(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001302130001-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 6
• Document Creation Date: January 12, 2017
• Document Release Date: September 21, 2010
• Sequence Number: 1
• Publication Date: September 27, 1984
• Content Type: MEMO

Sanitized Copy Approved for Release 2011/04/04: CIA-RDP85T00287R001302130001-3
Central
Washington. D. C 2=505
DIRECTORATE OF INTELLIGENCE
27 September 1984
ISRAEL: Peres's Visit to Washington
Summary
Prime Minister Peres will focus on his
government's plans to resolve Israel's economic
crisis and prospects for gaining emergency US
economic aid during his 8 to 9 October visit to
Washington. The most immediate economic problem
facing his national unity government is to stem a
rapid decline in foreign exchange reserves. To
tackle this and other economic problems, Peres's
government is seeking budget cuts and a wage-price
freeze.
Implementing this program will not be easy.
Several ministers have already publicly opposed
cuts in their budgets. Even if the Cabinet agrees
on where to pare the budget, the cuts are unlikely
to materialize in the absence of an enforcement
mechanism. Negotiations on a wage-price freeze
with the Histadrut, the powerful trade union
organization representing about 90 percent of the
work force, will also be difficult because
Histadrut Secretary General Kessar opposes
tampering with Israel's extensive system of
indexing wages to the inflation rate.
Another major problem for the new government
is the predictable lack of public support for a
rigorous, sustained austerity program, which to be
effective will entail increased unemployment and
lower real wages. Faced with these obstacles, the
easiest course for the new government will be to
ask the United States for additional aid.
This memorandum was prepared by I I the
Israel/Palestinian Branch, Arab-Israeli Division, Office of Near
Eastern and South Asian Analysis. Information as of 25 September
1984 was used in its preparation. Questions and comments should
be directed to Chief, Arab-Israeli Division,
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CONFIDENTIAL
During his 8 to 9 October visit to Washington, Prime
Minister Peres will focus on explaining his economic program and
sounding out Washington on its willingness to provide additional
aid. He will be accompanied by Alternate Prime Minister and
Foreign Minister Shamir.
Current Economic Climate
The most immediate problem facing Peres's national unity
government is to stem a rapid decline in foreign exchange
reserves. The Bank of Israel recently announced that foreign
exchange reserves fell by nearly $700 million during July. The
Bank subsequently announced that reserves fell by another
$192 million in August. Although the current reserve level of
$2.9 billion is sufficient to cover more than four months of
civilian imports, the precipitous drop has added to the uncertain
economic climate.
In our view, the drop in reserves is largely the result of
Israelis trying to hedge against anticipated economic policies of
the new government by converting their assets into US dollars.
They remember that the government denied plans to devalue the
shekel during the weeks prior to a major devaluation last October
and suspected that another devaluation was imminent. The foreign
exchange controls adopted and gradually tightened since the
October devaluation have encouraged an increasing number of
Israelis to trade shekels for dollars on the black market.
The pressure on reserves comes at a time when Israel's trade
deficit is improving. During the first eight months of this
year, the deficit was $1.9 billion, $600 million less than during
the same period in 1983, according to Israeli statistics. The
improvement is due to the more rapid depreciation of the shekel
since last October, which made Israeli goods more competitive
abroad and boosted the cost of imports in shekel terms.
Real wages plummeted during the fourth quarter of 1983
because the devaluation of the shekel and the large increase in
government-controlled prices in October caused inflation to soar
to its current 400 percent annualized rate. Several wage
increases to compensate for the higher inflation, however, have
since boosted real wages. In March, the latest month for which
data are available, real wages were 10 percent higher than the
low recorded last fall, and wage agreements negotiated this
summer will provide an additional boost to real wages.
According to Israeli statistics, the unemployment rate
reached a seasonally adjusted 5.9 percent in the second quarter
of this year, the highest in more than a decade. For the past
year industrial production has been holding fairly steady.
