Israeli economy becoming more dependent on US aid

Israel's current struggle to balance the state's mushrooming budget is being conducted with one eye on the United States. Even if the belt-tightening succeeds -- and government ministers are still squabbling over whose programs will be axed -- US and Israeli sources still expect Israel to turn to Uncle Sam for more money to pay Israel's foreign debt.

As Cabinet ministers debate whether to cut school hours, tax old-age pensions , or cut the once-sacred defense budget, Israel does not give the outward appearance of being financially overdrawn. Shop windows are filled with color televisions and video machines, newspapers scream out adds for bargain European tours, and Jerusalem streets are clogged with the evidence of the vast influx of imported cars during the past two years.

But while consumers went on a spree this year, the Israeli economy has sunk into worse and worse shape. The purchase of consumer durables, often imported goods which eat up precious foreign currency, increased nearly 20 percent in 1983. At the same time, inflation refused to budge below 130 percent, Israeli exports have nose-dived, and a trade deficit of between $4 billion and $5 billion is projected for this fiscal year.

Most worrying, according to a report by the US General Accounting Office, is that Israel is likely to face increasing difficulties in repaying its debts to the US. On a per capita basis, Israel's foreign debt of $21 billion is the world's largest, and with a current debt of around $7.8 billion to the US, Israel is the largest recipient of American foreign aid.

The entire US economic aid grant of $785 billion in 1983 won't cover Israel's debt payment to Washington this year, which adds up to more than $1 billion.

This gap will jump sharply over the next decade as major military loans made to Israel in the wake of the 1973 war start falling due after a 10-year grace period.

And just as the post-1973 war military debts to the US begin to slack off, payments will probably begin on Israel's just-signed largest-ever $2.7 billion arms deal with America for 75 F-16 jet-fighter planes.

How did Israel's financial picture get so clouded? Economists point to the post-1973 jump in Arab oil prices, which hit Israel hard (especially when Israel gave back Sinai oil wells to Egypt) as well as fueling sophisticated Arab arms purchases which Israel must match. Add to this a socialized economy that guarantees workers jobs despite low productivity.

Despite the recent drop in oil prices and an Israeli cutback in military purchases abroad, the Israeli economy worsened markedly during the last two years. The Likud government -- at first courting voters and later pursuing ''correct economics'' which are now attacked in all quarters -- overvalued the shekel, making imports cheap and setting off a two-year-long public buying spree.

The government also made costly political decisions - the war in Lebanon (largely paid for by new taxes) and heavy Israeli investment on the occupied West Bank. ''The government hasn't had a sense of priorities and wouldn't make choices,'' argued Prof. Haim Barkai of Hebrew University, a former chairman of the advisory committee of the Israel Central Bank.

The public has been cushioned from the pain of triple-digit inflation by a complex indexing system that links wages and savings to rises in the cost of living. Only in the last two to three years have government mortgages and business loans been linked, giving many citizens a capital windfall, at the government's expense.

The Israeli government was shielded from economic realities by the special relationship with the US which practically guaranteed an annual increase in aid and saw Congress last year override the administration to turn economic aid to Israel into a total grant, and military aid into a 50-50 grant-loan.

Israeli economists see the current situation as serious but far from hopeless. ''Israel has the potential, the skilled manpower, if it does some belt-tightening,'' Barkai says.

But both the GAO report and a confidential staff memo of the International Monetary Fund issued in May contend that Israeli official forecasts may be too rosy. The government's bitterly won budget cuts of about $1 billion could be reversed by various lobbies and threats by one small coalition partner to quit the government.

Treasury officials warn that dropping the index could spark labor unrest and a rush on savings.

Political considerations bar major savings in Lebanon or the West Bank. ''The costs in Lebanon ($1 million daily and $30 million for Israeli troop redeployment) are not the determining factor if the political or security situation dictates staying,'' explained a Treasury official.

In the midst of the budget-cutting debate, plans were submitted to the government by the World Zionist Organization for a new West Bank settlement scheme which would cost $1.5 billion over the next three years.

And Treasury officials say that Defense Minister Moshe Arens, an aeronautical engineer by training, is committed to the costly Lavie fighter plane project even if hoped-for US financing doesn't materialize.

Some financial publications like Euromoney are already labeling Israel a credit risk. Not so, says Ephraim Davrath of the Israeli Finance Ministry, who insists his country is neither a Mexico nor a Brazil.

''We never failed to repay a debt,'' he emphasizes, noting that 85 percent of Israeli obligations are long or medium term, unlike the short-term debt burden of many developing countries. He adds, ''The major part of our debt is to friendly governments and to the Jewish people at much below market rates.''

But both the GAO and IMF reports doubt Israel can cut its deficit quickly, especially since defense expenditure and debt repayment account for almost two-thirds of government expenditure. If Israel draws down foreign exchange reserves to meet its debt notes, the GAO reports, its international credit rating will suffer.

If it borrows commercially, it will pay higher interest rates. The GAO conclusion: ''Israel is more likely to make further requests that the United States assist by either increasing its economic support and/or rescheduling or forgiving prior military debts.''

In Israel, some officials argue that increased US aid is only fitting payment for Israeli defense of US strategic aims in the Mideast. But others worry about increased dependence on the US that one day could lead to political pressures. ''If the Americans continue to bail us out, we'll never have the incentive to pull our belts tight enough,'' a bank official suggested.

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