Israel is swimming in hard foreign currencies like the US Dollar, the British Pound and the Euro. The Bank of Israel (BOI) reported that Israel’s foreign exchange reserves at the end of January 2023 stood at $201 billion, an increase of $6.782 billion from their level at the end of the previous month. The level of the reserves relative to GDP was 39%.
This is both good and surprising news considering that foreign investments in Israel slowed in H2 2022. This means that fewer foreign currencies came into Israel. But at the same time the Shekel was unusually strong against foreign currencies at the end of 2022 and foreign tourism picked up a great deal. This means that more Dollars and Euros had to spend in Israel by tourists and imports cost Israelis less in foreign currencies so fewer Dollars and Euros and Pounds needed to be acquired by the bank.
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The world’s biggest economies like the US and Japan don’t have to worry so much about foreign currency reserves because their currencies are fully convertible – US Dollars, Canadian Dollars, Euros and Yen are accepted everywhere in the world. And the US Dollar is the world reserve currency, so no matter how low the Dollar may go the entire world wants as many Dollars as possible.
However, having a depth of hard foreign currency reserves is important for a nation with a small economy like Israel because the currency is needed to cover trade deficit payments and the repayment of debts. When the Shekel is strong, the BOI takes the opportunity to buy up foreign currencies at the low rate. And this also helped keep the Shekel from getting too strong. This is not desired since a more expensive Shekel makes foreign investment in Israel less attractive.
The BOI attributed the increase to a revaluation that increased the reserves by approximately $5.631 billion; Government transfers from abroad totaling approximately $1.110 billion; Private sector transfers totaling approximately $41 million.