.0 4.8 9.6 8.6 12.1 1.7 6.1 7.1 3.8 12
NIS/$ exchange rate 3.1 5.0 7.5 11.6 -2.6 21.8 -10.5 14.6 9.5 1.3 12
NIS/currency busket rate
5.8 3.0 -2.9 13.0 -6.5 17.1 -8.9 12.7 4.8 1.3 12
*
Last month for which data are available.

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The Government

During the period reviewed the budget deficit amounted to 4,7 percent of GDP, compared with 3.5 percent in the same period in 1995. The increase in the deficit was particularly marked in 1996:lV, reaching NIS 6 billion, 7.7 percent of that period's GDP, mainly because of a drop in government revenues in 1996:lV to 33.4 percent of GDP. Preliminary estimates show that in 1996 the domestic deficit excluding net credit (cash basis) reached NIS 14.4 billion, i.e. 4.7 percent of GDP. This represents a deviation of NIS 6.8 billion from the planned budget deficit of 2.5 percent of GDP. Most of this deviation was because of the approximately NIS 6.0 billion shortfall in actual revenues while government expenditure was not reduced substantially.

Throughout the year the public-sector debt was financed equally by borrowing from the public and the government injection, which was affected inter alia by the government's foreign-currency borrowing on international markets. In the second half of the year the share of the injection grew, mainly because of a NIS 2.3 billion injection in December. During the period reviewed the government injected a total of NIS 6.3 billion, and net public borrowing of NIS 5.1 billion consisted solely of sales and issues of bonds, with virtually no privatization.

During the period reviewed tax receipts were higher by a real 3.5 percent than in the same period in 1995—rising in 1996:lll and falling in 1996:lV. Most of the increase in 1996:lV was due to a 13.6 percent rise in tax receipts on domestic production. Direct tax receipts, including those from income tax, were up by a real 5.1 percent over the equivalent period in 1995, and indirect tax receipts on civilian imports fell by a real 12 percent. Transfer payments to the public fell by a real 41 percent, because of the decline in tax receipts from construction included in this item.

At the beginning of July the government decided to reduce government expenditure in that year's budget by NIS 350 million, with a 1997 deficit excluding credit of 2.8 percent of GDP, the latter to be attained mainly by increasing revenues. In December the Knesset (parliament) approved the budget, and the government thus undertook to return to the deficit reduction path.

Figure 11. Government cash flows (NIS million, monthly average)

Table 6. Fiscal and Monetary Indicators, 1995-96
(Cash flows as percent of GDP)


1995
1996
Jul-Dec
*

1995 1996 III IV I II III IV 1995 1996
Government domestic expenditure 40.5 40.5 42.0 39.3 42.7 37.6 40.5 41.1 40.7 40.8 12
Government receipts 37.0 35.7 35.7 35.9 38.5 34.6 36.5 33.4 35.8 34.9 12
Domestic budget deficit 3.5 4.7 6.3 3.5 4.1 3.0 4.1 7.7 4.9 5.9 12
Public-sector domestic deficit 4.4 5.4 7.3 4.0 3.3 3.5 6.0 8.6 5.6 7.3 12
Government net borrowing from the public 3.3 2.6 4.0 3.2 2.5 1.3 2.9 3.6 3.6 3.3 12
Public-sector injection 1.1 2.8 3.3 0.9 0.8 2.2 3.2 4.9 2.1 4.0 12
Bank of Israel injection
-8.4 -3.5 -9.1 -5.8 -2.5 -1.4 -6.3 -3.6 -7.4 -4.9 12
of which: Monetary loan -4.2 -1.0 -1.5 -1.5 1.1 -0.4 -2.5 -2.0 -1.5 -2.2 12
Private sector conversion of foreign exchange
7.0 1.9 5.7 4.8 2.9 -0.2 3.7 1.1 5.2 2.4 12
Change in monetary base
-0.3 1.2 -0.1 -0.1 1.3 0.6 0.6 2.4 -0.1 1.5 12
 * Last month for which data are available.

Top



The Money and Capital Markets

Because the rate at which prices rose in the first half of 1996 accelerated, overshooting the annual inflation target, the Bank of Israel adopted a contractionary monetary policy and raised the interest rate by 3 percentage points between May and July. Subsequently, as the rate of price increase began to moderate in July, and because of the decline in inflationary expectations, in August the Bank of Israel began to reduce the interest on its sources, and by January 1997 the rate had been reduced by a total of 2.3 percentage points. Despite the reduction of the interest rate in the second half of 1996, it was higher than the average interest rate in the first half of the year - 14.3 percent. The yield on indexed bonds shows that real interest rose during the period reviewed, although at a slower rate than nominal interest, and declined concurrently with nominal interest, reverting at the end of the year to its average level in the first half of the year.

