Source: Extrapolated from IMF, International Financial Statistics 1/ PX*X and Py⭑Y are the weight factors for exports and imports, respectively, in deriving the terms of trade index. Although the country's terms of trade and general export performance are likely to remain favorable, Israel will continue to run trade deficits. The civilian goods and services part of the deficits may well diminish as aggregate demand continues to be controlled and structural adjustment allows the country to more efficiently mobilize and allocate domestic resources. The military portion of the trade deficit will continue to require U.S.G. financing. The only alternative to this is to finance the military aspect of the trade account through a reduction in civilian importation which would directly result in slower growth and lowered living standards. The ability of the Israeli economy to provide for civilian consumption is being strengthened but military consumption continues to demand foreign assistance. As indicated in Table V.1, Israel's gross international liabilities have grown only slightly over the past three years. They grew about $400 million in the first half of 1987. As of June 1987 Israel's gross external debt (both public and private) came to $31.890 billion or about 110% of GNP (this is smaller than in 1986 at 117% or 1985 at 140%). Table V.1 shows that most of the new net increase in international liabilities came about through private sector long and short term borrowing. Also, as is clearly shown in Table V.1 item II Value Adjustments (net) a large share of the increase in the value of foreign liabilities outstanding, at least in 1986 and 1987, resulted from deposits of foreigners rather than from net new borrowing by the Government. Indeed, net government liabilities, item I a.1, declined by $121 million in the first half of 1987. Almost two-thirds of all external debt, excluding the financial assets of the banking sector, is owed by government. The remaining third is owed by the private sector. Of total debt at the end of 1986, 71% was long-term (maturity of more than five years), 15% was medium-term (maturity between one and five years) while the remaining 14% had maturities of less than one year. Of government debt, approximately 94% was long-term and the remaining 6% was medium term. -16 TABLE V.1 CHANGES IN ISRAEL'S INTERNATIONAL LIABILITIES 1987 1986 Jan-June ($ millions) 1985 1984 LOANS OUTSTANDING AT BEGINNING OF PERIOD 31,498 30,333 30,366 29,826 I. Change adj. to BOP (14) 360 (719) 1,054 (17) (121) 76 79 405 83 (37) 0 (154) (195) (150) 128 Sources: Central Bureau of Statistics "Statistical Abstract of Israel data for 1987 from Monthly Bulletin of Statistics, Oct. 1987 -17 Over the past three years Israel's debt service burden has been declining. Table V.2 presents the debt service burden over the period 1982 to 1986, which indicates a declining debt service burden, on gross terms, since 1984 and on net terms, since 1985. Source: IMF data and Bank of Israel. A. gross debt service excludes the receipt of principal and interest on loans made by Israelis to foreigners. B. net debt service includes the principal and interest payment made to Israelis by foreigners. Table V.3 contains IMF projections of the scheduled payments of Israel's external foreign currency liabilities from 1987 to 1990. The table implies a declining debt service requirement. Current GNP and exports trends imply, in conjunction with this table, a diminishing debt service burden. TABLE V.3 SCHEDULE OF REPAYMENTS OF ISRAEL'S EXTERNAL DEBT Total medium and long-term payment of debt 1989 1990 2,374 2,198 1,582 1,356 Source: IMF data and Bank of Israel. Debt to U.S. Government Of Israel's total foreign debt approximately $9.9 billion is owed to the U.S. Government. The overwhelming majority of this is against the foreign military sales (FMS) program. Over the next several years the debt service on loans from the U.S. Government will amount to approximately $1.2 billion per annum. Scheduled service of the debt is present in Table V.4. Over the past three years Israel's total external debt has been growing only slowly. Although the total amount of debt outstanding is high relative to GNP, most of this debt is long-term. The overall debt service burden has been decreasing and projections of future payments against Israel's debt indicate a declining burden, although debt service on loans from the U.S. Government is still growing slowly and does not peak until 1992. Given the current debt profile, Israel's ability to service its external debt obligations should improve over the rest of the decade. The U.S. has played an important role in the maintenance of the Israeli economy. More recently, it has provided advice and support on the reform process. Although ties between the U.S. and Israel are varied and extend far beyond bilateral governmental relations, for the purposes of this report the U.S. Government role in supporting the Israeli economy and providing assistance with regard to the reform program has been provided under three headings: economic assistance; policy dialogue; and the Free Trade Agreement (PTA). These are discussed below. Economic Assistance Since fiscal year 1972, A.I.D. has provided grant and loan assistance from the Economic Support Fund to finance non-defense commodity imports and to support Israel's requirements for foreign exchange. By 1976, annual transfers to Israel had increased to $700 million in response to Israel's growing economic problems. They remained at the $700-800 million level -19 In FY until FY 1984, when they were increased to $910 million. 1985 obligations were increased again to $1.2 billion (in addition to a $1.5 billion supplemental disbursed in two separate year tranches of $750 million each). In FY 1986, the program was reduced to $1.148 billion due to Gramm-Rudman-Hollings legislation. In FY 1987 the program was restored to the $1.2 billion level. From FY 1976 through FY 1979, approximately two-thirds of the ESF program was provided on a grant basis; the remainder on highly concessional loan terms. All economic assistance has been provided on a grant basis since FY 1980. In FY 1979, the Commodity Import Program (CIP) financing element was eliminated to alleviate administrative difficulties which the GOI had encountered in drawing down available funds in a timely fashion. Although Israel's non-military imports from the U.S. were large, the GOI had considerable difficulty in managing the documentation processes required for CIPS. The switch to cash transfers greatly eased the administrative burden placed on the Israeli Government. In addition to ESF, the U.S. provided. Public Law 480 Title I food aid for several years and authorized several Housing Guarantee Programs for Israel. Under other legislation, assistance has been provided to help Israel settle new immigrants from the Soviet Union and other countries. In FY 1975, a $20 million grant for a Joint U.S.-Israel Desalination project was authorized. This project was completed in 1983. FY 1988's allocation of $1.2 billion in Economic Support Funds provides a cash transfer to the Government of Israel to provide financing for needed balance of payment support. From July 1, 1974 through October 30, 1987, A.I.D. provided a total of $13,703.4 million of Economic Support Funds to the Government of Israel. As of October 30, 1987 all of these funds have been disbursed. The breakdown of the use of ESF is provided below. |