Recent Economic Developments, 82

01/05/1998
All Press Releases In Subject:
The Economy and Economic Activity
Recent Economic Developments, 82, October 1997 - March 1998


 Main Developments
  The Principal Industries
   The Labor Market
    The Balance of Payments
     World developments, the Asian crisis,
       and the economic implications for Israel
       Prices
        The Government
         The Money Market



Previous Economic Developments 81


Main Developments

From October 1997 to March 1998 (the period reviewed) there was a sharp reduction in the inflation environment, from about 10 percent in March-September 1997 to 4-7 percent at the end of the period reviewed. Concurrent there was further moderation of economic activity. The growth rate remained low for the eighth consecutive quarter, and per capita GDP fell. The level of unemployment remained high, and there are indications of a further rise towards the end of the period reviewed. Despite the rise in unemployment and moderation of economic activity, real wages per employee post increased, as did the minimum wage. Real short- and long-term interest rose in the period reviewed, while real appreciation moderated relative to the trend of the last few years. The decline in the trade deficit was checked, and in the period reviewed its monthly average was $ 456 million, similar to the level in the preceding period (April-September 1997).

The Consumer Price Index (CPI) rose by 4.4 percent in the 12 months to March 1998, and during the period reviewed the rise was even slower, 1.3 percent in annual terms. In five of the last seven months, the CPI has actually fallen. Indices taking seasonal adjustments into account also moderated sharply, rising by 2-3 percent, annual rate, in the period reviewed. Inflation expectations for the following 12 months also declined steeply, to 5-6 percent at the end of the period reviewed. This is the first significant reduction over a number of consecutive months, from the 10 percent inflation environment prevailing since 1992. In light of the consistent effect of the basic factors affecting inflation, a real opportunity exists to advance rapidly towards achieving the price stability prevailing in the industrial economies, in accordance with the government's decisions.

The factors leading to the economic slowdown in the period reviewed were effective throughout 1997, and are fully described in the Bank of Israel Annual Report, 1997. Processes associated with the ending of the expansionary effects of the influx of immigrants dampened domestic demand, mainly in investment in the principal industries and in construction. Investment in 1997:lV was 2 percent lower than in 1996:lV, and according to indicators of the construction industry and of capital goods imports, the slowdown persisted in 1998:l, too. Investment is also affected by the continued political and security uncertainty, which had an adverse effect on incoming tourism, too. Nonetheless, capital stock continued to rise markedly in 1997. Private consumption eased, rising by only 0.9 percent in annual terms in 1997:IV. Indices of turnover based on VAT receipts also show that consumption moderated. Economic policy, characterized by fiscal and monetary discipline in order to restore the balance-of-payments deficit to a sustainable path and attain the inflation target, served to keep the expansion of domestic demand low. Fiscal restraint, which enabled the attainment of the 1997 deficit target after two years of large deviations, is continuing to moderate the rate of expansion of public consumption, while tight monetary policy has kept real short-term interest rates relatively high.

The reduction of excess demand acted both to slow the rate of price rises and to dampen economic activity, as reflected by the various economic indicators during the period reviewed: business-sector product in 1997:IV was a mere 0.4 percent higher than in 1997:lll, the state-of-the-economy index rose at an annual rate of 1.6 percent during the period reviewed, and industrial production went up at a similar rate, and on average actually declined in the period reviewed compared with the preceding one. The tourist industry continued to suffer in the context of the tension vis-a-vis Iraq. The Bank of Israel's survey of companies supports these findings, firms' replies pointing to domestic demand as the major barrier to the expansion of activity. In the labor market, labor input in the business sector fell, but the real wage rose, apparently due to the sharp decline in inflation and the rise in the minimum wage. The easing of excess demand served for the first time in a long period to restrain real appreciation, compared with the trend of the last few years, and actually led to slight real depreciation in 1998:I. In 1997, this process was accompanied by some diversion from domestic to overseas markets, with a reduction of imports and growth of exports, but the improvement in the trade deficit halted in the period reviewed as imports stabilized and even rose slightly while export growth slowed.

Beyond the effect of lower excess demand, the modest rise in the exchange rate, which moved along the lower limit of the crawling band until March 1998, and the decline in dollar import prices also contributed to the fall in inflation. Inflation expectations fell due to wider recognition of the action of disinflationary economic forces, in particular the credibility of economic policy regarding commitment to the inflation target, and also as a result of adaptation to the slowdown in price rises. The fall in inflation expectations supports the reduction in the inflation environment.

Several factors hamper the return to a faster growth path. Demand for Israel's exports is expected to be adversely affected by the economic crisis in East Asia, as its ability to compete with exports from those countries declines and as world demand falls, reflected by the expected contraction of world trade. The first indications of the adverse effect can be seen in the decline in exports to Asian countries in the period reviewed, although its full extent is not yet clear. Labor shortages in high-tech occupations also make it difficult for some leading export industries to expand. The erosion of business-sector profitability - related to the rise in the real wage, and in particular to the further increase in the minimum wage in April 1998, and reflected in a rise in unit labor cost - has continued. The heavier tax burden in 1997 also acted as a disincentive to growth. The reduction of public-sector investment in the infrastructure is expected to harm the chances of growth in the longer term. Security and political uncertainty makes it harder to utilize the opportunities embodied in the globalization process, and also harms incoming tourism. Tension due to the actions of Iraq also impaired tourism, and could have longer-term results.

The moderation of both price increases and inflation expectations enabled monetary policy to gradually reduce nominal interest. Because actual and expected inflation declined faster than interest, monetary restraint was expressed in a rise in real short-term interest during the period reviewed. The combination of a sharp reduction in the inflation environment and cautious monetary policy often finds expression in high real interest rates for a while - a characteristic of economies undergoing rapid disinflation. The combination of high real interest rates and continued tight fiscal policy helps to dampen domestic demand. This caution is necessary, however, for two main reasons. The first is to ensure that the opportunity created in the last few months to significantly reduce inflation is not missed, and this is a process which requires time. The second is that the uncertainty in the foreign-currency market, due mainly to the uncertainty regarding the implications of continued liberalization and the Asian crisis, also requires particular caution in the conduct of monetary policy.

The exchange rate remained close to the lower limit of the band during the period, and the Bank of Israel did not intervene in trading, except for a few days in December and January. In April, in the context of uncertainty as the estimated date of the introduction of another significant step of liberalization approached (Independence Day), the foreign-exchange market became more volatile. The exchange rate against the currency basket rose quite sharply to about 4 percent above the lower limit of the band in mid-April, and declined to 2.9 percent above it at the end of April. The average quarterly level of capital inflow remained high, although from November 1997 to February 1998, in view of the crisis in Asia, nonresidents' portfolio investments in Israel's stock market halted, as did offerings abroad by Israeli companies, while direct investment remained high. Since February the stock market has rallied, against the backdrop of the return of foreign investors.

