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The Knesset Economics Committee today held a discussion on the future of Israeli industry.  The main points of the Governor’s remarks are below:

I appreciate the opportunity to speak about Israeli industry.  During the course of my term of office, I met with many manufacturers, some of whom are sitting in this room.

I will open by describing the conditions in which Israeli industry operates.  Global trade is expected to grow by a low rate of about 3.6 percent this year.  Global trade is very important to the growth of Israel’s economy, and it has a large effect.  Israeli exports are closely linked to global trade.  We have been witness to changes in export destinations, with exports to the European Union declining from 41 percent in 1995 to 31 percent in 2012, along with a smaller decline in the share of exports to the US.  In parallel, there has been an increase in the share of Asia’s share of Israeli exports, from 13 percent to 21 percent.  This is a very important change, since Asia is expected to continue growing at a rapid pace and its importance to the global economy is increasing.

Many of my discussions with manufacturers in recent years have dealt with the exchange rate.  The main problem in this context is that most of us would want a strong economy with a weak currency, but these are two things that generally don’t go together.  We have a relatively strong economy, and our interest rate is higher than in Europe and the US, despite the fact that we are reducing the interest rate gap.  The Bank of Israel has intervened in order to weaken the rate of appreciation.

The business sector constitutes 72 percent of GDP, and manufacturing constitutes 20 percent of it.  Basically, manufacturing is not the largest industry in any modern economy, even in Germany.  We are witness to a global trend, which is taking place in Israel as well, of decline in the share of manufacturing in GDP, and in the share of those employed in manufacturing out of total workers in the economy.  The share of manufacturing in employment is declining more rapidly than the share of manufacturing in GDP, which indicates that productivity in manufacturing increased more rapidly than in the rest of the economy.

Between 1995 and 2012, the share of high tech exports in total exports increased, and the share of high technology and medium high technology manufacturing is close to 90 percent of manufacturing exports, while the share of low technology manufacturing is shrinking.  At the same time, low technology manufacturing industries employ almost 35 percent of manufacturing workers, even though they constitute only 19 percent of manufacturing product and only 5 percent of manufacturing exports.  This means that if we want to encourage employment in manufacturing, we must also take into account low and mixed technology industries, and not just high tech industries.

I would also like to relate to the natural gas industry.  Natural gas finds are expected to lower the cost of production in Israeli manufacturing and to increase the certainty of energy prices for manufacturing, since natural gas contracts for manufacturing are long-term.  Natural gas production has an effect on the Current Account of the Balance of Payments.  It leads to a decline in the import of energy products, which leads in turn to appreciation pressure on the shekel exchange rate.  This phenomenon is known as “Dutch disease”, and relates to the damage that is generally caused to manufacturing following the discovery of natural resources and the appreciation of the local currency that this leads to.  The accepted solution is the establishment of a “Sovereign Wealth Fund” or a “Future Fund”.  The idea is simple: Natural gas receipts are invested abroad, and the yields are used for domestic needs, while the effects of a sharp surplus on foreign exchange markets and the sharp appreciation of the exchange rate are prevented.  From the point of view of the citizens, the effects of the natural gas will not be directly felt in the immediate term, since the government has smoothed the change in electricity prices such that the price increases will continue until the Israel Electric Company’s losses from previous years are covered—losses that were caused by the stoppage in the supply of natural gas from Egypt and the increase in the prices of fuels that the Israel Electric Company uses.

Another phenomenon, by which the discoveries of natural gas lead to the accelerated development of natural gas-based industry, followed by difficulties in this industry later on when the gas reserves dwindle, is also well-known. Therefore, should the price of natural gas encourage the development of natural gas-based industry, there will be room to consider levying a tax on the use of natural gas.

It is very important to be conservative regarding the volume of natural gas that is available to us, and not to use the natural gas too rapidly, so that we can make sure that we are able to benefit from it in the future as well. The Bank of Israel is not opposed to the export of natural gas. If Israel is interested in companies with advanced technology assisting natural gas exploration, we must enable them to benefit from the findings of that exploration, and these companies are not interested in waiting fifty years to see the fruits of their investments. We must plan so that the natural gas will supply the economy for 25-30 years. In our estimation, the quantity of natural gas in all of the fields is 900 BCM. We believe that we can find a solution that will lead advanced companies from the US, Australia, and other places to engage in exploration, while also ensuring that enough gas remains for the needs of the economy for the future as I have noted.