September 25, 2000

ANOTHER STEP IN THE LIBERALIZATION OF THE FOREIGN EXCHANGE MARKET TOWARDS FULL CONVERTIBILITY OF THE SHEQEL


Insurance companies and pension funds are now permitted to invest abroad up to 5 percent of their assets.

The prohibition on residents’ performing futures transactions with nonresidents for periods longer than thirty days has been removed. The Minister of Finance, Avraham Shochat, and the Governor of the Bank of Israel, David Klein, decided to implement another stage in the process of completing the liberalization of the foreign exchange market. This follows the change in the foreign-exchange control regime in May 1998, when all restrictions on foreign currency transactions were removed with the exception of those applying to provident funds, insurance companies, and pension funds and to futures transactions with nonresidents for periods longer than thirty days.

Henceforth, insurance companies and pension funds are permitted to invest in foreign currency and foreign assets, including direct investments abroad in real estate and share capital, provided that the total of these investments does not exceed 5 percent of the company’s or fund’s total asset holding. Provident funds, which since 1997 have been permitted to invest in foreign currency and in foreign financial assets up to 5 percent of their total assets are now also permitted to invest directly in real estate and share capital, within the framework of the existing ceiling. The situation of the insurance companies and pension funds has thus now been brought into line with that of the provident funds from the point of view of foreign-exchange control regulations. There are no restrictions on the activities of mutual funds in foreign currency or abroad.

As in the past, this stage in the liberalization process is accompanied by the application of the requirement to report to the Foreign Exchange Control Department, a requirement which will now apply to the insurance companies and pension funds, and which is intended to enable the monitoring of capital flows to and from the economy.
The Bank of Israel advised that the importance of extending the institutional investors’ opportunities of investment abroad lies in its contribution to improving the diversification of their investment portfolios. This step should be reflected in a reduction of the total risk in their asset portfolio and in a lowering of its exposure to shocks in the relatively small domestic capital market. The extension of investment possibilities also supports more efficient allocation of the public’s assets portfolio, strengthens the link between the domestic capital market and international markets, and improves the efficiency of the financial system by intensifying competition in the capital market.

The prohibition preventing residents from performing futures transactions with nonresidents for periods longer than thirty days has also been removed, and residents may now carry out such transactions for any period.

The Bank explains that once these changes take effect, on Tuesday, October 10, 2000, the restriction limiting long-term institutional investors’ investment in foreign currency and in foreign assets to 5 percent of their assets will be the last remaining restriction in the foreign-exchange control regulations. The removal of this restriction in the future will enable the sheqel to be declared a convertible currency.

The Bank of Israel states that the decision to effect this further stage in the liberalization of foreign currency was taken in the light of the continued improvement in Israel’s economy and the positive experience gained in the period since the last change in the foreign-exchange control regime, and particularly the relative stability shown by the economy even during the worldwide financial crisis in 1998. This step represents another stage in the globalization of Israel’s economy, and melds with the process of Israel’s convergence towards the economic norms of the advanced economies.