Journal Issue

Israel: Selected Issues and Statistical Appendix

International Monetary Fund
Published Date:
May 1999
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Israel: Developments in Exchange Restrictions

47. Since 1987, the extensive system of foreign exchange controls in Israel has been gradually eased. Before that time, all foreign currency transactions were forbidden unless explicitly permitted. Current account restrictions focused, inter alia, on limiting foreign currency travel allowances (including through use of credit cards) and wage payments and unilateral transfers abroad. Capital account restrictions focused on both inflows and outflows, but later the emphasis was more on restricting outflows due to a concern that, if left unrestricted, resident portfolio diversification would greatly outweigh the magnitude of foreign inflows. There were also multiple currency practices, such as the 4 percent tax on imports of tourism services levied at the time of the exchange transaction and the exchange rate insurance scheme for exporters.

48. The gradual easing of these restrictions over time—including elimination of the multiple currency practices—led to the acceptance by Israel of the International Monetary Fund's Article VIII, Sections 2, 3, and 4 in September 1993. Further, by 1994 all restrictions on capital inflows had been eliminated, including foreign borrowing by Israeli residents.

49. During 1998, three further steps were taken in the liberalization program. The first went into effect on January 1, 1998 and included:

  • Israeli residents were permitted to purchase freely foreign currency with local currency and to deposit it in foreign currency deposits in Israeli banks.

  • Israeli residents were permitted to transfer money and foreign securities held in custody deposit between foreign currency deposits within the domestic banking system.

  • All restrictions on mutual funds' investments in foreign securities were abolished.

  • The limit of 5 percent of turnover or 10 percent of capital on holdings of foreign securities and foreign currency abroad by Israeli companies was abolished.

  • Israeli residents, except insurers and pension funds, were permitted to freely engage in NIS/foreign currency derivatives, and provident funds could engage in such derivatives within the limit on foreign currency financial investments.

  • All restrictions on forward transactions between foreign currencies, cross rates, interest rates on foreign-currency assets or liabilities, commodity and securities prices, were removed.

50. Additional changes went into effect on February 12, 1998, namely:

  • Israeli residents and nonresidents traveling abroad were permitted to purchase $1,000 on leaving the country without having to produce documents or personal identification.

  • Israeli residents living abroad were permitted to open bank accounts there regardless of the length of stay.

  • Israeli residents was permitted to freely engage in selling foreign securities short, while a foreign resident was permitted to sell Israeli securities short.

  • All time limits regarding payments for imports and submittance of receipts for exports were abolished.

51. Finally, on May 14, 1998, all activities and transactions in foreign currency and between Israeli residents and nonresidents were permitted (instead of the previous negative list). Following this declaration, the shekel is now fully convertible. Individuals are allowed to invest freely abroad (including in real estate and land), to manage bank accounts abroad, to hold, make payments, or receive foreign exchange, to undertake any kind of unilateral transfer, and to make transactions directly with foreign financial intermediaries as well as authorized domestic dealers (there is an obligation by these parties to report on the nature of the transaction). The remaining restrictions are on institutional investors and derivatives made with nonresidents, as follows (and the government has committed to remove them over time):

  • A provident fund may not: (i) hold foreign exchange or foreign securities and make forward transactions involving payment or receipts in foreign exchange in an amount of more than 5 percent of the provident fund's total assets; (ii) hold 5 percent or more of a given security issued by a nonresident corporation; or (iii) buy or hold other kinds of foreign assets.

  • A pension fund or insurance company may not: (i) buy foreign currency and hold it in cash or deposit; (ii) accept foreign currency from another resident; (iii) engage in forward transactions involving payment or receipt of foreign exchange; (iv) buy or hold foreign securities unless issued by the State of Israel or by an Israeli resident company registered for trading on a foreign stock exchange or over the counter; and (v) buy or hold other kinds of foreign assets.

  • A resident may not undertake with a nonresident a derivatives transaction of any kind in which one of the underlying assets is local currency and which involves payment or receipt of foreign currency, unless the transaction is a forward transaction at a pre-set price for a period of no more than 30 days.

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