Figure 1. State-of-the-economy index (average 1994=100)
Figure 2. Industrial production (index, average 1994=100)
Figure 3. Interest and the inflation environment
Figure 4. Housing starts and completions, and relative price


Table 1. Indicators of Business Activity, 1996-98
(all data, excluding construction are seasonally adjusted)


1997
1998
Oct-Mara
*

1996 1997 I II III IV I 1997 1998
Rates of change (annual average, percent), compared with preceding quarter
State-of-the-economy
index

3.2 4.8 8.2 8.8 -0.5 3.1 0.4 1.4 2.0 3
Large-scale retail trade 12.6 8.0 9.3 15.2 0.4 3.8 12.0 8.8 7.4 3
Industrial production (excl. diamonds) 5.3 2.0 1.2 11.7 -0.7 -2.1 -3.5 1.6 2.2 2
Business-sector consumption
of electricity
4.7 3.9 22.3 7.6 -1.7 -31.0 -2.5 5.7 -5.4 1
Rates of change (percent), compared with preceding quarter
Tourist arrivals -5.4 -6.0 -1.0 0.7 -4.0 -4.0 -6.2 -15.2 -10.8 3
Immigrant arrivals -6.4 -6.6 -29.8 -5.6 45.4 2.2 -29.3 -6.4 -4.1 1
Residential starts
(percent)
-18.1 -9.9 -17.3 10.0 -2.0 -22.8
4.1 -31.2 12
of which:
 Government-initiated
-29.2 -18.0 -35.6 56.8 -27.2 -5.3
52.1 -30.4 12
Residential completions 35.4 21.7 1.0 1.7 3.8 11.8
14.9 19.2 12
of which:
 Government-initiated
132.2 36.4 0.4 20.7 -7.9 -14.6
146.4 -4.7 12
Survey of companies
(percent)b
Net output
of manufacturing firms
4c -2c -9 -6c -1c -4c -5c

3
Net sales
by commercial firms
-7c -8c -5c -7c 2c -23 -10c

3
Utilization of machinery and equipment in manufacturing -7 -13 -15 -8 -12 -15 -20

1
*
Last month for which data available.
a
Compared with same period in preceding year.
b
Difference between the number of firms reporting a rise and those reporting a fall, as a percentage of all reporting firms.
c
Denotes non-significant result at 5 percent level.

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The Principal Industries

According to national accounts data, per capita GDP declined in 1997, with GDP rising by 1.9 percent, and business-sector product by 1.5 percent, and population growing by 2.5 percent. Leading the slowdown in growth was that of domestic uses. Investment fell by 5.9 percent, reflecting a sharp decline in investment in construction and transport vehicles, and a more moderate reduction in machinery and equipment. The rise of private consumption slowed to 3.3 percent, and that of public consumption to 2.3 percent. The slowdown in the growth of domestic uses was also reflected in a significant moderation of the rise in imports compared with the average of the 1990s, to 2.6 percent. In contrast, exports of goods and services increased by 6.1 percent, slightly above the 5.0 percent rise in 1996.

In 1997:IV the rate of growth remained below its potential and slowed even a little further. GDP rose by 1.2 percent from the previous quarter (in annual terms), and business-sector product by only 0.4 percent. Imports of goods and services declined slightly, and their exports fell steeply. Private consumption grew slowly, after remaining stable in 1997:III. Investment rose sharply, after declining in the previous quarter. Public consumption rose to its level in 1996:IV. Note that the breakdown of quarterly national accounts data is sometimes problematic, and data of exports and investments for 1997:IV are inconsistent with other indicators such as foreign-trade or construction data.

The slowdown of industrial activity became more severe in the period reviewed. The index of industrial production, seasonally adjusted, rose on average by a cumulative 1.4 percent, annual rate, after declining in 1997:III. It was 3 percent lower on average in the period reviewed than in the previous period, although it was 2.5 percent higher than in the equivalent period a year earlier. The number of employees increased by a half of one percent, and the number of their hours worked fell by one percent in the period reviewed compared with the previous period (annual rates). In the period reviewed production declined from the previous period in nearly all industries, the electronic equipment industry remained stable, while only the transport vehicles industry increased. High-tech industries in total (machinery and electrical equipment, transport vehicles, and electronic equipment) slowed down by less, thereby preventing an even sharper decline in total industrial production. This was expressed in the continued growth of exports of the high-tech industries (see section on the balance of payments).

The construction industry also slowed down further in 1997:IV. The number of residential building starts, mainly private, plunged by 22.8 percent, following the downward trend of 1997. Residential completions accelerated in 1997:IV, so that the number of apartments in process of building declined by 8.3 percent compared with 1997:III. The number of Israelis employed in construction declined by 7.4 percent from 1997:III according to the Ministry of Construction and Housing. There was a sharp decline (of 30 percent) in the number of permits for private construction of apartments in the large towns, and in the number of transactions, based on the number of property tax and land betterment tax files opened. According to partial data for January-February 1998, there was a slowdown in the number of starts and completions of apartments under construction initiated by the Ministry of Construction and Housing in both urban and rural areas, in the number of housing loans taken up, and in apartment sales by the ten largest companies. Nevertheless, the number of transactions registered by the property tax and land betterment tax authorities in the first few months of 1998 rose to a level 2.7 percent higher than in the equivalent period a year earlier.

The number of tourists arriving by air continued to decline in 1997:IV and 1998:I, and was 11 percent lower than in the equivalent period a year earlier. The number of tourist bed-nights was 12 percent below than in the preceding period (seasonally adjusted, annual rates). The tension in the Gulf area also damaged tourism, which has suffered since the beginning of 1996. This could cause long-term harm due to the adverse effects on investment in tourism and the loss of the market share of world tourism.

The Bank of Israel survey of companies supports the results arising from data of the principal industries. Thus in 1998:I there was some decline in industrial activity (seasonally adjusted). The data, not seasonally adjusted show that output fell, as did domestic sales, domestic orders, and exports (but the latter not significantly). The shortage of domestic orders was quoted as the main limitation on companies' activity. Some of the companies reporting increased exports mentioned labor constraint as preventing output growth. All industries recorded reduced output apart from electronics, electricity, and transport vehicles, and chemicals, rubber, and plastics (with non-significant increases). For the eighth consecutive quarter, companies reported a fall in the utilization of machinery and equipment. Trading companies reported a seasonal decline in sales, although seasonally adjusted the fall was not significant. Construction firms reported a reduction - for the fifth consecutive quarter - in the extent of building works carried out. That in 1998:I applied to both residential and infrastructure construction. The downturn in hotel activity which started in mid-1996 continued, mainly in tourist bed-nights. Transport and communications companies also reported lower activity.

