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Israel Pushes For Sovereign Wealth Fund to Protect Shekel

Production of natural gas leads parliament to vote in favour of a SWF.

(April 16, 2013) -- Israel is on its way to launching a sovereign wealth fund (SWF), designed to prevent a steep appreciation of the shekel following the country's plans to allow access to its natural gas fields.

The country's cabinet voted to re-approve the establishment of a SWF, after the initial proposal from the previous administration failed to be passed by the Knesset - the Israeli legislative branch of government which passes all laws - before its election in January.

The pressing need for a SWF has been driven by production of natural gas, which began in late March at the Tamar field. The field has reserves of some 10 trillion cubic feet, and the nearby and much larger Leviathan field is set to become available as early as 2016, according to several media reports. Exports are scheduled to begin from 2016.

Israel wants to avoid so-called 'Dutch Disease', a phrase coined by the Economist magazine to describe a surge in income from new natural-gas fields in the Netherlands during the 1960s that triggered a currency gain, but eroded earnings for the country's other exporters.

Bank of Israel Governor Stanley Fischer cited Norway's SWF as an example to follow if Israel wished to safeguard the billions of dollars in windfall it is expected to generate in natural gas revenue.

Eugene Kandel, head of the National Economic Council - which assists the Prime Minister on economic issues - told Reuters he hoped the wealth fund bill would be quickly passed by parliament.

The Bank of Israel-managed fund, he said, should start operating in 2016 or 2017 and invest outside of Israel.

Flows to the fund will come from a progressive tax on gas exploration firms of as much as 60% on natural gas revenue, but only after they have recouped a large part of their investment.

Other natural gas income, such as royalties and corporate taxes, will stay in Israel and boost government coffers.

Under the proposed bill, the government will only be able to access the fund's principal in the event of an emergency, and only then with the approval of at least 65 of the 120 lawmakers in parliament.

Eugene Kandel, head of the National Economic Council, told Bloomberg: "The reason we are doing it now is because we want to manage the expectations of various currency markets, to show that we understand what 'Dutch Disease' is and we are going to take care of its consequences."

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