Peres tries to rein in unruly Israel economy

With an eye toward quickly establishing credibility both at home and abroad, the new Israeli government Sunday took its first steps toward repairing Israel's tattered economy.

In a late-night move, the Treasury devalued the shekel by 9 percent and hiked fuel prices by 9 percent.

The devaluation was seen as a necessary temporary measure to halt the run on dollars that has caused a massive erosion of Israel's foreign-currency reserves in recent months. Worried Israelis, anticipating a devaluation, had just in the past few days bought up huge amounts of dollars, according to Finance Minister Yitzhak Modai.

The devaluation is expected to be followed soon by further measures aimed at bringing Israel's raging 400 percent inflation rate under control and protecting the nation's dwindling foreign-currency reserves. (The official exchange rate rose to 396.86 shekels to the dollar Monday morning. The figure was as much as 50 shekels more per dollar on the open black market.)

It is crucial that the government move fast, analysts here said, because it must demonstrate its competence both to a skeptical Israeli public and to the American government, which Israel hopes will give it an emergency cash transfusion.

(Prime Minister Shimon Peres will meet President Reagan in Washington Oct. 8 to discuss US economic aid, Israeli officials reported.)

''Both the government and the public at large recognize we are at a point where we don't have a choice,'' said Ephraim Davrath, deputy director general for international affairs with the Finance Ministry. ''The readiness to pay the price (of controlling inflation) is greater than ever.''

There were other signs that the new Labor-Likud government is determined to demonstrate that the economy heads its list of priorities:

* Budget cuts: In its first meeting, the 25-member Cabinet agreed to cut $1 billion from the fiscal 1984 budget. The Cabinet will decide later in the week where those cuts will be made, but press reports have said that former Treasury Minister Yigael Cohen-Orgad had wanted to cut $500 million from government operations and $500 million from welfare allowances and food subsidies.

* Labor relations: On his first day in office, Peres rolled up his sleeves and headed the special government economic teams he has created in talks with the powerful Histadrut, Israel's largest trade union. More than 1 million Israeli wage earners are members of the Histadrut, and the government views it as essential that the union make concessions on linkage. In Israel, most workers' wage increases are linked to the cost of living. The government wants to alter that system and lower real wages. Finance Minister Yitzhak Modai said Sunday he wants to reduce the standard of living of the average Israeli to 1982 levels.

* Aid: Israel's Finance Ministry is preparing ''several plans'' to present to the United States in the next two weeks, Mr. Davrath said. The Israelis aren't saying how much aid they want above the $2.6 billion approved for next year, but press reports have put the figure at $700 million. Davrath, who is one of the ministers responsible for preparing the aid request, said the Israelis need ''one-time, immediate aid to solve the immediate problem'' of the drain on its foreign currency reserves, in addition to its regular aid package. Sources close to the negotiations say the request for additional aid will not be seriously considered without signs that the Israelis are willing to take action that may be politically unpopular.

''The Americans want the same thing the Israeli people want,'' Davrath said. ''They want a convincing policy package that should be put together and then implemented.''

A convincing package, however, may mean some real hardship for the average Israeli, who already is feeling the pinch, Davrath said.

''Already the people are suffering and we are going to suffer more,'' predicted Nitza Alfiah, a young Israeli. Nitza said she and her husband, who lost his job as a tractor driver four months ago, are having trouble paying the mortgage on their apartment.

''The situation is terrible,'' said Nitza, who has two children and is expecting a third. ''Grocery stores won't give food on credit anymore. Now either you have cash in hand or you can't buy. I buy less food. I think before I buy anything.''

The new government has said it is time to put a brake on the spending spree Israelis have enjoyed here under the liberal policies of the Likud government, which for seven years enhanced the buying power of individuals at the expense of the state's coffers. It remains to be seen whether a government where power is equally divided between the Likud and Labor will be able to work together long enough to implement the measures needed to untangle the economic problems.

''We are actually walking a tightrope,'' said Dr. Haim Barkai, professor of economics at the Hebrew University. ''The devaluation has to be part and parcel of an overall plan, and the government must restore its credibility. Right now, the people have so little confidence that even if you make all the right decisions, and carry them into effect, the results will take two months, maybe three or six months, to be seen. By then, the behavior of the people (circumventing new policies) can destroy the policy.''