On Thursday morning, Europe woke up to the reality of war. Russian president Vladimir Putin sent his army into Ukraine on several fronts. Around the world, and in Israel in particular, there are fears of the consequences of this geo-political earthquake.
Minister of Finance Avigdor Liberman explains in an interview with “Globes” that Israel needs to maintain the lowest possible profile. “No-one is asking us for advice or opinions, and we have no interest in providing them. We have to hope that the fighting will end as quickly as possible, and that the whole dispute will move to the diplomatic plane,” he says.
“We need to conduct ourselves wisely. We recognize the integrity of Ukraine, but we need to maintain a minimalist approach that looks objective,” Liberman said when asked whether Israel should join sanctions against Russia. “First of all, we shall act in accordance with Israel’s interests. There are enough problems in the world; we can’t get into every problem. We mustn’t develop delusions of grandeur: we’re not a world power, and the region that we are in is complicated, a very tough neighborhood, but we must look after our interests.”
The finance minister says that what should concern us is “the Bloombergs of this world” (financial data terminals). “We are looking at the effect on wheat prices, for example. You have to understand that 80% of our wheat comes from Ukraine and Russia. In the past five days, wheat prices have jumped 18%. We’ve seen the price of a barrel of oil surpass $100, and coal prices rise 200% since the beginning of the year. This whole situation should concern us. There’s no longer any such thing as an isolated economy. Ukraine affects the whole world; we’re not alone.”
Liberman revealed that Ministry of Finance staff had carried out a situation assessment the evening before the invasion of Ukraine. They examined Israel’s wheat, fuel and coal stocks, to avoid a situation in which they run out completely. They have also been in touch with the Israeli insurance companies and with international reinsurers to make certain that they will not be deterred by the security situation and will continue to insure goods transported from the region. “The situation looks reasonable. We’re properly prepared, and we have identified what we need to do,” Liberman said.
The only good thing: the dollar has strengthened
Prices were rising globally before the crisis in Ukraine. Following public pressure, the government took action to halt the price rises, but if global prices soar because of shortages of fuel and what, how will you be able to demand from manufacturers and importers not to raise their prices?
“The last thing that interests me is public pressure. I set out a work plan, it was published, and it is not connected to political pressure or articles in the press. Prices are rising, and that’s the truth, there’s no stopping it, we’re not in a communist regime. There is no possibility of holding prices down artificially from the top down. We saw what happened to the Soviet Union when they tried to fix prices. The laws of economics are clear.
“I constantly hear calls on the media to reduce duty on fuel. In my view, that’s like going out in a tidal wave with an umbrella. What good will it do? In order to reduce the price of a liter of gasoline by three agorot, you have to reduce state revenues by NIS 1 billion a year. At this point, we have to take a deep breath, let the system stabilize, and then it will be possible to act. The only good thing in all this chaos is that the dollar has strengthened somewhat. At least our exporters will gain.”
“In the end, we’ll come into line with the Federal Reserve”
Last week, the Bank of Israel signaled interest rate hikes in the coming months. Is that a mistake in your opinion, in view of the developments in Russia?
“The Fed announced that it would raise interest rates and would do so in four instalments. We will come into line with the Fed in the end. We don’t decide. They are 24% of the global economy, and we are naught point something. We are highly dependent on the US market, and that’s how it is.”
Last Wednesday, you met your panel of experts headed by Prof. Frenkel. What recommendations did they give you?
“There was an interesting discussion about the capital market. We didn’t talk about Russia very much. Our main problem today is a surplus of cash on the one hand, and few infrastructure projects on the other. The financial institutions hold altogether NIS 2 trillion, and they are looking for things in which to invest. All the money goes outward, to investment overseas, because there isn’t enough in which to invest in Israel.”
There are many projects planned, but the rate at which they are carried out is slow, and many developments are stuck.
