The Bank of Israel has a problem. After spending almost a decade and huge sums trying to curb the shekel, the currency is still rising relentlessly - to the dismay of the country's exporters. In 2008 the central bank began what was supposed to be a temporary fix. The plan was to buy large amounts of dollars and halt a rapid rise in the shekel, partly to protect exporters who account for more than 30 percent of economic output and form a strong domestic lobby.
But after purchasing more than $70 billion over the years, the bank is still struggling to soften the exchange rate and prevent Israeli exports from becoming relatively more expensive on world markets. In the past 12 months, the shekel has gained 6 percent against the dollar, 11 percent against the euro and 10 percent against a basket of its main trading currencies. This has taken it in recent weeks to a 15-year high versus the euro, a 2-1/2 year peak against the dollar and its strongest level ever against the basket.
With the Israeli economy growing well, some experts and former policymakers say intervention is no longer necessary and may be pointless. Buying dollars amounts to little more than a subsidy for sometimes inefficient exporters, at the expense of the rest of the economy, they argue. "Few people thought it should be a permanent part of policy," said Barry Topf, who as head of market operations at the central bank in 2008-2011 helped to develop and implement the foreign exchange plan. "The policy has been in place for nine years. It has to be re-evaluated."
The purchases started under former governor Stanley Fischer, now vice chairman of the US Federal Reserve. In principle a staunch opponent of intervention, he accepted its temporary need to stabilise the market after the shekel had leapt. Many economists believe buying dollars is futile since the shekel's strength stems from factors that are not expected to go away for some time. They note annual capital inflows of over $10 billion from foreign companies buying Israeli ones. And while Israel runs a modest trade deficit, the broader current account achieved a $12.4 billion surplus last year.
In the World Bank's 2017 Ease of Doing Business Report, Israel fell to 52nd place from 49th. At the same time, the government should help manufacturers modernise equipment to become more efficient, offer more job training, allow businesses to write off capital investments for tax purposes in one year, and hook up smaller firms to the natural gas network, economists argue.