Israel Finance Ministry, Yearly Pension Plan Report

BALANCE OF PAYMENTS AND FOREIGN TRADE

General

As a small country with a relatively limited domestic market, Israel is highly dependent on foreign trade. International trade (exports plus imports) in goods and services amounted to approximately 78% of GDP during the past three years.

The reduction in the goods and services trade deficit from $12.7 billion in 1996 to $8.2 billion in 1998 was due mainly to the economic slowdown and an improvement in Israel's terms of trade. In 1998, exports of goods and services grew by 5.6% in nominal terms to $35.0 billion, while imports decreased by 1.9% to $43.2 billion. The effect of the trade deficit on the current account deficit during this period was offset partially by economic and military assistance furnished by United States, German reparations, and personal and institutional remittances.

Foreign currency reserves grew from $6.9 billion at the end of 1994 to $22.7 billion at the end of 1998. The $2.4 billion increase in reserves in 1998 (from $20.3 billion in 1997) was due to earnings on the reserves. See "Public Debt-External Public Debt" and "Foreign Investments."

As of December 31, 1998, Israel's net foreign debt (as reported by the Central Bureau of Statistics) was $14.2 billion (14.5% of GDP), as compared to $19.6 billion (22.6% of GDP) at the end of 1995.

Balance of Payments

The balance of payments consists of two parts: (i) the current account, which measures the trade balance (receipts and payments derived from the sale of goods and rendering of services) and transfer payments, and (ii) the capital account, which reflects borrowing by the Government and the private sector, direct investment in Israel and abroad, and assets and liabilities of commercial banks.

The current account deficit decreased to $2.3 billion in 1998, compared with $4.9 billion in 1997 and $6.6 billion in 1996, due mainly to an improvement in Israel's terms of trade and a faster increase in exports than the increase in imports.
Table No. 14

Balance of Payments
(in millions of dollars)

	Year
	1995	1996	1997	1998
Current account (net):
Exports⁽¹⁾	$28,802	$31,149	$33,155	$35,019
Imports⁽¹⁾	40,774	43,827	44,067	43,234
Trade balance (net)⁽¹⁾⁽²⁾	(11,972)	(12,678)	(10,912)	(8,215)
Transfer payments (net)
Personal restitutions from Germany	855.7	844.5	748.8	786.7
Other personal remittances (net)	1,030.5	995.4	1,008.5	810.3
Institutional remittances	340.8	375.6	349.1	369.2
Intergovernmental remittances	3,342.7	3,846.1	3,894.7	3,951.9
Total	5,569.7	6,061.6	6,001.1	5,918.1
Current account balance	$(6,402)	$(6,616)	$(4,911)	$(2,297)
Capital and financial account:
Capital transfers	2,027	2,060	2,197	1,766
By the Government	200	198	176	185
By other	1,826	1,862	2,022	1,581

Financial account
Direct investments	684	605	839	1201
Abroad	(652)	(776)	(774)	(866)
In Israel	1,336	1,381	1,613	2,068
Portfolio investment	1,793	3,353	3,266	1,836
Assets	61	180	(237)	(49)
Equity securities	16	160	17	45
Debt securities	45	20	(254)	(94)
Liabilities	1,732	3,173	3,503	1,884

Other investments	1,605	908	4,438	(44)
Assets	(1,193)	(794)	893	(1,785)
Government	(1,229)	864	(19)	(13)
Private sector	263	(500)	(779)	29
Banks	(227)	(1,158)	1,691	(1,801)
Liabilities	2,798	1,702	3,545	1,741
Government - long term	139	96	(242)	(416)
Government - short term	28	(29)	(29)	(44)
Private sector - long term	324	1,285	1,432	505
Private sector - short term	1,088	(262)	32	108
Banks	1,218	611	2,352	1,589
Reserve assets (net)	(1,081)	(3,386)	(9,356)	(1,624)
Capital and financial account balance⁽³⁾	$5,028	$ 3,539	$1,384	$3,135
Statistical discrepancies⁽⁴⁾	1,375	3,077	3,528	(838)

____________________

(1)Includes exports and imports of both merchandise and services. The data on exports and imports of goods are based on current foreign trade statistics, adjusted for the balance of payments definitions established by the International Monetary Fund. The value of imports and exports is recorded on a f.o.b. basis. Defense imports, which are not included in the foreign trade statistics, are included in this table.

(2)A significant change in commercial bank assets in 1994 and 1995 resulted from the reduction, in 1994, of reserve requirements and the consequent transfer of deposits from the Bank of Israel to banks abroad. See "The Financial System-Monetary Policy." The rise in domestic interest rates at the end of 1994 and 1995, however, increased domestic demand for dollar denominated credit, which led to a transfer of commercial bank deposits from abroad to domestic uses. In 1997, this trend was reversed as a result of an increase in domestic credit.