“There is no planning available for projects. Everything that we could put out there, we have. The rest of the projects require approvals in the various committees. As far as the rate of execution is concerned, there is now an improvement in that situations. I looked at housing. In December, we’ll see a slowdown in the rate of price rises for housing. We have marketed land for more than a hundred thousand housing units, and we have issued nearly 70,000 building permits.”
The developers don’t think the same way as you. The prices they are offering in land tenders are very high.
“But there will be a drop. Minister of the interior Shaked, Minister of Housing and Construction Elkin and I held a press conference. We were asked when prices would moderate, and I stand by what I said, that by the end of 2022 there will be significant moderation.”
“94% of the economy is at full capacity”
You said that you would help the self-employed after you had analyzed their tax returns. What do you see in the tax returns that have already been received?
“We see a substantial rise in activity in the economy. 94% of the Israeli economy is working at full capacity, with output at 110-115%. That is to say, a factory that produced 100 shekels worth of goods in 2019 now produces 110 shekels.”
Not every sector is booming. In aviation, for example, the numbers are a long way from what they were before the pandemic, and it’s the same with hotels – in January, Israel’s hotels had an occupancy rate of 29%.
“Let’s look at the statistics for passengers passing through Ben Gurion Airport. In the past two weeks, we have seen a rise. Prices at most hotels are also on the rise, including in the north and for self-catering accommodation. In Tel Aviv too – at weekends, you can’t book a room at Kfar Maccabiah.”
Given the rise in state revenues, should the rate of VAT be cut?
“I don’t much believe in these artificial things. In my view, the most acute and immediate problem is the 140,000 jobs in the economy that aren’t filled. We’re short of 6,000 bus and truck drivers. If we want to be like Switzerland, we have to double the number of people employed in high-tech, and to bring two groups into the workforce: Arab women, and haredi men. If we do that, we’ll get close to Switzerland.”
Liberman says that “there are 400,000 workers in high tech” because he also counts support people who do not work in technology. “For example, a kitchen worker at a major technology company receives, on average, 40% more than in other industries; an accountant in high tech earns 30% than in an accounting firm,” he says. He indicates that he wants to double the number of people in the industry: “If we get to 800,000 workers in high-tech, we’ll have done our part,” he said.
“Without high tech, the Israeli economy would be in a completely different place. It’s good that there’s an engine that pulls everyone upwards. We need to create more jobs in high tech. We have to understand that the more that the high-tech industry grows and leads our growth, the better it will be for us.” Asked whether the government wasn’t putting all its eggs in one basket, he says, “The high-tech industry could collapse. But this is an industry that moves with technology and so it upgrades itself all the time. There are ups and downs, but the direction is clear.”
How do you see defense expenditure in the years ahead?
“First of all, at present, our expenditure on national defense is about 2.5 times the average in the OECD. 5.4% of our GDP goes on defense. The global average is about 2.5%. We are learning that in the end you can only rely on yourself. No-one will come to save us. The question is what you do with the defense budget.”
Liberman nevertheless believes that the defense budget should be higher. “When I look at the matter from the point of view of all the offices I have held, is the level of spending on national security adequate? It is not. The challenges do not disappear, but only grow. We live in a tough neighborhood.”
What will the next budget look like
“As far as I am concerned, the emphasis will mainly be on technological development. What has been lacking here in the past few years is artificial intelligence. I want to bring before the government for approval a national plan for investment in artificial intelligence development, a billion shekels a year for the next five years. The money will be channeled via the universities, and through the Ministry of Defense Directorate of Defense Research and Development. We have to be the country with the highest investment in research and development, and that’s where we have to excel. We need to change the mix in the universities and colleges. There are too many students in business administration and law.
“We have a meeting next week with the heads of the universities, together with Minister of Education Shasha-Biton. We are producing less than half the engineers that the market needs in every sector. We must put a greater emphasis on engineering. The universities need to adapt themselves to the market.”
Published by Globes, Israel business news – en.globes.co.il – on February 27, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.
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