A Talk with Israel's Finance Minister

Silvan Shalom holds no hope that the revenue- and growth-sapping war will end as long as Arafat remains in power

Finance Minister Silvan Shalom, one of the rising stars of Israel's right-wing Likud Party, finds himself uncomfortably close to the center of his country's political and economic storms. A former business journalist who is of Moroccan descent, Shalom is struggling with a widening budget deficit, caused in no small part by the war with the Palestinians. Also, his support of appointing a monetary policy committee has led to quarrels with Central Bank Governor David Klein, who fears the plan may weaken his ability to fight inflation.

Shalom, a member of Prime Minister Ariel Sharon's Security Cabinet, believes that a peace settlement with the Palestinians won't happen as long as Yasser Arafat is their leader. He recently shared his views with BusinessWeek London Bureau Chief Stanley Reed and Jerusalem Correspondent Neal Sandler. Edited excerpts of their conversation follow:

Q: How much will the war cost?


It depends on how long it takes. On one hand, there is pressure from President Bush and [his] Administration [to stop fighting], and on the other hand there is pressure from the Israeli army, which wants more time to destroy the terrorist infrastructure.

[Since September, 2000] the intifada has cost the Israeli economy an estimated $5 billion in lost tourism and other businesses. The latest offensive has increased costs for the army, police, and the security forces by $1 billion. We're now drawing up a supplemental budget of $800 million for the army and security forces.

It will cost us [even more] in the long term. Foreign investors and tourists aren't coming here. People are afraid to go to restaurants and malls, which affects the economy very badly. This leads to higher unemployment and an even deeper recession.

Q: What sectors have been hit by the intifada?


Tourists won't come to a place where there is violence. The high-tech industry has been hit because foreign investors who put billions into the Israeli economy aren't coming here like they used to. The construction industry has been in recession for the past few years. We've instituted tax reform for the construction industry, and in high-tech we've granted an exemption to all foreign investors in Israeli venture-capital funds.

Q: What is your assessment of the current situation with the Palestinians?


There is no way to reach an agreement with Yasser Arafat because of his support for terror and his demands for a withdrawal to the '67 borders, the establishment of a Palestinian state, and the right of return. This would lead to the destruction of the Jewish state. He wants to implement his dream of a Palestinian state from the Jordan River to the Mediterranean.

The other Palestinian leaders are not brave enough to stand up to him. They are talking to Israel and the Americans, but...if they say something against Arafat, they will find themselves dead.

Q: Do you still support expelling Arafat?


If he is not here, other Palestinians will be braver and reach a cease-fire agreement with us. Their people are suffering. Arafat is just taking money, bribes, from donors and the Arab countries.

Q: Do you plan to hold on to tax revenues intended for the Palestinian Authority?


We are holding onto nearly 2 billion shekels [about $500 million] that hasn't been transferred since the start of the intifada. I've recommended that the funds be used by Israel to pay costs related to the intifada.

Q: How is the government planning to finance the additional costs?


The recession is deeper, and there is a growing gap over what was initially predicted. Our target at the beginning of the year was a 3% budget deficit. If we don't do anything, the deficit will increase to 5%. We are going to have to adjust the budget. I will bring the new plan to the government on Apr. 29 and expect the Knesset to approve it by June 1.

Q: Are you hoping for more aid from the U.S.?


In 2001 we had a larger deficit than we had planned because $850 million [promised by President Clinton] to support the withdrawal from Lebanon did not come. He couldn't pass the budget at the end of his term. When Bush came to power it was another story.

They know our difficulties, they know our problems, they know our needs. But we are not doing it [the military operation] to get more money from America. We are doing it to keep people alive.

Q: Why have you decided to change the status of the Bank of Israel?


We're the only democracy in the world where one man determines the rate of interest. I discussed the proposed changes with the Chairman of the Federal Reserve, the Bank of England, and the Swiss National Bank. They didn't see anything wrong with our plan to appoint a monetary committee to determine policy. The government has already approved the proposal, and the Knesset is expected to when it returns from its current recess.

Edited by Patrcia O'Connell

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