Israel Closes Market

Israel expected to get a big economic boost from its peace dividend with the PLO and Jordan. But it's in danger of squandering it through confusing economic policy. On Aug. 16, Israel's popular Finance Minister, Avraham Shohat, shocked the Israeli financial community by unveiling plans to introduce a 10% capital-gains tax on stock investments. Both he and Prime Minister Yitzhak Rabin had recently ruled out such a move. The new tax, apparently aimed at bringing Israel in line with Western economies, is likely to further shake investor confidence in the once-booming Tel Aviv Stock Exchange, which is off 35% from its peak. To head off a selling spree, Israeli authorities ordered the market closed for two days.

Investor dismay was fueled by Shohat's admission that inflation for 1994 would be 14%--well over the government's target. "Instead of a peace dividend in Israel, just the opposite is happening," says Daniel Carasso, research manager at investment firm Furman Selz Inc.

On the positive side, economic growth is forecast at a respectable 5% next year, on top of this year's 5%. Shohat is also pushing some $700 million in tax cuts for next year. Jacob A. Frenkel, the energetic central-bank governor, wants to see even more tax cuts. With tax receipts running well over government projections, he may have a point.

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