SKOPJE, Macedonia, April 15 (UPI) -- The Danish firm Sid, as it was canceling an order with an Israeli supplier, dispatched to it this unusually blunt message: "When the soldiers of the Israeli army brutalize the areas of the Palestinians ... we do not feel it is the time to do business with your country. We hope this ugly war will end soon."
Consumer boycotts of Israeli products are being touted -- often through the Internet -- from Belgrade, Yugoslavia, to Moscow and from Copenhagen, Denmark, to Brussels.
Alarmed by this unprecedented erosion in their international image, Israeli industrialists donated food, clothing, and medicines to the inhabitants of the still-smoldering refugee camp in Jenin. The Israeli Electricity Company has contributed four transformers to the East Jerusalem Electricity Company, intended to help mend the ravaged grid in
Tulkarim. These gestures are aimed at ameliorating the European Union's wrath as it convenes Monday in Luxembourg -- together with Russia -- to debate possible trade sanctions against Israel.
The European Parliament and the Belgian ministry of foreign affairs have already recommended to the Council of Ministers to suspend the EU's Association Agreement with Israel. This Agreement provides Israel with favorable terms and privileged access to its largest trading partner. The country exported about $8 billion of goods to the EU in 2000.
An effective, though unofficial, arms embargo is already in place. Israel complained that Germany withheld shipment of spare parts for the Merkava tank. Other EU countries banned the export to Israel of all military gear that can be used against civilians.
Belgium denied rumors regarding a unilateral boycott of Israeli goods, including diamonds. It will act, it muttered ominously, only in tandem with all other EU members. Belgium exports about $4 billion of rough diamonds annually to Israel's diamond industry.
The EU is unlikely to revoke the agreement -- but it is likely to invoke its human-rights provisions in bilateral "consultations" with Israel. Despite its warm endorsement of deeper American involvement in the region, the EU is competing with the ubiquitous USA for clout -- mainly of the economic sort -- in the Middle East. A joint EU-US-Russian statement, issued in Madrid last week, was followed by U.S. Secretary of State Colin Powell's trip and a reassertion of America's (reluctant) dominance. In a desperate effort to remain relevant, Germany has floated its own peace plan.
Next week's round in the Barcelona Process of cooperation between the EU and 12 countries of the Mediterranean Basin is likely to be an awkward affair. Israel is invited, as are all its Arab adversaries, including the tattered Palestinian Authority. It is difficult to envision a free-trade pact between all the participants by 2010 -- the end goal of the process.
But EU sanctions may be the least of Israel's concerns. Its economy seems to be imploding. Small business debts worth some $5 billion (out of $15 billion outstanding), may have gone sour. Bank Hapoalim, Israel's largest bank, has lately undershot Bank of Israel's (the Central Bank) capital adequacy ratio of 9 percent -- and misreported it. Small
businesses constitute one-fifth of the asset portfolio and two-fifths of the operating profit of Bank Leumi, Israel's second-largest bank. Last year, bad debt provisions in the banking sector almost doubled to $1 billion.
Israel's Minister of Finance, Silvan Shalom, a life-long political activist, wavers between levying a compulsory war "loan" and drastic cuts in budget spending. The director general of the Ministry, Ohad Marani, is less ambiguous. Cuts in government spending would have to amount to about $2.1 billion-$2.5 billion to offset the gaping hole left by the fighting.
No one bothers to explain how expenditures could be so pervasively cut in mid-fiscal year. The Treasury talks about freezing "populist" laws that cost the budget about $200 million annually. But even if political hurdles to such an unpopular move are overcome, this is less than one-tenth of the cuts needed in order to constrain the deficit to 3 percent
of Israel's fast-contracting gross domestic product. In the year to January, Israel's industrial production dived by 10 percent and its GDP by 3.5 percent. Last year's budget deficit reached 4.6 percent of GDP. The trade deficit will top $5 billion this year, compared to $3.7 billion last year.
More likely, taxes -- including Value Added Tax -- will have to continue to be raised after climbing steeply in 2001. In a speech to the Israeli Venture Association Conference in Tel Aviv, on April 14, Marani gloomily warned of a "financial collapse" and an "economic crisis."
Dan Gillerman, the affable president of the Federation of Israel's Chambers of Commerce, warned against raising taxes: "Such a move would give a final blow to the economy's backbone, especially as the same population that pays taxes also does reserve
duty, and is economically productive."
The government's chief economic adviser by law, Bank of Israel Gov. David Klein, is a much-respected economist and technocrat. Yet, he is on the verge of resigning. He complains of being isolated by Treasury officials. He was quoted in The Jerusalem Post as saying: "There is a total lack of communication between the Finance Ministry and
Bank of Israel. The Treasury has not included me in any discussions over the economic package. I am not a partner in debate on the deficit target or discussions over new taxes."