The sales revenue index of trade, as well as that of trade and services, rose slowly in the period reviewed compared with the previous period, by 0.5 and 1.1 percent respectively (annual rates). The large-scale-retail-trade index rose by 8.6 percent compared with the equivalent period a year earlier, similar to its rise in 1997 and below its 12.8 percent rise in 1996. In 1998:I it rose at an annual rate of 12 percent, but this should be treated with caution in light of the great volatility of this index.

The moderate activity level of industries was reflected in 1996-97 in the nonrealization of potential GDP, i.e., of the production capacity inherent in the available factors of production - capital and labor. The Bank of Israel Annual Report, 1997 estimates the output gap, the average deviation from the potential in 1997, at 5 percent of GDP. Labor utilization (the actual unemployment trend compared with natural unemployment) and capital utilization are usually taken as indicators of the approach towards or distancing from potential output. The current indicators, including the trend of unemployment, changes in utilization of equipment, and responses in the survey of companies, as well as utilization according to business-sector electricity consumption (Table 1), show that the economy is still on a path below that of its potential output.

Figure 5. Tourism (index, average 1989=100)

Table 2. National Accounts, 1996-98
(seasonally adjusted)


1997
1998
Oct-Mara
*

1996 1997 I II III IV I 1997 1998
Rates of change (average annual rates, percent, constant prices), compared with preceding quarter
GDP 4.5 1.9 2.2 2.1 1.9 1.2
3.3 1.8 12
Business-sector product 5.2 1.5 -0.8 4.1 1.6 0.4
3.2 1.3 12
Private consumption 5.2 3.3 5.0 15.6 -0.1 0.9
1.4 5.2 12
Gross domestic investment 6.8 -5.9 -13.6 2.6 -4.0 8.3
-5.9 -2.0 12
Goods and services exports 5.0 6.1 12.8 5.7 8.7 -9.5
3.6 4.0 12
Goods and services imports 7.6 2.6 5.2 15.8 -0.8 -1.4
-0.7 4.5 12
Public-sector product
5.5 2.3 3.8 -6.7 -1.3 4.9
8.5 0.1 12
*
a
Last month for which data available.
Compared with same period in preceding year.

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The Labor Market

The unemployment rate rose from an average of 6.7 percent in 1996 to 7.7 percent in 1997, along with stability in the labor force participation rate. The rise reflects the slow rate of economic growth, which reduced demand for workers, while the civilian labor force continued expanding. Nonetheless, and despite the increased share of nonresidents among the employed, the real wage and unit labor cost in the business sector rose relatively fast in 1997. This may be due to several factors: wage rigidities such as the determination of the wage path on the basis of one- or two-year agreements without taking into account the full effect of the increase in unemployment and the rapid (and unexpected) decline in the rate of inflation; the rise in the minimum wage (due to changes in legislation and the rapid rise of public-sector wages in the last few years which increased the average wage); laying-off workers at low wage levels; and a shortage of labor in highly skilled occupations.

In 1997:IV, the rate of unemployment fell, with a rise in both the civilian labor force and the number of employed persons (in the public sector), but data on the number of work-seekers and claims for unemployment benefit show that unemployment worsened. In the period under review, the number of work-seekers (excluding those applying for income support) rose on average by 3,000 (about 2.5 percent) compared with the preceding period, and the number of claims for unemployment benefit went up by 7,000 (about 7 percent). The number of work-seekers rose by 10,000 (5,00 excluding claims for income support), and claims for unemployment benefit increased by 7,000. The number of unemployment black-spots grew to 20 in March, most in the south of the country. Unemployment is on the increase in the main towns, too. Those laid-off accounted for 60 percent of newly registered work-seekers in March.

The number of employed Israelis increased by 0.9 percent in the period reviewed compared with the preceding period (seasonally adjusted). The number employed in the business sector, not seasonally adjusted, fell by 0.8 percent, mainly in construction, with the number employed in manufacturing at a standstill in 1997:III and 1997:IV. The public sector continued to expand, and increased by 3.3 percent, reflected by the decline in unemployment in 1997:IV. The number of hours worked per employee was 4.5 percent lower in 1997:IV than in 1996:IV. According to unadjusted data of the National Insurance Institute, the number of employee posts declined marginally in the period reviewed, with the business sector contracting and the public sector growing, and compared with the equivalent period in 1996-97 there was no change in either sector. These data emphasize the extent of the slowdown of labor demand in the business sector.

The real wage per employee post rose by 2.3 percent (seasonally adjusted) compared with the equivalent period in 1996-97. This reflects a relatively steep 3.4 percent rise in the private sector and a more moderate one in the public sector. The real wage per employee post (unadjusted) fell in both sectors in the period reviewed compared with the preceding period, in the public sector a steep seasonal decline, and in the business sector a moderate one. In contrast, the industry survey shows that the hourly wage rose significantly in real terms in 1997:III and 1997:IV (seasonally adjusted), despite the fact that hourly output remained unchanged. The minimum wage was raised by 8.5 percent in April 1998, due to a rise in the average wage, following significant increases in 1996-97.

Figure 6. The labor market (thousands)
Figure 7. Real wage per employee post (NIS, 1995 prices)


Table 3. Indicators of Labor Market Developments, 1996-98
(seasonally adjusted)


1997
1998
Oct-Mara
*

1996 1997 I II III IV I 1997 1998
('000s)
Civilian labor force 2,157 2,209 2,184 2,204 2,220 2,227
2.5 2.4 12
Israelis employed 2,013 2,039 2,023 2,035 2,042 2,057
2.1 1.8 12
   Business sectorb
1,436 1,446 1,416 1,457 1,461 1,448
1.5 1.3 12
   Public sectorb 577 594 599 585 588 606
3.6 3.1 12
Average hours worked
per employee
b

38 38 39 37 38 37


12
Claims for
unemployment benefit
76 97 90 96 100 103 107 19.7 27.6 3
Work seekers 83 119 112 121 122 122 126 44.7 15.8 3
Real wage per employee post (NIS) 4,282 4,393 4,353 4,380 4,407 4,430 4,446 2.7 2.3 1
   of which: Business sector
4,275 4,442 4,362 4,484 4,441 4,482 4,471 2.2 3.4 1
Unemployment rate (%) 6.7 7.7 7.4 7.7 8.0 7.6


12
*
Last month for which data are available.
a
Percent change compared with same period in preceding year.
b
Not seasonally adjusted.

