INTRODUCTION

1. General

This publication presents Israel’s balance of payments and the state of the economy’s assets and commitments vis-à-vis elements abroad, during the first half of 2004. The current account and capital account are presented by seasonally adjusted and not seasonally adjusted data.

The following tables appear in this publication:

  1. Balance of payments – summary (seasonally adjusted and not seasonally adjusted)
  2. Current account (seasonally adjusted)
  3. Trade in goods (seasonally adjusted and not seasonally adjusted)
  4. Trade in services (seasonally adjusted and not seasonally adjusted)
  5. Income (seasonally adjusted and not seasonally adjusted)
  6. Current and capital transfers (seasonally adjusted and not seasonally adjusted)
  7. Adjustment of foreign trade data to balance of payments definitions (not seasonally adjusted)
  8. Freight and transportation (not seasonally adjusted)
  9. Financial account (not seasonally adjusted)
  10. Changes in foreign loans, by sector (not seasonally adjusted)
  11. Foreign liabilities – end of period (not seasonally adjusted)
  12. Foreign assets – end of period (not seasonally adjusted)

Balance of Payments is a systematic listing of all economic transactions which were performed during a specific period between Israeli and foreign residents. The Israeli balance of payments is compiled in accordance with the definitions of the International Monetary Fund[1]. These definitions were adopted by international statistical institutions and by most countries in the world. They make it possible to present the balance of payments in a consistent manner, and adjust it to definitions and classifications common in national accounting.

The balance of payments is composed of the following accounts:

  • The current account
  • The capital account
  • The financial account

The current account presents transactions between Israeli and foreign residents, according to the following:

  • Import and export of goods and services (goods account and services account)
  • Income and expenditure from production factors – capital and labour (income account), such as the interest received by Israeli residents on their investments abroad, or the interest paid by Israeli residents on investments made by foreign residents in Israel (income and expenditure from a capital production factor); and the income and expenditure resulting from the labour of Israeli residents abroad, or that of foreign labour in Israel (income and expenditure from a labour production factor).
  • Current transfers (current transfers account), which are transferred between Israeli and foreign residents, such as transfers by the USA government and the Jewish Agency to Israel; transfers by the Israeli government to international institutions; and transfers between private individuals in Israel and abroad.

The deficit (surplus) in the current account, is the summary of all credits and debits in the subsidiary accounts of the current account.

The capital account is composed of capital transfers, which are separate from current transfers, and includes transfers by new immigrants and donations received from abroad for specified projects, which are designated mostly for investment in fixed assets.

The financial account mainly details the financial investments of foreign residents in Israel, and of Israeli residents abroad, such as acquisition of equity in commercial companies and a reinvestment of profits by interested parties (direct investment account), acquisition of negotiable securities (portfolio investment account), making bank deposits, loans and commercial credit (other investments account). This account also includes the changes in the national foreign exchange balance abroad (reserves), held by the Bank of Israel.

Statistical discrepancies are the difference between the summary of the current account (the deficit/surplus in the current account), and the summary of the capital account and the financial account. In theory, every entry on the credit side of the balance of payments must be balanced by a corresponding entry on the debit side. Therefore, all entries on the credit side of the current, capital and financial accounts, must be balanced by the total debit entries. In fact, however, due to the various sources used for drawing up the balance sheet, and the lack of credible data in all sections, there is an imbalance which is expressed in the section “statistical differences”.

Transactions with Palestinian Authority residents are included in the balance of payments as of 1967.

The income account in the balance sheet has been drawn up according to a new formula from the methodological aspect, as of 2002. Data from previous years were updated according to the new formula, up to 1995. Concurrently, the presentation of the income account was also changed, and since then it has been drawn up according to the full distribution of financial tools, institutional sectors and types of investment, as required by the International Monetary Fund.

2. Main Findings

The surplus in the current account of the balance of payment in the first half of 2004 – seasonally adjusted – totaled 216 million dollars, as opposed to a deficit of 176 million dollars in the second half of 2003. The deficit in the current account results from totaling the deficits in the goods and services account and the income account (from labour and capital), and adding the surplus in the current transfers account.

The balance of payments also includes, in addition to the current account, both the capital account and the financial account. From the financial account it can been seen that directinvestments and investments in securities by foreign residents in Israel, including bonds acquisitions, rose by 4.5 billion dollars in the first half of 2004, compared with a rise of 2.1 billion dollars in the corresponding half of 2003.

In other investments by foreign residents in the Israeli economy – which includes foreign resident deposits, non-negotiable government bonds and foreign credit for the private sector – a drop of 0.4 billion dollars was recorded in the first half of 2004, continuing the drop of 0.5 billion dollars in the first half of 2003.

In Israeli investments abroad, which include direct investments and investments in securities, a rise was recorded of 3.1 billion dollars in the reported period, compared with a rise of 1.0 billion dollars in the corresponding half of 2003.

