Devalues Shekel by 18.8%, Raises Some Prices 75% : Israel Takes Measures to Ease Economic Crisis

JERUSALEM â€”  The Israeli government Monday devalued its currency, the shekel, by 18.8%, raised the prices of subsidized goods by as much as 75%, ordered an across-the-board wage cut for government workers and took initial steps toward reducing the government work force.

These moves, announced early this morning, were part of an emergency economic package the Cabinet is debating to replace voluntary wage-price control agreements that have failed to stem the country’s economic crisis.

The actions came during a stormy marathon meeting of Israeli ministers that was still in progress this morning, 22 hours after it began. Still undecided were controversial proposals for new cuts in government health and education budgets and possible emergency government decrees that would slash workers’ real incomes.

Debate Rages On

It was unclear here whether Israel’s fragile national unity coalition government could survive differences between the ministers on the remaining issues.

A national radio address by Prime Minister Shimon Peres, scheduled for shortly after 7 a.m. today, was postponed indefinitely as the debate raged on.

At one point during the Cabinet meeting--one of the longest in Israeli history--Deputy Prime Minister David Levy reportedly said that the 9 1/2-month-old government has failed and should resign. Levy is a member of the rightist Likud Bloc.

An ally of Peres in the rival Labor alignment suggested angrily that Levy be the first to quit, according to the account by Israel television.

Peres had pledged at the start that the Cabinet session would go on until an emergency economic plan was finally adopted. And he had declared that once decisions were made, any minister who refused to support them must quit.

On Sunday night, Israel radio quoted unnamed government sources as saying that the extraordinary ministerial session “would either end in an overall plan or dissolution of the government.�

The head of Israel’s powerful Histadrut trade union federation, which opposes many of the moves, pledged that the union would take “any action necessary to protect the workers.�

Israel’s ports were ordered closed to normal commerce today, and the Tel Aviv Stock Exchange was shut down for a second day to avoid confusion and panic. But banks were slated to go back into full operation after being closed Sunday for foreign currency trading.

On Sunday, the black market rate for the dollar shot up by about 25%, and long lines formed in shops selling imported appliances as Israelis scurried to protect themselves against the anticipated devaluation, which would drive up the price of goods produced abroad. Many gasoline stations were reported out of fuel.

The austerity measures were part of an emergency economic plan drafted by the Treasury and backed by Peres.

75% Rise in Bread Prices

The new prices, effective at midnight today, include a 75% increase in bread, 65% in milk and milk products, 45% for meat and frozen poultry, and 27% for gasoline, pushing the price of a gallon of gas to about $3 a gallon.

The government also ordered a 3% cut in the government work force, a loss of 12,000 jobs. At least some of the jobs will be lost through attrition, the Treasury spokesman said.

The proposals were designed to curb runaway inflation and stem a dangerous depletion of the country’s foreign currency reserves.

But Israeli economists said the Peres plan was highly risky because the measures will only exacerbate inflation unless he succeeds in forcing major cuts in government spending.

“If the budget is not cut, the program has no chance,� conceded Mikhail Bruno, an economics professor who advised the Treasury on the plan. “We could enter a tailspin in which the foreign currency reserves would again dwindle, and the inflationary spiral again worsen.�

However, Bruno said, if the budget is cut sufficiently the economy could be on the road to recovery within three months.

The ministers were under pressure to act because a voluntary agreement to limit wage and price rises--known as Package Deal 2--will expire later this week. Barring some action, said Hebrew University economist Eitan Sheshinsky, “All hell will break lose.�

Sheshinsky, who was a principal contributor to a U.S. Joint Economic Committee study of the Israeli economy late last year, said of the government deliberations: “They’re firing their next to the last bullet. I don’t know what the last one will be, but I have a feeling this is about it.�

The country’s annual inflation rate is edging back toward the 1,000% mark it hit last fall, just before the first Package Deal wage and price control agreement was signed in November, 1984. That pact and a successive agreement were meant to buy time for the government to take the more far-reaching measures necessary to bring the economy back into balance.

Sheshinsky said the July inflation rate is expected to be a record 26%--equal to an annualized rate of more than 1,500%, assuming prices continued to rise at the same pace for a year.

Currency Reserves Low

Meanwhile, Israel’s reserves of foreign currency are again perilously low--about $2 billion compared with the $1.5 billion that Sheshinsky said is the “absolute minimum� necessary. More than the specific level of the reserves, Sheshinsky said, there were “alarming signs in recent months� of a serious deterioration in the trend.

The United States has urged Israel to take tougher economic measures in connection with a planned $1.5 billion in emergency U. S. aid to the country. The money is to be transferred here in installments over the next 16 months, although a U.S. Embassy source said Sunday that final congressional action on the aid request is now not expected until after July 4.

The worsening crisis has hit Israeli consumers hard.

There was a rash of service sector strikes earlier this month, with taxi and truck drivers, garbage collectors and gasoline station operators among those walking off the job to press their demands for wage increases.

Some manufacturers have halted production, arguing that the lid on prices is forcing them to produce at a loss. One of the most painful examples for heavy-smoking Israelis is the Dubek Group, which had produced about 80% of the country’s cigarettes.

“We Are Sorry,� proclaimed the headline on a front-page advertisement the firm placed in the Jerusalem Post on Friday. Dubek apologized to its customers, employees, wholesalers and retailers for shutting down but said: “Our explanations, appeals, and requests have so far produced no response that would permit us to continue production under reasonable economic conditions.�

However, Histadrut Secretary General Yisrael Kessar complained that it has been the workers who have borne the brunt of the voluntary wage and price agreements. While workers have twice accepted wage cuts, he said, the government has failed to introduce promised tax reforms and manufacturers have increased their prices beyond agreed limits.

“The government proposals on wage erosion are unacceptable,� Kessar said Sunday after meeting Peres. The premier had left the Cabinet session to try to sell the plan to the labor leader.

“We’ll act forcefully against emergency orders if they’re implemented,� Kessar added.

According to two public opinion polls published in mid-June, well over 80% of Israelis are dissatisfied with the government’s handling of the economic situation.