(3)Excluding central monetary institutions.

(4)Statistical discrepancies are, without accounting for the signs of the component terms, the difference between the current account balance and the capital and financial account balance less the change in reserves.

(5)In 1999, some definitions have changed to conform to international standards. Consequently, certain figures for prior periods were revised.

Source: Central Bureau of Statistics.

Foreign Trade

Export growth has played a significant part in Israel's overall economic growth and demonstrates the growing competitiveness of the Israeli economy. In 1998, the growth in Israeli merchandise exports was made up predominantly of increased exports to the U.S., led by high value-added and high-tech products. Exports grew at a faster pace than imports in 1997 and 1998, a reversal of the trend from 1992 through 1996.

In 1997 and 1998, all components of imported goods registered slower growth or declines, particularly consumer goods, raw materials and investment goods. Israel's imports have grown rapidly in the first half of the 1990's as a result of rapid growth rates of private consumption, investments, including infrastructure investments by the public and private sectors, and the partial effects of the Government's trade liberalization policy that began in 1991.

The principal features of the Government's trade liberalization policy included the elimination of certain compulsory licensing requirements designed to protect local manufacturers (with the exception of agriculture), the Government's review of other licensing requirements with an intention to eliminate those imposed for protection purposes, and the replacement of administrative and other non-tariff barriers to imports with tariffs, which are being reduced over time. Tariffs were reduced in September1996 for most sectors, and in September1998 for certain sensitive products such as wood and footwear. In September2000 they will be lowered for textiles. At the end of the tariff reduction process, the average rate of customs duties will range between 8% and 12%, a decline from 25% (or more) at the time the new trade liberalization was introduced in September1991. The trade liberalization program also provided for assistance to certain enterprises that would suffer seriously from the implementation of the program. In 1996, Israel signed GATT accords on agricultural products, and replaced import restrictions with import duties. Duties on processed agricultural products will be reduced gradually from 100% to 50% by 2003.

Notwithstanding the Government's trade liberalization policy, Israel has a number of trade restrictions, including quotas, licensing restrictions, and outright prohibitions on certain goods (including a ban of the importation of non-kosher meats imposed at the end of 1994). The non-tariff barriers have diminished both in number and in size as part of Israel's trade liberalization scheme, embarked upon in 1991. Israel also imposes a post-duty surcharge, called TAMA, that varies in amount by product and is applied after the imposition of an import duty, but before any assessment of purchase taxes. The rate is determined according to the importer's average profit margins in a specific category of goods, and reflects the difference between the retail price in Israel for a domestic product and the import price of the imported good. Israel also maintains product standards that, in certain instances, favor domestic producers of consumer goods over importers. In November 1998, 140 official standards pertaining to the food industry and an additional 130 standards in other industries, were abolished. Israel also charges importers 1.3% of c.i.f. cost of imports into Israel for the use of Israeli ports and stevedores. The Ministry of Industry and Trade is in the process of revising the standards law to limit the Governm's authority in setting compulsory standards for products sold in Israel for certain purposes, such as safety, public health, protection of the environment, and to prevent any potential use of this authority for protectionist purposes. During the past three years many standards have been changed to suit international standards.

Although the U.S. and the EU currently account for approximately 64% of Israel's exports of goods (excluding diamonds), the percentage of exports sold to these countries has been declining. This decline is a result of an increase in the level of exports to existing Asian markets and the opening of new markets, particularly in Asia and Eastern Europe. Historically, exports to Asia were low due to the effects of the Arab boycott. Exports to countries other than the U.S. and the EU accounted for 44% of the total increase in Israel's exports in 1996 and 20% in 1997. In 1998, due to the effects of the crisis in Southeastern Asia, the U.S. and the EU markets accounted for all of that year's growth in exports. Exports of non-diamond goods to Asia accounted for 11% of Israel's total non-diamond exports in 1998. The East Asian economic crisis was reflected in a drop in Israel's exports to the region (particularly diamonds) as early as the fourth quarter of 1997.

In 1998, Israel had a trade surplus of $2,869 million with the U.S., compared with a surplus of $321 million in 1996. In 1998, Israel had a $6,178 million trade deficit with the EU, compared with a deficit of $8,073 million in 1997.

Israel is primarily an exporter of manufactured goods. The high-tech industries of the manufacturing sector experienced high nominal export growth of approximately 13% in 1998. Exports of electrical equipment and motors (which account for 3% of industrial non-diamond goods), increased by 21% while exports of communication, control and scientific equipment, (which account for 26% of industrial non-diamond goods), increased by 21% as well. Electrical equipment and electronics accounted for most of the increase in exports during the period from 1990 through 1998.

