MOF DG WANTS TO REMOVE TRADE IRRITANTS

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 001535 SIPDIS SIPDIS DEPT FOR NEA/FO, NEA/IPA, EB/IFD, TREASURY FOR HIRSON, NSC FOR ABRAMS, DORAN, WATERS E.O. 12958: DECL: 05/21/2017 TAGS: ECON EFIN PGOV IS KWBG SUBJECT: MOF DG WANTS TO REMOVE TRADE IRRITANTS Classified By: Ambassador Richard H. Jones for reasons 1.4 b, d. -------------- Summary -------------- ¶1. (C) In a May 15 meeting with A/DCM Weinstein and A/EconCouns, Ministry of Finance (MOF) DG Ariav expressed the strong desire to find a solution to U.S. trade concerns, and offered to spearhead a GOI inter-agency effort to deal with the problem areas. Regarding a visit of U/S Burns to Israel, Ariav noted that the pressure of the Israeli budgetary cycle necessitated resolving the assistance issue in the near future, and offered to travel to Washington if that would help move the process along. Declining to speculate on who might be named to be the next Minister of Finance, Ariav said that a strong full-time minister is vital for properly engaging the political echelon. He is continuing to push the Hirschson and Trajtenberg economic reform plans and is trying to "educate" the new head of the Knesset Finance Committee, who opposes key elements of the plans. Ariav noted that the strong shekel is due to Israel's positive balance of payments, and was hurting exporters, who are asking the government for help. He expressed the hope that Stanley Fischer would remain Governor of the Bank of ISRAEL (BOI), said he had no contact with any members of the Palestinian Authority (PA),and added that, while he needed more time to study it, the proposed U.S. Loan Guarantee Agreement term sheet looked to be in line with the discussions at the JEDG. He also indicated that the GOI would be going to market in the next two months to issue bonds worth between Euro 750 million and one billion. End Summary. -------------- MOF Eager to Engage USG on Trade -------------- ¶2. (C) In a May 15 meeting with MOF DG Yarom Ariav and his Senior Advisor Michal Finkelstein, A/DCM stressed the importance of improving the U.S.-Israel bilateral trade relationship. He briefed them on the 301 process, saying that there is no dialogue between the two governments on IPR issues, but noted that a discussion on standards issues had begun. Pointing out that USTR wants to make progress on trade this year, A/DCM added that the USG is also interested in discussions on enhancing the U.S.-Israel Free Trade Agreement to include services. Ariav said he understood that the USG is very disappointed by the GOI response on trade issues and asked how he could help change the situation. A/DCM said the primary problem is that there is no one in the GOI who has "taken ownership" of the issue to move it forward and make sure that it does not damage other aspects of the U.S.-Israel relationship. It is therefore key to involve many others in the discussion beyond the Ministry of Industry, Trade, and Labor (MOITL),including -- most importantly -- the Prime Minister's office. -------------- Ariav Wants a Solution -------------- ¶3. (C) Ariav responded that his new team at the MOF wants to fully understand and deal with the problem areas. He called Israel's relations with the U.S. "extremely important," and wanted to prevent a negative atmosphere from developing. Ariav said that he believes in globalization and free trade and added that both countries have an interest in reducing non-tariff trade barriers and solving problematic customs issues. After becoming fully educated on the issues, he said that he would be pleased to spearhead an effort involving all the relevant GOI actors to deal with U.S. concerns. -------------- U/S/ Burns Visit -------------- ¶4. (C) Ariav asked about the status of the potential visit of U/S Burns to ISRAEL to discuss future assistance. He noted the need to reach some resolution due to the Israeli budgetary timetable, and added that he and others would be willing to travel to Washington if this would be useful. A/DCM responded that the U.S. wants to move forward on the issue. -------------- MOF Needs a Full-Time Minister -------------- TEL AVIV 00001535 002 OF 003 ¶5. (C) Regarding the situation at the MOF, Ariav said that it would take another two to three weeks for a new minister to be named, but declined to speculate over possible candidates. Being without a full-time minister is "not easy." (Note: The Attorney General is allowing PM Olmert to hold the post only temporarily due to allegations of his being involved in improper conduct in the privatization of Bank Leumi when he served as Finance Minister in the Sharon government. End note). The ministry requires a minister with political power to interface with the political echelon regarding the substantive issues on the agenda. These include university reform, the Brodet Committee report on the need for transparency in the defense budgeting process, and the Hirschson and Trajtenberg economic reform plans. -------------- Ariav Pushing Economic Reform Plans -------------- ¶6. (C) Ariav said that he is developing a comprehensive plan to implement the economic reforms and has organized eight committees to deal with specific issues, such as the negative income tax, the "Wisconsin" employment plan, and foreign workers. These committees, which meet monthly, include representatives of the MOF, MOITL, the BOI, the Welfare Ministry, and other government agencies. Ariav noted that the new chairman of the Knesset Finance Committee from Yisrael Beteinu, Stas Misezhnikov, will present a particular obstacle to MOF plans, given his openly-stated opposition to some of the reforms, most notably the effort to raise taxes on employee use of company-owned cars. Ariav said that Misezhnikov is "still learning" and will ultimately have to compromise on some of his views. In general, he noted that the overall uncertain political situation is making it harder to get things done. However, work in now beginning, as scheduled, on the 2008 budget. -------------- Strong Shekel Hurts Exporters -------------- ¶7. (C) Ariav also noted that the general instability is not impacting negatively on the economy. The strong shekel is admittedly a problem for exporters, but is a natural outgrowth of Israel's positive balance of payments. Despite certain problems, it is clear that the benefits of globalization far outweigh the costs. Export services and foreign investment, in particular, have risen lately, even as tourism remains in the doldrums. -------------- Fischer Must Stay -------------- ¶8. (C) On rumors that BOI Governor Stanley Fischer might be offered the job of World Bank President to replace Paul Wolfowitz, Ariav expressed the hope that Fischer would stay in Israel, calling him "very important" to the economy. Fischer is trying to fix the labor problems at the BOI, the idea being that newer employees - called "Generation B," would enter into a less generous employment agreement than that given more veteran employees. The BOI is still a public sector entity, and its employees' wages need to reflect that, despite the very aggressive stance of the workers' union. -------------- No Contact With PA -------------- ¶9. (C) In response to an EconCouns query, Ariav indicated that neither he nor anyone else at the MOF had any contact with the Palestinian government or with Salam Fayyad, with whom MOF officials used to have a close relationship. A/DCM noted that at some point, a mechanism might need to be established for transferring money to the Palestinian Authority (PA),and it would be worthwhile initiating some sort of dialogue to pave the way for that. Ariav said that the decision on whether or not to talk to Fayyad is political and would be decided by the Prime Minister's office. He noted, however, that he would be going to the Davos economic conference in Jordan where PA ministers would be present and wondered how long the no-contact policy could continue. -------------- LGA Term Sheet Looks Good -------------- ¶10. (C) On the Loan Guarantee Agreement term sheets, Ariav TEL AVIV 00001535 003 OF 003 and Finkelstein both said that they would need some time to study them carefully. However, after a quick look, they could say that they seemed to be in line with the discussions that were held at the JEDG in Washington. Ariav added that the GOI would issue bonds worth between Euro 750 million to one billion in the next two months, but had no plans at present to use the U.S. guarantees. ********************************************* ******************** Visit Embassy Tel Aviv's Classified Website: http://www.state.sgov.gov/p/nea/telaviv You can also access this site through the State Department's Classified SIPRNET website. ********************************************* ******************** JONES