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The Balance of Payments

The trade deficit declined in 1997, with imports falling, due to a decline in domestic demand, and exports rising, especially those of high-tech industries. The improvement in the terms of trade also contributed to this development, with relatively modest appreciation compared with that of the last few years. The trade deficit did not change in the period reviewed (excluding ships and aircraft, diamonds, fuel, and seasonally adjusted) compared with the preceding period (March-September 1997), and stood at $ 456 million, in monthly terms. This development reflects a moderation of industrial exports, which rose by 2.6 percent, and a slight increase, 1.5 percent, in imports, with a 6.0 percent reduction in imports of capital goods, a rise of 4.2 percent in imports of intermediates, and stability in imports of consumer goods. Nevertheless, in 1998:I the trade deficit declined from the previous quarter, and was lower than the average for 1997. A reduction of 1.2 percent in imports of intermediates and of 6.9 percent in those of capital goods, with a 1.7 percent rise in industrial exports, contributed to this development. In the period reviewed, exports of the high-tech industries continued expanding. Exports of machinery and equipment increased by 11 percent, communications, medical, and scientific equipment by 4.3 percent, motors and electrical equipment by 24 percent, and electronic components and computers by 2.1 percent. On the other hand, exports of rubber and plastic fell by 4.7 percent, and of jewelry by 3.6 percent. Exports of textile, clothing, and leather rose for the fourth consecutive quarter (a cumulative 7.5 percent increase), despite the crisis affecting the industry.

In 1997, the net goods and services account showed an improvement of $ 1.5 billion; in 1997:IV there was an improvement of 0.6-0.8 percent compared with both 1997:III and 1996:IV (in annual terms). There was a slight decline in unilateral transfers from the level in 1996:IV, so that the net current account ended with a surplus of $ 164 million compared with $ 39 million in 1996 (the surplus in the current account derives from the receipt of the US economic aid). Private-sector medium- and long-term capital flows remained at a relatively high level ($ 1.4 billion) in 1997:IV, alongside small-scale short-term capital inflow of the nonfinancial private sector.

According to data of the Bank of Israel Foreign Exchange Control, there was a decline in the current account in 1998:I.* Capital inflow, on a quarterly basis, remained at a high average level in the period reviewed. Capital exports by the commercial banks and purchase of foreign currency by the Bank of Israel bridged the gap. Foreign-currency credit from authorized dealers was renewed in 1998:I, and amounted to $ 1 billion, having eased off for about half a year. Nevertheless, foreign-currency-indexed credit fell significantly in the period reviewed so that the two together, credit in and indexed to foreign currency of the nonfinancial private sector rose by only $ 0.5 billion in 1998:I. From November 1997 until February 1998 there was a halt in nonresidents' portfolio investments in shares on the Tel Aviv Stock Exchange and in issues overseas, against the background of the crisis in Asia, but in March they recovered. Nonresidents' direct investment remained at a relatively high level throughout the period reviewed. The Bank of Israel foreign reserves reached $ 21.3 billion at the end of the period, compared with $ 19.0 billion at the beginning.

According to national accounts data, there was on average no real appreciation in 1997:IV, in contrast to the long-term trend. The price of exports went down by 0.7 percent, and the price of imports (excluding defense exports, ships and aircraft) rose by 0.6 percent, compared with an increase of only 0.1 percent in the prices of business-sector output. Nevertheless, compared with 1996:IV there was real appreciation which accumulated in the first three quarters of 1997. An indication of real depreciation may be obtained by comparing inflation abroad, plus the depreciation of the exchange rate, with domestic inflation. In the countries whose currencies make up the currency basket, average inflation was 2 percent. The value of the basket rose by 4.8 percent in the previous 12 months, and by 3.6 percent in the previous 6 months. The CPI rose by 4.4 percent in the previous 12 months, and by 1.3 percent in the previous 6 months. In other words, according to this indicator, there was real depreciation of 2.5 percent in the last year, and of 4 percent in the last 6 months (in annual terms).

* Foreign-exchange control data are on a cash basis, and are not always consistent with Central Bureau of Statistics data.


The liberalization of foreign-exchange control

Continuing the gradual liberalization of foreign-exchange control, just before Independence Day the Prime Minister, the Ministry of Finance, and the Bank of Israel announced a change in the regime. Whereas to date every foreign-exchange transaction was forbidden unless specifically permitted, henceforth every foreign-exchange transaction is permitted unless specifically forbidden. All the restrictions regarding foreign-exchange transactions that formerly applied to households and the business sector have been lifted, except for those regarding investment by institutional investors and derivatives transactions of nonresidents. Among the principal transactions that are now permitted are unlimited investment abroad by individuals, unlimited unilateral transfers, unrestricted holdings of foreign currency, removal of restrictions on making payments in foreign currency in Israel or abroad, and on receiving foreign-currency from nonresidents; the requirement to present documentation upon making foreign-currency transactions is annulled, and foreign-currency transactions may be undertaken directly with foreign financial entities. There will nonetheless be a reporting requirement regarding transactions, so that foreign-currency flows can be analyzed.

The main transactions to which restrictions still apply concern institutional investors and derivatives transactions by nonresidents. The remaining restrictions on resident institutional investors are the probibition of direct and portfolio investment abroad by pension funds and insurance companies, and of direct investment abroad by provident funds, and the limitation of the foreign-currency investment of the latter to 5 percent of their portfolio. These restrictions will be removed gradually at the forthcoming stages, in accordance with the tax policy regarding residents' investments abroad. At present there are no limitations on investment abroad by banks and mutual funds. The restrictions on nonresidents' NIS/foreign-currency derivatives transactions will be removed once the implications of the removal of the restrictions on households and individuals have been examined. This step is intended to remove the one-month time-limit on NIS/foreign-currency derivatives transactions denominated in foreign currency and implemented by nonresidents (there is currently no restriction on such transactions by residents, but are limited to a one-month horizon for nonresidents). Note that for some time nonresidents have been permitted to deposit and borrow local currency, invest in the TASE, and undertake derivatives transactions in foreign-currency- indexed local currency without any restrictions.

