The Bank of Israel (BOI) reported that Israel’s foreign exchange reserves at the end of June 2022 stood at $193.81 billion, a decrease of $5.998 billion from their level at the end of the previous month. The level of the reserves relative to GDP was 38.7 percent.
The Bank of Israel explained that the decrease was the result of a revaluation that decreased the reserves by approximately $6.739 billion.
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In contrast, the decrease was partly offset by – Private sector transfers of approximately $348 million; Government transfers from abroad totaling approximately $393 million.
Interestingly, the BOI usually increases its foreign currency reserves as a way of devaluing the Shekel against foreign currencies. When the Shekel is too strong against the US Dollar or the Euro it tends to be because of too much investment in the country and not much money leaving Israel. So the rules of supply and demand step in: if more Dollars and Euros are spent buying Shekels than Shekels are spent buying foreign currencies the Shekel will increase in value.
When this happens, the Bank of Israel will step in and sell Shekels for foreign currencies. In this way it hopes to devalue the Shekel by offsetting some of the foreign investments.
Recently, however, the Shekel has dropped against the Dollar, falling below the 3.5 mark for the first time in years. This trend began when the U.S. Federal Reserve raised interest rates. And now, with a global downturn in the markets, foreign investment in Israeli firms has declined. So, fewer Shekels are being bought with Dollars and Euros.
So, why does any of this matter?
Well, when an Israeli buys a foreign currency with his Shekels the money comes from the Bank of Israel. This happens when someone exchanges cash, or buys something from abroad with a credit card. Then there are all of the big transactions made by importers.
The Bank of Israel needs to be able to cover these transactions with its foreign currency reserves. And so it needs to be sure to have plenty of hard foreign currency available to pay off the difference whenever more Shekels are sold than bought on the open market.
This money, of course, does not just sit in cash in a local bank vault. Much of the foreign currency reserves are merely numbers on accounts held by Israel in other countries.