News Analysis: New Bank of Israel head faces political, economic challenges

by Adam Gonn

JERUSALEM, Oct. 21 (Xinhua) — Israel’s new central banker Karnit Flug faces political and economic challenges in her job given her seemingly lackluster background and Israel’s economic woes, including the shekel’s upward pressure and the increasing cost of living, analysts said.

Flug was appointed to the post by Israeli Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid on Sunday. The first women to hold the position, she had been acting as interim head of the bank during the 112 days that passed since her predecessor Stanley Fisher stepped down.

Regardless of the fact that Fisher praised Flug’s work and expressed his preference for her succession, Netanyahu and Lapid tried to nominate five other candidates before finally appointing Flug.

While there is no doubt that Flug has the necessary qualifications to lead the bank, she doesn’t have the same resume as Fischer, who held senior positions both in private American banks and at the International Monetary Fund prior to joining the Bank of Israel. When Fischer was appointed to head the bank in 2005 it was considered a triumph for Netanyahu, who at that time was finance minister, leading some to view Fischer as “Netanyahu’s man.”

Analysts that spoke to Xinhua said that because Flug lacks Fischer’s background, it might be harder for her to get Netanyahu and other senior members to listen to her advice.

“She will be much more attentive to internal needs within the country, such as housing prices and income gaps and inequality than Fischer was. Nevertheless, I’m sure she will be just as punchy on exchange rates and watching government policy,” Professor Dan Peled of the University of Haifa, told Xinhua on Monday.

Peled added that he hopes that “not having Fisher’s international stature, Flug will be able to curb the prime minister and minister of finance, whom occasionally needs to be stopped.”

POLITICAL CHALLENGES

“Fischer was Netanyahu’s man and he enjoyed an international stature that very few Israeli economists, in academia or in public service, have. So it’s harder to say no to someone like Fisher than someone like Flug,” Peled said.

Yaacov Sheinin, formerly vice chairman of the Advisory Committee to the Bank of Israel, said that Flug did a good job as the acting governor of the bank if one judges what happened in the last 112 days. However, he added, now that she has become the official governor of the Bank of Israel, she needs to plan a program and a strategy for a longer term of four to five years.

Sheinin argued that Flug will be able to stand up to Netanyahu and Lapid despite lacking Fisher’s prestige because “once you get the job, you become stronger, especially if you are mature enough, you know your limitations and you have experience.”

A good example of this he said was her decision to reduce interest rates despite opposition from the monetary committee. ” She decided to take a risk and reduce the interest rates and that gives me a sign that actually she knows how to take a stand on issues that she thinks are important to the economy,” he said.

ECONOMIC CHALLENGES

The Israeli economy did fare the global economic crisis far better than both the United States and the EU, however, their weak economies are closely tied to the challenges that Flug will have to solve, including the strength of the shekel and the weak demand for Israeli goods, especially in the United States and EU, which are Israel’s two most important export markets.

During his tenure Fischer managed to build up a substantial reserve of U.S. dollars as he almost routinely bought dollars to ensure that dollar didn’t fall too much in value against the shekel, and Flug is expected, as noted by Peled, to keep a close eye on the exchange rate.

The second challenge that Flug will have to deal with is the rising costs of living in Israel, especially the high housing prices. According to Sheinin, Israel needs a governor “who will try to change the particular situation Israel faces of very high housing prices, … even a bubble in housing prices.”

Sheinin said that the high housing prices together with the strong shekel means that “instead of having a growth rate of five percent we have a growth rate of only three percent, which isn’t enough for the Israeli economy and that’s because our shekel is too strong for stability for the export side”.

However, lowering housing prices is a complicated balancing act as many Israelis have much of their savings invested in their houses, so a dramatic reduction in housing pricing would also result in a many losing parts of their savings.