Approximately 68% of Israel's imports are production inputs (including diamonds and fuels). The remainder of imports are made up of investment goods and consumer products.

Since 1948, members of the Arab League have maintained a trade boycott of Israel. See "The State of Israel-International Relations." In September1994, a number of the Gulf States (Qatar, Oman, Bahrain, United Arab Emirates, Saudi Arabia, and Kuwait) declared their intention to lift the secondary and tertiary trade boycotts of Israel. In addition, four other Arab League members (Algeria, Djibuti, Mauritania and Somalia) no longer enforce the secondary and tertiary boycotts of Israel. Nevertheless, some Arab states continue to maintain their trade boycott of Israel. It is difficult to determine the impact on Israeli trade of the remaining elements of the boycott.
Table No. 15

Exports of Goods by Major Groups⁽¹⁾
(in millions of dollars, f.o.b.)

	Year
	1994	1995	1996	1997	1998
Agricultural
Vegetables and field crops	$160.6	$177.3	$221.9	$243.2	241.1
Fruits	191.9	286.0	270.3	242.6	253.6
Other	241.2	277.2	312.3	316.3	330.3
Total	593.7	740.6	804.4	802.1	825.0
Industrial
Mining, quarrying and non-metal minerals	332.2	381.5	367.3	418.7	434.6
Food and beverages	559.4	616.5	608.5	527.3	473.0
Textiles, clothing and leather	968.0	1,036.0	999.3	997.8	1,059.4
Wood, furniture, paper and printing.	135.1	170.6	158.9	171.4	186.1
Chemicals and refined petroleum.	2,216.9	2,471.8	2,531.0	2,865.2	2,953.9
Rubber and plastics	559.5	746.9	808.4	868.0	886.7
Products metal basic	545.7	751.3	853.1	945.2	998.0
Machinery and equipment	833.1	897.6	970.5	985.8	1,101.3
Electronic components and computers	747.7	1,098.5	1,258.3	1,416.2	1,446.0
Communication, control, medical, and scientific equipment	2,406.9	2,470.6	2,808.0	3,456.0	4,023.0
Electrical equipment and motors	246.5	317.7	372.4	419.0	505.4
Transport equipment	916.5	683.7	650.5	702.2	881.9
Jewelry goldsmith and silversmith	513.5	565.0	595.3	525.9	478.4
Software	197.8	286.6	485.5	495.6	568.3
Miscellaneous	92.7	94.4	90.5	122.1	110.2
Total (excl. diamonds)	11,271.5	12,588.7	13,557.5	14,916.4	16,106.2
Diamonds (net)	4,014.5	4,622.5	4,964.6	5,100.2	4,737.0
Other	834.0	780.8	806.7	841.3	476.2
Returned goods	(69.1)	(94.9)	(79.7)	(77.1)	(138.4)
Total (net)⁽²⁾	$16,050.9	$17,897.1	$19,249.1	$20,780.8	$21,181.00

____________________

(1) Excludes trade with the West Bank and Gaza Strip.

(2) Net exports equal gross exports less unworked diamonds returned to the supplier and other returned goods.

Source: Central Bureau of Statistics.

Table No. 16

Imports of Goods by Major Groups⁽¹⁾
(in millions of dollars, c.i.f.)

	Year
	1994	1995	1996	1997	1998
Consumer Goods:
Durables
Vehicles	$ 777.0	$ 927.6	$ 897.8	$ 819.2	$ 731.4
Other	720.9	883.4	992.7	986.8	998.1
Non-Durables	1,548.7	1,845.9	2,051.2	2,070.1	2,145.9
Total	3,046.6	3,656.9	3,941.7	3,876.1	3,875.4
Production Inputs:
For agriculture	289.8	375.4	437.1	365.2	264.4
Raw food products	694.9	781.8	836.9	943.4	898.6
Fabrics and yarn	711.2	786.0	703.9	710.5	703.0
Wood and related products	286.6	323.4	304.9	303.8	286.5
Chemical products	1,381.9	1,668.0	1,759.9	1,758.9	1,758.7
Rubber and plastics	701.8	944.0	866.7	872.8	907.6
Paper-making material	470.0	689.3	549.2	547.1	544.8
Metals
Iron and steel	774.9	1,122.2	967.2	1,003.6	914.8
Precious metals	262.4	266.9	263.3	228.3	201.9
Nonprecious metals	393.4	559.4	518.1	536.1	536.9
Machines, electronics and other industries	4,391.2	5,503.2	6,261.6	5,710.1	5,950.9
Crude oil, related products and coal	1,658.3	1,998.8	2,141.4	2,259.9	1,800.1
Total (excl. diamonds)	12,016.4	15,018.4	15,610.2	15,239.7	14,768.2
Diamonds (net)	3,873.2	4,429.5	4,818.5	4,779.2	3,839.4
Investment Goods:
Machinery and equipment	2,962.1	3,468.1	3,780.1	3,557.7	3,660.9
Transport vehicles⁽²⁾	1,214.6	1,184.4	1,259.7	1,002.8	889.7
Ships and aircraft	333.2	298.4	275.3	278.1	84.1
Total	4,509.9	4,950.9	5,315.1	4,838.6	4,634.7
Other Goods	3.5	3.6	3.8	2.7	12.3
Returned goods	(80.3)	(77.4)	(105.6)	(111.5)	(118.7)
Total (net)⁽³⁾	$ 23,369.3	$ 27,981.9	$ 29,583.7	$ 28,624.8	$27,010.7