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CONFIDENTIAL
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CONFIDENTIAL
The Government's Economic Program
Yitzhak Modai, leader of
Likud's Liberal Party, was named Finance Minister to mollify the
Liberals, who almost bolted from the Likud bloc before the
election on 23 Jul .
/ His major accomplishment was the
successful negotiation of an oil supply agreement with the United
States in 1979 fol l owin the signing of the Israeli-Egyptian
peace treaty.
The rough outlines of Modai's economic strategy are already
clear. These include budget cuts and a wage-price freeze. The
Cabinet has approved in principle a $1 billion budget cut.
According to press reports, an 8-10 percent surtax will be
imposed on October income taxes and "compulsory" loans of
5-7 percent of wages will be made to the government in each of
the following three months. Prices of basic commodities have
been substantially increased in order to reduce outlays on
subsidies.
The budget cuts would improve the balance of payments; lower
growth and higher unemployment would probably follow.
we estimate that the civilian goods and
services deficit would be $500 million lower than it would have
been if the budget cuts were not implemented. Real growth,
however, would drop from 3.5 percent to 1.6 percent, and the
unemployment rate would rise slightly.
According to Israeli press reports, the government hopes to
save another $350 million by cutting subsidies. The resulting
price hikes will boost inflation from its current 400-percent
rate to a higher level that will be sustained unless the current
cost-of-living adjustment formula is reduced. Subsidy cuts alone
will have only marginal impact on the balance of payments.
Obs tacles
Implementing Modai's program will not be easy, in part
because of cabinet opposition.
Education Minister Navon has rejected the proposed
$100 million cut in his budget.
Labor and Social Welfare Minister Katzav opposes welfare
allowance cuts.
Tourism Minister Sharir claims his ministry cannot cut its
budget at all because this would undermine efforts to
attract tourists who bring in badly needed foreign
currency.
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CONFIDENTIAL
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CONFIDENTIAL
Even if the Cabinet agrees on where to pare the budget, th e
cuts are unlikely to materialize in the absence of an enforcement
mechanism. Israeli cabinets have been "cutting" the budget
without effect for the past two years. Ministers have _-_come
adept at using "unanticipated" price hikes to justify their
actual outlays. We believe it will be extremely difficult to
discipline any minister for exceeding his spending ceiling
because the Cabinet is so delicately balanced between Labor ?arty
and Likud ministers.
Negotiations on a wage-price freeze with the Histadrut, the
powerful trade union organization representing about 90 percent
of the work force, will also be difficult. Histadrut Secretary
General Kessar is particularly opposed to tampering with Israel's
extensive system of indexing wages to the spiralling inflation
rate. The US Embassy reports that he has three priorities:
Maintain a high level of employment.
-- Share the burdens of austerity equitably among all
segments of society.
-- Insure that the government carries through cn all car-_S of
the agreement.
Histadrut officials are not willing to renegotiate the
public-sector or the private-sector agreements that were signed
during the past few months, according to the US Embassy. The,
also have rejected proposed changes in the cost-of-1 ivir.g
adjustment formula. The Israeli press reported that Mocai ai.ed
to reduce the September cost-of-living adjustment by 10 j=rce:,t,
but he subsequently announced that he had been misunderstood.
Militant second- and third-echelon Histadrut leaders favor a
much more aggressive protection of worker interests. These
younger leaders, particularly in government-sector unions that
would be most directly affected by an austerity program, will
resist Histadrut acquiescence to government proposals leadinc to
loss of jobs or purchasing power. We believe these militants are
prepared to take strike action in the expectation that the
government will cave in rather than face widespread lacer
unrest. Kessar, who faces a Histadrut re-election campaign early
next year, probably will be reluctant to back government
initiatives on austerity that could provoke major divisions
within the Histadrut.
Modai is unlikely to tackle the structural problems of t =-
economy, such as the need for an independent monetary policy and
to end wage linkage between various groups of workers. The
Finance ministry staff is likely to press for establ ish:ment of an
independent monetary policy, but we are sceptical that '!oda i -