The goods, services and income (from production factors) account

In the first half of 2004 the deficit in this account, seasonally adjusted, totaled 2.7 billion dollars, compared with 3.3 billion dollars in the second half of 2003. The general drop in the deficit, in the sum of 0.6 billion dollars, between the two periods, resulted from a drop in the deficit of the income account, in the sum of 0.4 billion dollars, and a drop in the deficit of the goods and services account, in the sum of 0.2 billion dollars. The changes in the income account resulted mainly from fluctuations in the component of income from capital –dividends and undistributed profits.

An additional reduction in the deficit of the goods and services account was recorded in the first half of 2004, after continuous drops since the first half of 2002. In the first half of 2004 the deficit in this account, seasonally adjusted, totaled 0.7 billion dollars, compared with 0.9 billion dollars in the second half of 2003 and 2.3 billion dollars in the first half of 2002.

The deficit in the goods account, seasonally adjusted, dropped from 1.0 billion dollars in the second half of 2003 to 0.7 billion dollars in the survey period. The drop in the deficit resulted from a rise of 2.1 billion dollars in the export of goods between the two periods, which was partially set off by a corresponding rise of 1.8 billion dollars in the import of goods. The export of goods in the survey period totaled 17.6 billion dollars, compared with 15.5 billion dollars in the second half of 2003. The import of goods totaled 18.4 billion dollars, compared with 16.6 billion dollars in the second half of 2003. The import of goods includes security imports of 0.9 billion dollars, but does not include the expenditure for transporting the goods to Israel.

In the services account import and export totaled similar sums in the survey period, compared with an export surplus of 0.2 billion dollars more than imports, in the second half of 2003, seasonally adjusted. The sum export of services totaled 6.8 billion dollars in the first half of 2004, compared with 6.5 billion dollars in the second half of 2003. The import of services totaled 6.8 billion dollars for the survey period, compared with 6.3 in the second half of 2003.

The income from tourism services, seasonally adjusted, totaled 1.1 billion dollars in the first half of 2004, similar to the data in the second half of 2003, and in contrast to 0.9 billion dollars in the first half of the same year. This income includes the local expenditure of foreign workers, which dropped recently as a result of the drop in the number of foreign workers staying in Israel. The import of tourism services, seasonally adjusted, totaled 1.4 billion dollars in the survey period, similar to import in the second half of 2003.

In the income from interest payments and labour costs account, a surplus of expenditures totaled 2.0 billion dollars in the first half of 2004, compared with 2.4 billion dollars in the second half of 2003. From the data it can be seen that in receipts from investments – constituted from interest, dividends and undistributed profits – a slight drop occurred, from 0.9 billion dollars in the second half of 2003 to 0.8 billion dollars in the survey period. On the other hand, payments on investments dropped from 2.2 billion dollars in the second half of 2003 to 1.9 billion dollars in the survey period. This drop resulted mainly from the dividends and undistributed profits on investments by foreign residents in Israel. These payments were particularly high in the second half of 2003. A drop was recorded in expenditures on payments to salaried employees, from 1.1 billion dollars in the second half of 2003 to 1.0 billion dollars in the survey period.

Current transfers account

The surplus in this account, seasonally adjusted, totaled 2.9 billion dollars in the first half of 2004, compared with 3.1 billion dollars in the second half of 2003.

The financial account

Total foreign investments in the economy rose by 4.1 billion dollars in the first half of 2004, compared with a rise of 3.9 billion dollars in the second half of 2003, and 1.6 billion dollars in the first half of 2003. These investments included direct investments, investments in negotiable securities and other investments. The rise in total foreign investments in the economy resulted from the rise in investments in negotiable securities, whereas a drop was recorded in direct investments and other investments in the survey period.

Direct investments by foreign residents in Israel rose by 1.2 billion dollars in the first half of 2004, similar to the rise in the second half of 2003 and in contrast to 2.4 billion dollars in the first half of 2003 (direct investments are investments in which the investor receives voting rights on the board of directors, and the possibility of participating in the management of the company).

A significant increase of 3.3 billion dollars was recorded in investments by foreign residents in negotiable Israeli securities (including bonds issued by the Israel government) in the survey period, compared with an increase of 2.6 billion dollars in the second half of 2003 and a decrease of 0.3 billion dollars in the first half of 2003. The increase in investments by foreign residents in negotiable Israeli securities resulted mainly from new share issues which Israeli companies conducted abroad, and from government bond issues abroad. The government offered two issues abroad during the survey period: one in March, totaling 500 million dollars and the second in April, totaling 1 billion dollars. The second issue was carried out with the full guarantee of the USA.

In other investments by foreign residents in the economy, a decline of 0.4 billion dollars was recorded in the first half of 2004. In the second half of 2003, no significant changes occurred in these investments, and in the first half of 2003, a drop of 0.5 billion dollars was recorded.

