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State Comptroller v. Bank of Israel: Holds too much foreign currency

Is the Bank of Israel holding too much foreign currency? "

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• State Comptroller

• Bank of Israel

• salvo

• Currency balances

Sonia Gorodisky

Monday, 18 October 2021, 08:32 Updated: Tuesday, 19 October 2021, 16:01

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The Bank of Israel's foreign exchange reserves are high by international standards, exceeding 70% of the desired maximum level of reserves, and State Comptroller Matanyahu Engelman recommends that the Bank of Israel "prepare a contingency plan" for realizing the surplus balances. Shekels to the dollar In March 2020, the Bank of Israel did not sell foreign currency.

"As of February 2021, the total foreign exchange reserves held by the Bank of Israel were estimated at $ 185 billion, compared to the desired level, which stands at $ 70 to 110 billion. This led to a cumulative deficit of about NIS 70 billion in capital and could pose a reputation risk on the Bank of Israel, "the auditor's report published today states. The main source of changes in the level of reserves is foreign exchange purchases made by the Bank of Israel.

It should be noted that since the end of the audit, the Bank of Israel's foreign exchange reserves have already crossed the $ 200 billion threshold and stood at about $ 204 billion at the end of September. A maximum of $ 30 billion this year.

In 2008, the Bank of Israel began purchasing dollars as part of a stated policy to prevent the strengthening of the shekel, which harms exporters. According to many economists, it is precisely the Bank of Israel's high foreign exchange reserves that provide stability to the economy - something that is reflected in Israel's high credit rating.

However, the auditor's report states that "the significant increase that has taken place in the last decade in the level of foreign exchange reserves that the Bank of Israel holds in the background of economic developments in the world has led to a deviation of about $ 75 billion in February 2021." large balance sheet commitments totaling approximately -555 billion, most of which are attributed to the accumulation of reserves, along with bank capital reduction to shareholders' cumulative deficit of $ 70 billion, as of December 2020

with the intention to return to the desired level and reduce the reputational risk borne by the bank recommended to prepare A contingency plan, for examination by the Monetary Committee, for the effective realization of the excess balances in the appropriate circumstances. "

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Level of foreign exchange reserves held by the Bank of Israel (Photo: Photo Processing, State Comptroller)

The audit revealed that apart from the Bank of Israel, two other central banks out of the nine that belong to the comparison group for the State of Israel (Czech Republic and Thailand) have negative capital. "Although the transfer of profits is not one of the goals or functions of the bank listed in the law, a continuous deficit in the bank's capital since 1999 (in which it transferred about NIS 9 billion to the government following a profit recorded in 1998) prevented the transfer of profits to the government. . "

another critic noted that the desired level of foreign exchange reserves in international comparison - the level of reserves in the Bank of Israel (currently at 46% of GDP as of February 2021)" above the desired level by any conventional estimation approaches (an average of 15% Up to 22% of GDP), and higher than the average level of balances among comparison countries in all accepted indices.

It should be noted that the average level of balances among the comparison countries is also higher than the desired level and indicates a tendency to have a higher level of balances than it. "

The report explains that the countries of the "comparison group" are the "accepted countries for comparison to Israel" which is located near the dividing line between developed and developing markets, similar to Israel.

The level of foreign exchange held by central banks around the world (Photo: Photo Processing, State Comptroller)

In view of the findings of the audit, the auditor recommends that the Bank of Israel "periodically examine the desired level of balances and the extent of the deviation from it and present reasons for accumulating excess balances and the costs involved. In addition, it is recommended to continue ".

The law entrusts the Bank of Israel with the management of monetary policy and the management of reserves independently, without the need for approval by the Ministry of Finance. Despite this, in view of the deviation from the desired level of the Comptroller's reserves, the Bank of Israel will examine the need to change the principles by which the Governor will decide on the desired level of long-term foreign exchange reserves, with the approval of the Minister of Finance. "In formulating policy tools that encourage exporters to be available to the Ministry of Finance, the purchase of balances has been replaced."

In addition, the Comptroller recommends that Governor Yaron continue to "examine the use of other monetary instruments to support the achievement of monetary policy objectives, taking into account the cost incurred as a result of the deviation from the desired level of reserves and risks and the effectiveness of foreign exchange purchases."

Governor of the Bank of Israel, Prof. Amir Yaron.

The central bank is angry with the auditor (Photo: screenshot, screenshot)

"A significant foreign exchange balance is a strategic asset of the State of Israel"

The Bank of Israel is angry at the auditor's remarks, and responds to criticism:

"The Bank of Israel's policy in the foreign exchange market has proven itself in the last decade and has allowed the Israeli economy to make a gradual adjustment to the exchange rate appreciation process. Evidently, the process was carried out with a continuous increase in exports of services, and without shocks and payment of painful prices such as extensive waves of layoffs and the closure of mass factories, which could have occurred if a sharp and rapid appreciation had taken place that would not allow the industry to adapt gradually.

Monetary policy management is the central role of the Bank of Israel under the law and activity in the foreign exchange market is one of the tools for achieving its goals and fulfilling its functions. Considerable amounts of foreign currency deposited by the state in the Bank of Israel; and from the fact that the yield on the balances has risen in recent years.

A significant foreign exchange balance is a strategic asset of the State of Israel and has helped the Bank of Israel operate its tools and helped the Israeli economy overcome the corona crisis with relatively little damage compared to the rest of the world. .

The Bank's position on the various sections appears in the report and the Bank of Israel will continue to do its job faithfully as it has done so far. We thank the State Comptroller for the work done on the issue. "

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