Jerusalem, 31 December 1999
Speech by Bank of Israel Gov. Frenkel
(Communicated by Bank of Israel Spokesman)
Following are excerpts from a speech given by outgoing Bank of
Israel Governor Jacob Frenkel on (Friday) 31.12.99 at the 9th annual
meeting of the Commerce and Industry Club in Tel Aviv:
The Israeli economy finds itself in the new and irreversible reality
of global economic integration that present it with unprecedented
challenges and opportunities. This is the result of a systematic and
continuous process of liberalization, opening the economy and
creating the necessary conditions to convert Israel into an
attractive location for local and international investors. Israel's
rate of inflation has been reduced to its lowest level in decades
and the inflationary environment is now close to Western rates; the
foreign currency market has been successfully liberalized and
controls been removed; the exchange rate has been made flexible; the
financial and banking systems made secure; and the necessary
conditions for renewed sustained growth have been created. As a
result of these steps, the Israeli economy has won high status in
international financial markets, and foreign investment has been
increasing for several years. In addition, foreign banks have been
steadily increasing their involvement in the Israeli economy. Since
the second quarter of 1999, all sectors of the Israeli economy have
been undergoing a significant recovery.
It is necessary to consistently continue the economic strategy of
openness, increased competitiveness, price stability and adopting
the accepted norms of the world's developed economies. This will be
done by carrying out long-term economic policies based on setting
multi-year targets that strengthen the commitment to economic
competitiveness, efficiency and flexibility and achieving fiscal and
inflationary targets and implementing structural reform policies
that will contribute to Israel's full integration with the global
economy and renewed economic growth. These steps will enable
translating the current accelerating economic activity into
sustained growth that will lead to constant improvement in
employment. This is the proper key to solving the economy's problem
of unemployment.
In the past several years, thanks to the determination and
consistency of the policies of liberalization and openness of the
financial and capital markets, the Israeli economy has successfully
passed important tests, even as Israel was committed to reducing
inflation and budgetary restraint. In this context, it should be
noted that the strategy of direct non-intervention by the Bank of
Israel in the foreign currency market and its deep encouragement of
this market, together with the flexibility of the exchange rate
regime and use of interest rate policy to achieve the government's
inflation targets contributed decisively to the economy' successful
meeting these challenges, despite the effects of last year's global
financial crises. The liberalization of the foreign currency market
was very successful, inflation has been markedly reduced, the
foreign currency market operates properly with intervention by the
Bank of Israel, and recently the economy has shown significant signs
of recovery. It is now essential to implement structural reforms to
reduce the tax burden, expand the tax base and liberalize tax rates.
In addition, the issues of the pension funds has to be dealt with as
part of essential reforms of the capital market.
As part of the economic strategy leading to successful integration
with the global economy, it is necessary to amend the Bank of Israel
Law to the accepted standards of the developed world as recommended
by the Levin Committee Report. This will strengthen the basis for
the Bank of Israel's activities to enable the economy to meet the
challenges of the 21st century in the manner of the world's leading
central banks. For this purpose, the new Bank of Israel Law must
include the four principles recommended by the Levin Committee
Report - principles that characterize central bank laws as a single
package:
1)Defining the primary goal of the Bank as the achievement of price
stability and maintaining it over time;
2) giving the Bank full independence to use the necessary tools to
do so;
3) increasing the Bank's transparency and reporting to the
government, Knesset and the public; establishing a monetary
committee headed by the Bank of Israel governor and whose members
are experienced professionals in the relevant fields;
4) prevent conflict of interests and maintain impartiality in
matters whose full and sole jurisdiction is the Bank of Israel.
Legislative proposals that are not fully consistent with these
principles are dangerous and are a deviation from the successful
economic strategy of globalization and the adoption of the accepted
norms of developed markets.