Shalom promises to present an economic plan to the Knesset in two weeks. While he procrastinated, a survey of 575 businesses, conducted by the central bank, documented a sixth-consecutive quarter of economic slowdown. Domestic orders were sharply reduced, though exports held stable. Surprisingly both the hi-tech sector (including telecommunications) and traditional industries fared better than mid-tech manufacturing -- perhaps because they were battered senseless in the last two years and have nowhere to go but up. For the first time since 1998, Israeli firms also expect higher inflation and accelerated depreciation. The New Israeli Shekel has depreciated by almost 15 percent in the last few months.
This -- and a sharp reduction in inventories -- are the two lonely sprouts in this economic wasteland. The devaluation has rendered many Israeli products competitive exactly when a global recovery has commenced. A massive inventory rundown will translate into a sharp upswing once the economy recovers.
Still, Dan and Bradstreet's index of purchasing managers plunged below the 50 percent line last month, indicating a contraction in the activities of manufacturers. Domestic demand shrank by 3.5 percent and exports have yet to pick up the slack. The employment component of the index stood at a dismal 45 percent.
Bank of Israel Governor Klein, warned, though, that further depreciation might result in additional interest rate hikes, following a recent dizzying shift from easing to tightening. He has little choice.
The CPI figure to be announced Tuesday may be higher than the 0.6 percent-0.8 percent forecast by pundits and government alike.
Inflation was already catapulted by depreciation cum deficit spending to an annual 4 percent on a quarterly basis, up from 1.4 percent last year and an average of 2.7 percent in the last three years. Should the fighting escalate, Israel may well end up in the familiar 7 percent-11 percent inflation range.
The IMF urges the Israeli authorities to tighten fiscal and ease monetary policy. Hitherto -- the December 2001 economic package notwithstanding -- they have done exactly the opposite. The IMF blames the shekel's precipitous depreciation on Bank of Israel's sudden departure from gradualist policies when it hastily shaved 2 percentage points off interest rates.
Small wonder that S&P revised Israel's outlook from "stable" to "negative." Only the country's $24 billion in foreign exchange reserves prevented the downgrading of its long-term foreign currency debts from the "A minus" rating it currently enjoys.
The desperation of Israeli businessmen can be gauged from an interview granted by Dov Nardimon, general manager of Israel W&S management consultancy to Israel's leading paper Yedioth Aharonot. Nardimon pins his hopes on a recovery led by surging demand for old-fashioned military products, such as munitions and gas masks. This will revive the moribund
metallurgic, chemical, and electrical industries in 2002-3, he predicted. Growing global security awareness will enhance Israeli defense exports.
Regrettably, he may well be right. Foreign direct investment in February amounted to about $300 million (compared to $200 million in January). The bulk of this amount went to defense-related hi-tech firms. The American Department of Defense invested about $3 million in Atox -- an Israeli research and development firm, which is in the throes of developing molecules that suppress the activity of biological weapons.
But with all its woes, Israel is still the undisputed regional economic Gulliver. Its cumulative net capital inflow, in excess of $110 billion, outweighs its GDP. It has more foreign exchange reserves per capita than Japan. Its GDP per capita is a European $17,000.
The real victims of the intifada are its instigators, the Palestinians. According to the World Bank, the Palestinian economy lost $2.4 billion by December 2001. Israeli economists add another $1 billion in triturated infrastructure and lost earnings since then.
The bulk of the damage is the result of Israeli closures -- a manifestly inefficacious defensive measure against proliferating suicide bombers as well as a punitive reflex. Between 120,000-150,000 Palestinians used to work inside the "green line" separating Israel from the occupied territories -- mainly as day laborers in construction workers, in tourism and in restaurants. Yet another 50,000 found employment illegally.
Officially the number -- and with it remittances -- has now dropped to zero. In reality, about 50,000-70,000 Palestinians still cross the line daily.
The International Monetary Fund estimates that Israel withholds about $400 million in revenues -- mostly VAT and tax receipts -- owed to the Authority. As a result, Palestinian tax collection has dropped to one-fifth its pre-intifada level. The PA owes half a billion dollars in arrears. Household savings are utterly depleted and PA GDP dropped 12 percent last year according to the World Bank.
The Palestinian Authority -- whose Web site now redirects to "Electronic intifada," a counter-spin news page -- puts the unemployment rate at 25 percent. The real figure is at least 40 percent. Half the population subsists on less than $2 a day -- the official poverty line.
The U.N. Office of the Special Coordinator in the Occupied Territories mostly concurs with these findings. Had it not been for $1 billion annually doled out by donors as diverse as the EU, the United States, Iraq, and Saudi Arabia, 120,000 civil servants would have joined the ranks of the pulverized private sector and the destitute unemployed.
Israel's trade with the PA -- about $3 billion annually -- has all but vanished. It was forced to open its gates to unwanted and unskilled African and Asian migrant labor to compensate for the disastrous deficiency in Palestinian semi-skilled labor. This, perhaps, would be the most lasting lesson of this sorry episode: that the PA is economically dependent on Israel and that no complete separation is a feasible solution. The parties are doomed to swim together or sink together. At this stage, they both seem to prefer sinking.
