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Israel asks US for $10bn to halt recession - Intifada takes its toll on a once-buoyant economy

Chris McGreal in Jerusalem
The Guardian
October 22, 2002

Ariel Sharon is pressing Washington for billions of dollars of emergency aid to revitalise the Israeli economy, driven deep into recession by the two years of Palestinian uprising.

Already the biggest recipient of US foreign aid - $2.1bn a year, most of it spent on military equipment from America - Israel is putting together a proposal for up to $10bn (£6.5bn).

The intifada has helped to give Israel its worst recession for 25 years. Foreign investment and tourism have collapsed. The shekel loses value by the month. Unemployment has risen to 10% and shops suffer from people's reluctance to wander through malls which may attract suicide bombers.

Three years ago the economy was growing at the rate of 6%: now it is contracting.

The bursting of the dotcom bubble has compounded the crisis by battering the hi-tech industries which were the engine of Israel's growth.

The government's attempt to contain the damage with deep budget cuts, tax increases and a pay freeze has provoked a public sector strike which has left the streets of Israel's main cities strewn with rubbish but done little to reverse the economic downturn. And there is an election next year.

Last month the chairman of the national security council, Uzi Dayan, told the knesset that the intifada was costing the economy close to £2bn a year and that without an end to the violence there is little hope of reversing the financial decline.

Professor Ephraim Kleiman, an economist at Hebrew University in Jerusalem, agrees.

"Tourism revenues have halved. Foreign investment has fallen by two-thirds since the start of the intifada, although much of that drop also has to do with the bursting of the dotcom bubble.

"I think nothing will improve until something happens to the peace process."

Mr Sharon asked President Bush for the biggest aid package to Israel for more than 10 years when they met at the White House last week.

The president made no promises, but he tried to talk up the Israeli economy at a press conference. "We have great confidence in the Israeli economy. We have a great confidence in the Israeli people. I am confident that the economy will be strong," he said.

The head of the prime minister's office, Dov Weisglass, is heading a team from the treasury and the foreign and defence ministries considering a number of options, including a request for loans from the US treasury, guarantees for low-interest loans from US banks, and the diversion of some of Washington's military assistance to the Israeli treasury.

At present Israel must feed military aid back into the US economy by buying American equipment. One proposal is for it to be spent on Israeli-made weapons, which would help boost manufacturing and prop up the shekel.

Israeli officials said the Americans were "sympathetic" to the request, but there is likely to be some wrangling about the kind of help and the political price to be paid.

Prof Kleiman says Mr Sharon is seeking to take advantage of Washington's concern about Israel's role in any coming conflict with Iraq.

"I think Sharon is just trying to exploit it to get some money. Bush wants Israel to behave more decently to the Palestinians and to keep out of a war with Iraq. Sharon wants to exact a price and guarantees for cheap loans are it," he said.

Israeli officials acknowledge that the Americans may seek further concessions in return for financial assistance.

In the early 90s Yitzhak Shamir, then prime minister, sought $10bn in loan guarantees to help absorb hundreds of thousands of immigrants from the former Soviet Union.

As a condition the Clinton administration demanded a freeze on Jewish settlements in the occupied territories.

Mr Shamir refused, his government fell and he was replaced Yitzhak Rabin, who agreed to the US demand.

Prof Kleiman thinks the Americans will not want to make loans themselves, so guarantees are the most likely option. "Having these guarantees means there's no chance of Israel reneging on its foreign debt," he said.

"This improves very much Israel's credit ratings, which have come to play a much more important role. It's a confidence-building measure."