Capital inflow continued during the period reviewed. Short-term capital imports by the nonfinancial private sector amounted to $ 545 million in 1996:lll, similar to the average in the first half of the year. The capital inflow exerted pressure for appreciation of the currency-basket exchange rate throughout the period reviewed. In order to prevent the exchange rate from falling below the lower limit of the crawling band, from end-August to end-October the Bank of Israel had to renew its intervention in foreign-currency trading (having refrained from doing so since mid-February). Thus, the currency-basket exchange rate rose by an annual 1.3 percent during the period reviewed, and at the end of it, after receipt of economic aid in October, the foreign-exchange reserves reached $ 11.4 billion.

During the period reviewed the monetary base grew by NIS 2.3 billion, representing 1.2 percent of GDP, with wide fluctuations in its components. In June-August the government injection soared, reaching NIS 5 billion (in July alone there was a large seasonal injection as public service employees received their vacation supplement). From end-August the government injection shrank, but the Bank of Israel began to intervene in foreign-currency trading. In December, when the government injection is generally large, the government injected an additional NIS 3.5 billion. All these were offset in part by the Bank of Israel, which absorbed NIS 7.8 billion during the period reviewed. The Bank of Israel found it difficult to absorb the excess liquidity due to the increased government injection and private-sector conversions by cancelling the daily monetary auction and reducing the monetary (discount-window) loan, and was forced to introduce a new instrument - an auction for the commercial banks' local-currency deposits in the Bank of Israel for three months.

Narrow money (M1) increased by an annual 15.6 percent in the period reviewed (up to December, preliminary estimates), and M2 by 32.5 percent. A rise in long-term deposits generally goes hand in hand with a reduction in the interest rate, as in fact occurred during the period reviewed. Although the exchange rate against the currency basket remained near the lower limit of the crawling band for most of the period reviewed, inflationary expectations do not appear to have been generated. As a result, in the category denominated in and indexed to foreign currency, deposits increased by a moderate 8.3 percent, while credit rose by a substantial 23.6 percent (both of them in dollar terms).

The index of bond prices fell by 5 percent in July-August, when withdrawals from provident funds peaked, also causing the price of bonds to fall. Because of the high interest rates, the world stock market slump in the summer, and the expected slowdown in the rate of growth, the general share-price index continued to decline, reaching a trough at end-August unseen since March 1995. All these factors created an atmosphere of crisis in the capital market, leading the Bank of Israel and the Ministry of Finance to announce and implement a safety-net, undertaking to purchase bonds in order to prevent wide fluctuations in their price. As a result of this, together with monetary restraint, the lower demand for credit, the fall in the supply of indexed bonds, and the slowdown in withdrawals from provident funds, bond and share prices rose once more in 1996:lV.

Figure 12. M1, M2 and bank credit (constant prices; index 1988: I=100)
Figure 13. Nominal interest rate and inflation (annual rate)
Figure 14. The sheqel exchange rate against the currency basket


Table 7. Monetary Indicators, 1995-96
(Percent, in annual terms)


1995
1996
Jul-Dec
*

1995 1996 III IV I II III IV 1995 1996
Rates of change (over previous quarter, percent)
Increase in aggregates (average)
during period**
 
M1 8.4 14.4 46.9 0.0 14.3 15.1 16.9 -1.4 15.3 10.9 11
M2 (excluding securities) 35.2 25.7 41.1 22.4 25.1 17.0 38.3 24.8 29.4 33.8 12
M3 (excluding securities) 25.5 25.2 32.9 23.7 25.4 25.9 30.6 22.8 27.1 25.3 11
Nondirected bank credit 26.2 20.6 18.0 19.3 21.8 24.9 21.8 22.0 19.9 20.2 11
Unindexed local-currency credit
11.0 10.1 -4.0 10.0 11.9 16.9 10.5 17.7 5.8 13.8 11
Levels
Nominal interest (percent)










Short-term unindexed local-currency credit 20.2 20.7 18.9 19.8 19.6 20.5 21.9 20.8 19.2 21.5 11
Monetary loan (percent, average) 15.6 16.1 14.1 15.0 14.8 15.9 17.6 16.2 14.6 16.9 12
Self-renewing overnight deposits (SRO) 13.3 13.8 12.0 12.7 12.5 13.6 15.1 14.0 12.2 14.6 11
3-month Eurodollar 5.9 5.4 5.8 5.7 5.3 5.4 5.5 5.4 5.7 5.4 12
Yield to maturity of Treasury bills (percent) 15.4 15.6 14.0 15.1 13.7 15.7 17.0 15.9 14.4 16.6 11
Real yield to maturity of 10-year bonds (percent) 4.3 4.5 4.4 4.4 4.3 4.3 4.9 4.5 4.4 4.7 11
General share price index 90.7 92.4 97.4 97.1 97.4 94.8 84.4 93.0 97.3 88.7 12
*
**
Last month for which data are available.
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