Israel economy: Israel moves closer to setting up sovereign wealth fund

The Israeli cabinet approved draft legislation on April 14th to establish a sovereign wealth fund (SWF), which will hold and invest between US$50bn and US$70bn of the revenue that the state expects to earn from the country’s natural gas output over the next 25 years. Production began in late March, which has prompted the government to act after long delays in preparing the legislation. In addition to securing a source of long-term financing for the government, the fund is designed to prevent Israel from contracting “Dutch disease”, a situation where natural resources exports cause the local currency to appreciate, undermining the price competitiveness of other export industries.

The proposed fund, which will become active once the government has earned NIS 2bn (US$525m) in revenue from hydrocarbons output, will invest exclusively in foreign assets, allocating 3.5% of its income to the government annually. The fund will start collecting funds from a special tax, which, at its top rate of around 60%, will kick in only around 2016-17, after the oil and gas exploration firms involved have recouped most of their investment; remaining royalties and standard corporation tax earned by the government will go directly to the state coffers. The SWF will probably absorb 30-40% of the total government take from the gas windfall. The government will be able to borrow from the SWF (subject to a special parliamentary majority of 65 votes, instead of the usual 61) only in a national emergency.

The government hopes that channelling gas earnings to the SWF will help Israel to avoid “Dutch disease”.

In Israel’s case, the gas reserves uncovered so far are not only enough to reduce the country’s energy-import bill, which currently accounts for around 20% of total import costs, and its demand for dollars, but also sufficient to export and accumulate substantial foreign-currency earnings when the giant Leviathan field goes into production in 2016-17. As such, the earnings from gas will have a substantial impact on the local currency, and therefore potentially on other export industries.

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