Deputy Bank of Israel Governor: I Agree with Sheshinski
The Deputy Governor of the Bank of Israel, Professor Zvi Eckstein, addressed on Tuesday the conference on “Forecast for 2011 and the Sheshinski Committee Report” of the Rothschild Caesarea Center for Capital Markets and Risk Management. The conference was held in the Herzliya Multidisciplinary Center.
During his remarks, Prof. Eckstein stated that the debt crisis in Europe is still in full swing, and it constitutes a risk to the whole global financial system and to the forecast growth in economies worldwide. At the same time, Eckstein noted that Israel is experiencing relatively rapid growth and added that the Bank of Israel expects that despite the slowdown in the growth of exports, the GDP will grow by 3.8 percent in 2011 and that the unemployment rate will decline to about 6 percent.
Eckstein explained Israel’s monetary policy, which is aimed at a return to a normal level of interest while maintaining price stability as the Bank of Israel's main objective. He said that inflation expectations for long-term periods of 5-10 years are within the target inflation range, indicating that the Bank’s policy and its commitment to act to achieve the target are perceived as credible. Nevertheless,
Eckstein emphasized the fact that one of the lessons learned from the recent financial crisis was that during a time of crisis the central bank can adopt a non-conventional policy. The Bank of Israel's policy of intervention in the foreign exchange market can be viewed as a non-conventional policy aimed at stabilizing the market and preventing excessive strengthening of the shekel, according to Eckstein.
The Deputy Governor also spoke of the recently published conclusions of the Sheshinski Committee which had looked at the issue of royalties from Israel’s natural gas finds. The commission had been appointed by Finance Minister Yuval Steinitz following the discovery of huge natural gas reserves in Israel.
One of the huge gas fields, off Israel's Mediterranean shore, is the Leviathan field, where it was confirmed last week that the amount of natural gas is estimated at 450 billion cubic meters. A second natural gas field, called Tamar, is said to have 237 billion cubic meters of natural gas, nearly 60 times larger in volume than the Kinneret .
Yet as Israel discovers natural gas which will be able to solve many of its financial problems for years to come, the big question is how the royalties should be handled and creating a formula that allows the Israeli consumber to benefit from them, as other countries do from their natural resources, without harming investors' incentive to develop the fields. The fields are owned by Noble Energy Inc. and two companies controlled by Yitzchak Teshuva's Delek Group.
The Sheshinski Commission was given the task of making recommendations on the royalties from the natural gas profits, and had said that there is a need to increase the share of oil and gas profits from which the Israeli public benefits. While the committee rejected calls to increase government royalties on the finds, it said taxes should be increased from about 20 to 60%.
During his talk, Eckstein said he agrees with the commission’s recommendations that the tax rate will depend on the size of the profits. He explained that the recommendations were aimed at preserving the balance between a significant return for the entrepreneurs, far in excess of the capital cost, and protecting the state’s and the public’s share of the resource. Eckstein added that the recommendations ensure that taxation will be such that it will leave high profits for the investors, which will contribute to the development of the industry and the whole economy.