These measures come in addition to a series of liberalization measures announced by the Ministry of Finance and the Bank of Israel in August 1997 and implemented in three stages. First, the upper limits on investment abroad by institutional entities were raised, and the ceiling on portfolio investment abroad by firms and mutual funds was annulled. In January 1998 the amount individuals were permitted to send abroad as a support payment or gift was increased, and residents were allowed to buy foreign currency in order to place it in a foreign-currency-denominated deposit and undertake unlimited NIS/foreign-currency derivatives transactions. In April the implemented of the third and final stage of liberalization was announced, and Israeli banks were permitted to purchase sheqels from banks abroad, thereby enhancing the sheqel's convertibility. The number of categories of nonresidents' deposits was reduced to two, one in local currency and one in foreign currency, and any transaction permitted in local currency was permitted in foreign currency, too. Employers of short-term foreign workers were permitted to buy foreign currency in order to pay their wages without having to present a visa and employment permit.

An important condition for significant progress in the liberalization process is dealing with the asymmetry in the taxation of portfolio investments of residents in Israel and abroad (see Bank of Israel, Annual Report, 1997, Chapter 6). The gap between the taxation of portfolio investments in Israel and abroad contributed to the asymmetry of capital flows, and detracts from the effectiveness of progress in liberalization as regards its contribution to the diversification of the investment portfolio and the moderation of real appreciation.

Figure 8. Foreign trade ($million per month)

Table 4. Balance of Payments, Foreign Trade, and the Reserves, 1996-98
($ mill., current prices)


1997
1998
Oct-Mara
*

1996 1997 I II III IV I 1997 1998
Monthly averages
Trade deficit 662 478 514 466 450 482 430 497 456 3
Goods imports 1,854 1,776 1,785 1,737 1,779 1,802 1,765 1,757 1,784 3
   Consumer goods 328 322 327 324 314 322 324 319 323 3
   Capital goods 421 383 382 358 414 376 350 384 363 3
   Intermediates 1,105 1,071 1,075 1,054 1,052 1,104 1,091 1,054 1,097 3
Goods exports 1,193 1,298 1,270 1,271 1,329 1,320 1,336 1,260 1,328 3
   Industrial 1,124 1,228 1,199 1,205 1,257 1,253 1,274 1,191 1,264 3
Quarterly averages
Net current account -1,337 -889 -1,004 -1,468 -1,249 164
39 164 12
Long- and medium-term
capital flows
1,190 1,344 1,643 663 2,226 843
1,758 843 12
   of which: Private sector 769 1,043 617 670 1,470 1,415
1,665 1,415 12
Short-term capital flowsb 495 1,266 3,506 2,985 -543 -885
-1,236 -885 12
   of which: Private sectorb 292 1,278 3,530 2,982 -485 -916
-1,170 -916 12
Net foreign debt (% of GNP) 20.84 19.15 20.56 21.05 20.91 19.15
20.84 19.15 12
End-period Bank of Israel reserves 11,420 20,071 15,336 17,794 18,973 20,071 21,341 12,728 20,511 3
*
Last month for which data are available.
a
Foreign trade data are seasonally adjusted monthly averages (excluding ships, aircraft, diamonds, and fuel).
b
Including the banking system.

Top



World developments, the Asian crisis,
and the economic implications for Israel

In March 1998 the IMF revised its forecasts for 1998-99 and amended its estimates for 1997. The forecast rate of growth for the world in 1998 was cut by another 0.25 percent, to 3.25 percent, from the 3.5 percent forecast in December, in view of the reassessment of the effect of the crisis in South-East Asia, and from the 4.3 percent forecast in October, which did not take the Asian turmoil into account. This was despite the calmer state of the Asian financial markets (except Indonesia) since January, and the IMF's appraisal that the effect of the crisis will be far weaker than that of the oil crisis of 1974-75 and the crises of 1980-83 and 1990-91. Nonetheless, the crisis will be aggravated if there is deviation from the stabilization policy, which will have an adverse effect on investor confidence.

The slowdown reflects primarily the direct influence of the crisis on the GDP of the South-East Asian countries - and of Indonesia, Korea, and Thailand, in particular - due to the steep fall in foreign financing sources and plummeting asset prices; the rise in their exports will not be sufficient to lift their economies within the forecast period. The decline in foreign financing sources will affect all the developing countries and economies in transition to some extent. The forecast for the immediate future for Japan was downgraded because of the weakness of its financial system in general, and its banking system in particular, and the delay in introducing essential structural changes. Despite the fiscal incentives and the measures introduced in order to support the financial system there, it is feared that economic stagnation will persist. The crisis will have only a modest effect on economic activity and prices in the countries of North America and western Europe, and will serve to prevent overheating (especially in the US) in the context of high share prices. A deterioration in these countries' balance of payments vis-a-vis Asia is also expected.

The IMF lists several reasons for the crisis. Investor confidence was undermined by overheating, expressed in large balance-of-payments deficits and soaring asset and share prices. Adherence to fixed exchange rates hampered the prosecution of an appropriate monetary policy. Inefficient banking supervision and incautious management caused the quality of loans to deteriorate. Alongside the political uncertainty, economic uncertainty rose due to the absence of reliable economic information. External factors also played a part. These included large capital inflows into these countries because of the underestimation of risk, and the growing strength of the dollar, which reinforced currencies in the region that were indexed to it. Hesitancy in adopting stabilizing economic policies exacerbated the situation, although the commitment to introducing the necessary measures is significantly greater now, except in Indonesia.

The economic effect on Israel is evident in two main spheres: exports and capital flows. The worldwide slackening in economic activity, especially in the countries of South-East Asia, and the greater competitiveness of their exports, will harm Israel's exports. An estimate of the expected effect on domestic exports and GDP may be found in Bank of Israel Annual Report, 1997, Chapter 6 (between 2 and 2.5 percent of exports, and 0.6 and 0.8 percent of GDP). Foreign-trade figures show that exports to the countries involved in the crisis (Thailand, Indonesia, the Phillipines, Korea, and Malaysia) plummeted to a quarterly rate of $ 140 million in 1997:lV and the first two months of 1998 compared with over $ 200 million in the first three quarters of 1997. Exports to other Asian countries (Hong Kong, Singapore, Taiwan, and Japan) also slowed significantly in the first two months of 1998, after rising in July-December 1997.

As stated, developments in Asia might affect capital movements to many countries, and to Israel in particular. Investors' confidence in the countries involved in the crisis, whose overseas sources of capital shrank, was seriously undermined. Under certain circumstances, the loss of confidence and increased awareness of risk could also find expression in the attitude of foreign investors to Israel, causing the direction of capital flows to change. The capital inflow to the Latin-American countries, for example, has hardly been affected, however, and in some cases it has even risen. The capital inflow into Israel has also remained high, with the exception of a period of adjustment from November 1997 to February 1998, when nonresidents' investments in shares traded on the Tel Aviv Stock Exchange (TASE) halted and offerings abroad by Israeli firms were deferred; recovery in both these areas was evident in March, however.