____________________

(1) Excludes trade with the West Bank and Gaza Strip.

(2) Excluding ships and aircraft.

(3) Net imports equal gross imports less unworked diamonds returned to the supplier and other returned goods.

Source: Central Bureau of Statistics.

Table No. 17

Exports of Goods by Region⁽¹⁾
(in millions of dollars, f.o.b., except percentages)

	Year
Region	1994		1995		1996		1997		1998
EFTA	$ 376.4	2.2%	$ 377.2	2.0%	$ 342.2	1.7%	$ 440.1	2.0%	$ 427.4	1.8 %
EU	4,965.9	29.2	6,152.6	32.3	6,593.5	32.0	6,773.2	30.1	7,186.0	30.9
Americas	5,914.5	34.8	6,411.9	33.7	7,055.8	34.2	8,154.3	36.2	9,322.5	40.0
Asia	3,185.2	18.7	3,824.7	20.1	4,131.3	20.0	4,196.6	18.6	3,244.5	13.9
Africa	283.5	1.7	353.7	1.9	388.7	1.9	476.8	2.1	473.4	2.0
Other	2,280.2	13.4	1,926.0	10.1	2,098.7	10.2	2,461.5	10.9	2,628.3	11.3
Total	$17,005.7	100.0%	$19,046.1	100.0%	$20,610.2	100.0%	$22,502.5	100.0%	$23,282.1	100.0%

____________________

(1) Gross exports (including diamonds returned by the importer abroad and other returns to the exporters in Israel).

Source: Central Bureau of Statistics.

Table No. 18

Imports of Goods by Region⁽¹⁾
(in millions of dollars, c.i.f., except percentages)

	Year
Region	1994		1995		1996		1997		1998
EFTA	$ 1,587.4	6.7%	$ 1,770.4	6.3%	$ 1,750.4	5.8%	$ 1,669.1	5.8%	$ 1,583.2	5.8%
EU	12,718.9	53.7	14,807.9	52.4	15,483.1	51.7	14,800.1	51.0	13,335.4	48.5
Americas	4,696.8	19.8	5,709.6	20.2	6,446.7	21.5	6,061.8	20.9	6,081.9	22.1
Asia	2,293.1	9.7	2,835.1	10.0	3,048.5	10.2	3,134.1	10.8	3,417.5	12.4
Africa	324.6	1.4	413.6	1.5	389.5	1.3	387.8	1.3	354.6	1.3
Other	2,080.3	8.8	2,749.2	9.7	2,830.8	9.5	2,972.7	10.2	2,697.2	9.8
Total	$23,701.1	100.0%	$28,285.8	100.0%	$29,949.0	100.0%	$29,025.6	100.0%	$27,469.8	100.0%

____________________

(1) Gross imports (including unworked diamonds returned to the supplier abroad and other returns to exporters abroad).

Source: Central Bureau of Statistics.

Table No. 19

Merchandise Trade Indices
(1995=100)

	Year
	1994⁽¹⁾	1995⁽¹⁾	1996⁽¹⁾	1997⁽¹⁾	1998⁽¹⁾
Indices of Physical Volume⁽²⁾
Exports	95.7	100.0	109.1	123.8	137.0
Imports	91.9	100.0	107.1	108.6	113.2
Indices of Prices
Exports	94.6	100.0	98.7	95.8	92.7
Imports⁽³⁾	89.7	100.0	98.3	93.3	87.5
Terms of Trade⁽⁴⁾	105.6	100.0	100.5	102.7	106.0

____________________

(1) New classification.

(2) Volume indices are not seasonally adjusted.

(3) Excluding ships and aircraft.

(4) The price index of exports divided by the price index of imports, multiplied by 100.

Source: Central Bureau of Statistics.