Direct investments by Israeli residents abroad in the first half of 2004 rose by 2.0 billion dollars, compared with a rise of 0.7 billion dollars in the corresponding half of 2003.

In investments in securities by Israeli residents abroad, including shares and bonds, a rise of 1.1 billion dollars was recorded in the first half of 2004, compared with 0.2 billion dollars in the first half of 2003.

Other investments by Israelis abroad – including mainly deposits, loans and commercial credit – rose in the first half of 2004 by 3.6 billion dollars, compared with a rise of 2.9 billion dollars in the first half of 2003. This rise resulted mainly from additional credit for overseas exports and growth of deposits abroad of banks and the private sector.

There were no changes recorded in reserve assets in the first half of 2004, compared with a drop of 0.1 billion dollars in the corresponding half of 2003 (changes do not include re-evaluation of the assets resulting from fluctuations in prices or exchange rates).

Summary of Foreign Liabilities and Foreign Assets

At the end of June, 2004 net foreign liabilities totaled 35.3 billion dollars. This sum is the result of foreign liabilities totaling 130.6 billion dollars, offset by foreign assets totaling 95.3 billion dollars.

3. Definitions

Current account: This account includes trading in Israeli goods abroad (the goods account adjusted to the definitions of the balance of payments), the import and export of services (the services account) and the foreign receipts and payments which result from income from production factors (labour and capital) and current transfers (the income account and the current transfers account).

Deficit (surplus) in the current account: Asummary of the credits and debits in the current account, for a specific period.

The goods account: This account includes transactions of import and export of goods. The transactions included are those that relate to import and export of general goods, goods intended for further processing, goods repairs, and goods supplied in ports to freight/transport companies. The value of the goods recorded in the balance of payments is on a F.O.B. basis; i.e., without freight/insurance charges which are recorded in the appropriate services sections.

The services account: The main services recorded in the balance of payments are: travel services, freight/transport services, computer and information services, communication services, insurance, government services and other business services. Exports of travel services include expenditure of foreign workers in Israel, in addition to expenditures of tourists from abroad. Freight/transport services include fares of passengers traveling by sea or air, freight haulage, ship and plane charter, and various port services. Freight insurance is not included in this section, but in insurance services. Supply of goods in ports to freight/transport companies is included in the goods account, as stated above.

The income account: Two types of transactions are represented in the income account;

1)income from labour

2)income from investments.

Income from labour is paid to private persons and includes wages and other auxiliary expenses. This income is received by Israeli residents, on labour performed abroad, and by foreign residents, on labour performed in Israel. Income from investments includes interest, dividends and undistributed profits which are received from direct investments, investments in securities or other investments, as detailed below.

Current transfers account: Transfers are recorded in the balance of payments in every case where financial or non-financial assets are transferred between Israeli residents and foreign residents, without another asset being transferred concurrently and in the opposite direction. Current transfers are all those, which are not defined as capital transfers – see definition of capital transfer below.

Current transfers are classified according to the sector receiving or conducting the transfer in Israel. Actually, in the relevant balance of payments table, the distinction is between the government sector and other sectors. Transfers from the government of the U.S.A. to Israel are detailed separately.

Capital account: This account includes capital transfers from Israel abroad and from abroad to Israel. Capital transfers are usually connected to transfers of ownership of fixed assets, or to debt amortization between countries.

In Israel, transfers conducted by new immigrants within the first three years of the date of their immigration are considered capital transfers. Other capital transfers listed in the balance of payments are part of those received from national institutions (Keren HaYesod, the Jewish Agency) and from non-profit organizations.

The financial account: This account includes the financial transactions abroad of Israeli residents, and of foreign residents in Israel, according to four main types: direct investments, portfolio investments, other investments and reserve assets (see definitions below).

Direct investments: These are investments by foreign residents in local business companies, or investments by Israeli residents in foreign companies. Investors in these types of investments receive voting rights in the board of directors of the company and the possibility of sharing in its management. Usually, holding over 10% of the company capital shares is considered a direct investment. These investments include a purchase of shares, owners’ and other types of loans, between a direct investor in Israel/abroad, and subsidiary or affiliated companies abroad/in Israel.

Portfolio Investments: These include all investments in shares which are not defined as direct investments and are not part of the country’s foreign currency reserves. This section includes investments in shares (which are not direct investments), investments in bonds and in notes.

Other investments: This section includes all other financial transactions – between Israeli residents and foreign residents – not recorded as direct investments, portfolio investments or foreign currency reserves. The main types of investments included in this group are:

-international trade credit (suppliers’ and exporters’ credit)

-loans

-cash and deposits

-changes in other assets or liabilities

Reserves assets: These are the foreign assets of the country, which are the responsibility of the Bank of Israel and can be realized by it for purposes of financing deficits in the balance, supervision of rates of exchange, or for other purposes. This section includes monetary gold, special drawing rights, foreign currency reserves (including cash, deposits and securities), reserves in the International Monetary Fund and other assets.