In view of these risks, it is important to continue with a supervisory and cautious economic stabilization policy that will keep the financial markets on track, aim at continuing to improve the balance of payments, and prevent an increase in credit risk in the banking system. Another lesson of the recent episode is that a managed exchange rate hampers the conduct of an appropriate monetary policy in the face of demand pressures and capital flows.

Table 5. Indicators of Economic Development in Advanced and Developing Countriesa, and Estimate for 1998-99


1996 1997 Estimate
1998
Estimate
1999
Annual rate of changeb
World GDP
   Total 4.1 4.1 3.3 3.8
   Advanced countries 2.7 3.1 2.5 2.6
   Developing countries 6.6 5.8 4.5 5.3
World trade
   Total 6.7 9.5 6.3 6.0
   Advanced countries
      Imports 6.4 8.4 6.7 5.2
      Exports 5.9 9.6 6.0 6.0
   Developing countries
      Imports 10.0 12.2 4.5 7.7
      Exports 9.3 11.6 7.1 6.6
Inflation (CPI) </TD<
   Advanced countries 2.4 2.1 2.2 2.1
   Developing countries 13.7 8.6 8.8 7.7
Short-term interestc (%)
   Dollar deposits 5.6 5.9 6.2 6.2
   Yen deposits 0.7 0.7 0.7 1.2
   DM deposits 3.3 3.4 4.1 4.6
Unemployment rate
   OECD countries 7.5 7.3 7.0 6.9
a
According to "World Economic Outlook", Israel is classified as an advanced country.
b
Apart from interest and unemployment rates, which are shown as percentages.
c
6-month LIBOR rate.
SOURSE: "World Economic Outlook", (IMF), and OECD "Economic Outlook".


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Prices

The CPI rose by 7.0 percent in 1997, identical with the lower limit of the inflation target. The slowdown in price increases was evident in all the items comprising the CPI, in the index adjusted for items with large short-run volatility, such as construction, clothing and footwear, and fruit and vegetables, as well as in most of the indices derived from the national accounts. The slowing of price increases began in the second half of 1997, and intensified in 1997:lV. Among the factors contributing to this were the tighter monetary policy implemented since mid-1996 and fiscal restraint in 1997, which operated with a delay to moderate prices. The slowing of domestic demand constituted an important channel through which economic policy had an effect. The relatively low rise in the exchange rate. together with declining dollar input prices, also helped to dampen pressure on prices. The winding-down of the effect of the influx of immigrants on investment and private consumption contributed to the moderation of excess demand. Investment by nonresidents and and the improvement in the current account helped to keep the exchange rate down. The credibility of economic policy in serving to attain the inflation target, after several years in which there was a contradiction between expansionary fiscal policy and monetary restraint, also contributed to the lowering of inflation expectations and through them to a slower rise in actual prices.

The low rate of price increases was also maintained in 1998:l, and in the twelve months to March the CPI rose by 4.4 percent. During the period reviewed the CPI went up by only 1.3 percent in annual terms, with a decline in fruit and vegetables (-15.0 percent) and clothing and footwear (-8.5 percent). The education, culture and entertainment, transport and communications, and housing items increased at the same rate as the CPI. The other items rose at a slightly higher rate - between 3 and 5 percent. Indices adjusted for the volatile items rose by 2-3 percent. The sharp slowing of prices was expressed by the decline in 5 of the last 7 consumer price indices - something that has not happened in Israel for many years. The wholesale price index rose by only 0.9 percent in the period reviewed, and declined in 1998:l. The exchange rate against the dollar increased by 4.5 percent during the period reviewed, and against the currency basket it rose by 3.6 percent.

Inflation expectations were below the upper limit of the inflation target (10 percent) throughout 1997, declining to 9 percent in the second half of the year. At the beginning of 1998 inflation expectations moderated rapidly each month, dropping to less than 6 percent at the end of the period reviewed. The decline in expectations also reflects their adjustment to the series of low indices. From the Bank of Israel's survey of companies (for 1998:l), it transpires that inflation expectations have moderated for the third quarter in succession. Expected inflation for the twelve months from April 1998 to March 1999 averages 6.7 percent, compared with 8.9 percent in the preceding quarter.

In accordance with the government's decision, the inflation target for 1998 is 7-10 percent while continuing to reduce the inflation rate, the objective being to attain price stability as is the case in the industrial countries. A previous decision made at the end of 1996 set the target for the year 2001 at the rate of inflation of the OECD countries. In the context of the forces supporting disinflation, an opportunity has arisen to proceed towards the target of price stability. According to data for the last 12 months for the OECD countries, inflation there was 4.2 percent in January 1998 (compared with 4.9 percent in 1996). However, when this figure is adjusted for the countries with particularly high inflation (Mexico, the Czech Republic, Hungary, and Turkey), it was only 2.1 percent (compared with 3.7 percent in 1996). Inflation in the US declined from 3 percent at the beginning of 1997 to less than 2 percent at the beginning of 1998. According to IMF figures, inflation in the advanced economies, which was 2.4 percent in 1996, decreased to 2.1 percent in 1997, and is expected to remain at that level in 1998-99. The weighted inflation rate in the countries whose currencies comprise the currency basket is some 2 percent.



Table 6. Selected Price Indicies, 1996-98
(annual rates of change during period, percent)


1997
1998
Oct-Mar
*

1996 1997 I II III IV I 1997 1998
CPI 10.6 7.0 10.8 9.6 5.4 2.4 0.3 10.0 1.3 3
CPI excl. housing, fruit and vegetables 10.1 6.7 6.3 10.8 5.2 4.8 -0.5 7.5 2.1 3
CPI excl. housing, fruit and vegetables, controlled goods, clothing & footwear 10.2 7.8 10.1 7.5 10.9 2.7 3.0 7.6 2.9 3
Index of housing prices 13.2 7.5 14.2 10.8 7.7 -1.9 5.1 14.9 1.5 3
Wholesale price index 7.0 5.9 6.3 7.2 7.8 2.5 -0.6 6.2 0.9 3
NIS/$ exchange rate 5.0 7.9 11.5 10.7 6.5 3.1 6.0 13.0 4.5 3
NIS/currency-busket rate
3.0 3.7 -0.8 11.3 1.0 3.6 3.6 5.8 3.6 3
*
Last month for which data are available.

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The Government

In 1997 the government attained the total deficit target, although there was some departure from the planned domestic deficit. This constitutes a turnaround with respect to the fiscal expansion of 1995-96. Fiscal restraint acted to reduce excess domestic demand, thereby narrowing the deficit on the balance of payments and slowing inflation. The composition of the deficit reduction included a rise in taxes and a decline in public-sector investment, a combination which impairs Israel's ability to grow in the long term.

During the period reviewed the domestic budget deficit stood at 4.2 percent of GDP. In the period from January to March 1998 the deficit exceeded its planned level, considering the budget's seasonal path in the last few years. The departure is the result of a shortfall with respect to the plan on both the expenditure and the income sides. The shortfall in expenditure is largely due to the slower rate of inflation than was assumed in the budget (5 percent rather than 9.2 percent), while that on the income side is real and is partly explained by the economic slowdown. Public-sector consumption expenditure expanded moderately, while the share of public consumption in GNP did not increase, and was even lower in 1997:lV than in 1996:lV.

The national budget for 1998 maintained the targets set in the Budget Deficit Reduction Law and did not include a tax increase. The special reserve allocated for price adjustments in the budget was raised from 3 to 5 percent, in view of the slower rate of price increases at the beginning of 1998, which fell below the rate predicted at the time the budget was prepared. This decision is significant as it prevents the government from increasing its real expenditure without an equivalent rise in income, as long as the annual average rate of price increases is more than 4.2 percent. The deficit target is also defined as the total deficit, both domestic and foreign, and the income from the Bank of Israel's foreign-exchange reserves may help to attain the target. The budget is extremely tight, however, and there is a danger of departure from the target during the year, especially in view of the more intense economic slowdown than predicted in the budget.

Over half the deficit financing of the public sector in the period reviewed (NIS 7.5 billion) was by means of privatization (NIS 4.1 billion), which included the sale of the core holding of Bank Hapoalim. The injection to the monetary base was about NIS 2.3 billion, and net borrowing from the public (by the government and the Bank of Israel) was NIS 2.5 billion. In the foreign-currency segment, financing vis-a-vis the public was negative, and the public sector bought foreign currency to the value of NIS 1.4 billion.

Total tax and other revenues were 1 percent lower in 1998:l than in 1997:l, a decline that reflects the economic slowdown and sanctions by the Income Tax Office in February. The decline in tax revenues in 1998:l reflected an increase in receipts from direct taxes and national insurance payments alongside a decline in those from indirect taxes on domestic production, the import tariff - which has been falling for several quarters due to the decline in imports - and transfer payments from the public. The decline in indirect tax receipts reflects mainly the 5 percent fall in VAT revenues from the equivalent period last year, due to the economic slowdown, as well as the drastic decline in receipts from both property tax - in the wake of the recession in the construction industry - and purchase tax.

Transfer payments to households via the National Insurance Institute rose by a real 8 percent in the period reviewed (compared with the equivalent period last year), and reached an annual rate of NIS 30 billion at the beginning of 1998. Unemployment benefits rose by a real 20 percent (to an annual rate of NIS 2.5 billion at the beginning of 1998) due to the rise in unemployment.

Figure 9. Government cash flows (NIS million, monthly average)

Table 7. The Budget and its Financing, 1996-98
(cash flows, as percent of GDP)


1997
1998
Oct-Mar
*

1996 1997 I II III IV I 1997 1998
1. Government domestic expenditure 40.7 39.8 41.2 37.2 39.1 41.6 41.0 41.2 41.3 3
2. Government receipts 35.9 36.9 40.6 34.8 37.5 34.8 39.5 37.2 37.1 3
3. Domestic budget deficit (1)-(2) -4.7 -2.9 -0.7 -2.4 -1.7 -6.9 -1.6 -4.1 -4.2 3
4. Public-sector domestic deficita  (5)+(6) 5.4 3.3 1.5 2.1 2.3 7.3 1.5 5.0 4.4 3
5. Government net borrowing from the public 2.6 2.3 4.5 4.5 1.3 -1.0 1.4 4.1 0.2 3
6. Public-sector injection (9)-(8)-(7) 2.8 1.0 -3.0 -2.4 0.9 8.3 0.0 0.9 4.1 3
7. Bank of Israel injection
-3.5 -6.7 -16.0 -7.0 -0.5 -4.0 -3.2 -9.9 -3.6 3
8. Private-sector foreign-currency conversions 1.9 6.8 17.4 10.6 -0.1 -0.0 1.7 9.3 0.8 3
9. Change in monetary base
1.3 1.1 -1.6 1.2 0.3 4.2 -1.5 0.4 1.4 3
* Last month for which data available.
a Budjet deficit plus Jewish Agency injection, plus non-budgetary injection.


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The Money Market

In 1997:lV and January 1998 the Bank of Israel did not change its key interest rate. Subsequently, from February 1998 to May 1998, it reduced the interest rate each month (by 0.5, 0.3, 0.4, and 0.3 percent respectively) by a cumulative 1.5 percentage points. Concurrently, there was a significant moderation of inflation expectations and actual price rises, as a result of which expected real interest at the deposit auctions for banks rose to above 6 percent in 1998:l. This cautious policy of responding gradually and with a delay to developments in the inflation environment was intended to consolidate the achievements in the area of prices and make it possible to utilize the opportunity to advance towards bringing inflation down to the price stability accepted in the industrial countries, in accordance with the government's decision. In view of the considerable uncertainty in both the domestic foreign-currency market and international financial markets, and the Far East in particular, the cautious monetary policy - which prevented interest-rate volatility - also helped to prevent sharp shifts in the exchange rate and in capital flows.

For most of the period reviewed the exchange rate remained close to the lower limit of the band, whose slope was reduced from 6 to 4 percent in June 1997. The Bank of Israel did not have to intervene in foreign-exchange trading (except for a few days in December 1997 and January 1998, to a total extent of $ 0.5 billion). The currency-basket exchange rate rose by an annual 3.6 percent during the period reviewed, and the slow rate of depreciation helped to dampen the rate of price increases. In April 1998 the exchange rate of the dollar depreciated steeply, while that of the currency basket appreciated to 4 percent above the lower limit of the band in the middle of April, and to 2.9 percent at the end of the month. These changes occurred in the context of the expectations that the process of liberalization would continue as Israel's Independence Day approached, and of uncertainty regarding its specific provisions.

Expected real interest* at the Bank of Israel's deposit auctions for the banks averaged 5.1 percent during the period reviewed, and 6.6 percent in March, compared with 4.1 percent in the preceding period (March-September 1997). In the credit segment, the real expected interest on overdraft facilities and overdrawn current accounts averaged 11.1 percent, and stood at 12.1 percent in January, compared with 10.4 percent in the preceding period. Real ex post interest was higher due to the low rise in the CPI during the period reviewed. At the deposit auctions the real ex post interest** was higher than 12 percent, compared with 6 percent in the preceding period, and 18 percent on overdraft facilities and overdrawn current accounts compared with 12 percent in the preceding period. The yield gap between interest on the deposit auctions for banks and the 3-month Eurodollar rate shrank to an average of 7.4 percent in the period reviewed, and to some 6.5 percent in April, compared with 7.8 percent in the preceding period, as a result of the reduction of the nominal interest rate at the Bank of Israel auctions.

The narrow money supply (M1) rose at an annual rate of 4.8 percent during the period reviewed, with wide fluctuations, compared with 10.7 percent in the equivalent period last year. In the 12 months to March 1998 it rose by 10 percent, slightly above the inflation environment and the growth rate. Unindexed resident time deposits continued to expand rapidly during the period reviewed, especially those for up to 3 months. M2 also grew rapidly in the period reviewed, and in the 12 months to May 1998 it increased by 24 percent, compared with a 4.4 rise in the CPI. This notable real increase expresses the continued rise in the liquidity of the public's asset portfolio as a result of the high real interest rate maintained in unindexed deposits, and the consolidation of the inflation-target regime, which reduces the risk of an inflationary eruption, and hence also of investing in unindexed assets. These factors were expressed in the particularly rapid increase in unindexed local-currency deposits for more than one year in the period reviewed, continuing their rapid rise since the beginning of 1995, when they were first offered to the public. Deposits in or indexed to foreign currency rose more slowly than those in local currency.

Total nondirected credit rose at an annual rate of 11 percent during the period reviewed, and by 14.7 percent in the 12 months to March 1998. This represents the continued moderation of the rate at which total nondirected credit increased in nominal terms in the last few years, although it is still expanding more rapidly than the nominal growth rate. In 1997:lV unindexed credit expanded more rapidly than the other credit components, but in 1998:l credit in and indexed to foreign currency rose slightly once again, at the expense of the unindexed and CPI-indexed segment.

The yields to maturity on 10- and15-year bonds rose steeply in the period reviewed, to 5.2 and 4.7 percent respectively at its end. compared with 3.5 and 3.7 percent in August 1997. The yields thus returned to the peak level that had prevailed in the summer of 1996 in the context of the provident funds crisis. The economic slowdown, led by a fall in demand and in investment in particular, should have acted cyclically to depress real long-term interest. The rise in the extent of privatization during the period reviewed served to reduce the government's need to issue Treasury bonds, and thus to lower their yield. The buyers financed the purchases to some extent by resorting to long-term CPI-indexed credit, which increases the long-term interest rate. There was no increase in the long-term real interest of the advanced economies in 1997 as inflation and long-term interest declined at similar rates. According to IMF calculations, real long-term interest declined in the Euro bloc in 1997 and at the beginning of 1998. The tight monetary policy, reflected by the rise in real short-term interest as a result of the rapid disinflation and slower, more cautious reduction of nominal interest, contributed to the rise in long-term interest.

The share-price index of the TASE 100 plummeted in October 1997 against the backdrop of the crisis in the Far East, remaining low - and even declining slightly - until February 1998. Since then, in the context of the renewed surge on the capital markets of the industrial countries, the index has risen markedly, once again reaching the peak of July and October 1997. Alongside the rise since February, there has been an increase in turnover, in view of the renewed surge of investment by nonresidents in shares traded on the TASE. Some of the stock markets in the Far East have also rallied in the last few months, after plunging in the second half of 1997.

*Nominal interest for the period less gross inflation expectations as derived from the capital market.
** Average nominal interest less the rise in the CPI during the period.


Figure 10. Monetary aggregates and credit (change in prev. 12 months)
Figure 11. Nondirected bank credit (NIS million per month)

Table 7. Monetary Indicators and Nondirected Bank Credit, 1996-98
(annual terms, percent)


1997
1998
Oct-Mar
*

1996 1997 I II III IV I 1997 1998
Rates of change Average
Compared with preceding quarter
During perod
M1a
14.9 14.3 26.6 6.8 28.5 -1.3 5.2 18.0 2.5 2
M2b 27.0 25.8 30.3 17.6 24.9 25.0 36.2 26.0 29.2 2
M3c 26.5 24.6 30.9 16.0 23.7 20.1 33.4 27.5 25.2 2
Nondirected bank credit 21.6 18.2 14.3 19.4 17.9 13.2 9.8 17.8 11.5 2
   Unindexed local-currency 10.6 8.6 3.1 2.0 8.6 23.9 12.0 9.7 18.1 2
   CPI-indexed 23.7 19.0 17.6 14.0 15.9 18.5 8.2 18.1 10.8 2
   Foreign-currency indexed & denominated 40.0 32.3 27.7 57.3 33.5 -4.8 9.2 30.3 4.7 2
*
Last month for which data available.
a
Narrow money supply (cash in the hands of the public and demand deposits).
b
M1 plus short-term local-currency deposits.
c
M2 plus foreign-currency-indexed and denominated deposits.


Figure 12. The sheqel exchange rate against the currency basket Figure 13. Yield on Treasury bills (end-period figures)

Table 9. Interest Rates, Yields, and the Share-Price Index, 1996-98


1997
1998
Oct-Mar
*

1996 1997 I II III IV I 1997 1998
Nominal interest
Nondirected local-currency credit 20.7 18.7 19.7 19.0 18.0 18.2 17.8 20.4 18.1 2
Average monetary loan 16.1 14.3 15.0 14.5 13.6 14.1 13.5 15.6 13.8 3
SROs 13.8 12.2 12.8 12.3 11.5 12.0 11.7 13.6 11.9 2
3-month Eurodollar 5.4 5.6 5.4 5.7 5.6 5.7 5.5 5.4 5.6 3
Yield to maturity on Treasury bills 15.6 14.1 14.6 14.1 13.5 14.1 13.4 15.2 13.7 3
10-year bonds 4.5 4.0 4.1 4.0 3.7 3.9 4.6 4.3 4.3 3
5-year bonds 4.4 3.9 4.0 4.0 3.6 4.0 4.9 4.2 4.5 3
General share-price index (points) 92.4 129.2 116.3 127.9 139.4 133.1 131.5 104.7 132.3 3
*
Last month for which data available.