Similar Accord Reached 3 Months Ago : Israel Seeks New Wage-Price Pact

The Israeli government is scrambling to negotiate a new wage and price control agreement with the country’s manufacturers and trade unions amid growing evidence that distortions introduced into the economy by a similar pact three months ago threaten chaos in the marketplace.

A so-called package deal signed by government, industry and labor in November is scheduled to expire Feb. 4, and as the deadline nears, there has been a run on items ranging from coffee to air conditioners by consumers anticipating big price hikes.

Other items have disappeared from store shelves when manufacturers pulled their products off the market rather than continue to sell at frozen prices. Israel’s only cigarette maker, Dubek, halted production at all five of its plants Sunday after the government refused its demand for an immediate 42% price increase.

Responding to such pressure Monday, a tripartite committee set up to monitor the freeze approved 10% price hikes for instant coffee, tea, beer and cigarettes.

In another sign of trouble, the black market rate for the dollar has jumped sharply this month in anticipation of a large devaluation at the end of the current economic package deal.

The government is clearly afraid that a full-fledged consumer panic will occur unless it can quickly announce a replacement wage-price control agreement--”package deal II,” as it has been called.

A worried Prime Minister Shimon Peres complained late last week about prophets of doom.

“I suggest we stop menacing and frightening people and making such very gloomy predictions,” he said.

A new wage-price agreement would also be important to Israel’s request for a big boost in U.S. aid.

Washington last month deferred consideration of a request for $800 million in emergency aid until Peres’ national unity government takes tougher measures to straighten up its own economic household. Israel has also asked for an aid increase of nearly 60% during the 1986 fiscal year beginning in October.

Leaders of the America-Israel Public Affairs Committee, a congressional lobbying group, stressed during several days of meetings with top Israeli officials here earlier this month that, barring more austerity in Jerusalem, they will have a hard time persuading Washington to boost 1986 fiscal year aid significantly, much less win approval for the $800 million in emergency 1985 money.

Congress is expected to start hearings on the aid program next week.

When the first package deal was signed early in November, it was billed as the symbolic cornerstone of the new national unity government’s economic program.

The agreement, which included a 90-day price and basic wage freeze and a sharp, one-time cutback in workers’ cost-of-living protection, was intended to break the back of the country’s runaway inflation and give the government more time for the fundamental economic reforms needed to bring Israel’s ailing economy back under control.

Consumer prices, which rose by more than 24% during the month before the package deal was signed, increased by only 3.7% in December, according to the latest cost-of-living figures, which were announced last week. And according to a poll published Sunday, an overwhelming 80% of respondents want the package deal to continue.

What worries Finance Minister Yitzhak Modai is that people will see the latest rise in the consumer price index as an indication that “the country’s economic problems are over” when, in fact, they are only the result of administrative action. Meanwhile, Modai concedes, the government has made little progress on the reforms necessary for any genuine economic improvement.

In fact, according to a preliminary 1985 budget proposal presented to the Cabinet on Sunday and quoted Monday in the Jerusalem Post, “in the period of the package deal, the picture worsened from the viewpoint of both the budget and the balance of payments.”

The national unity Cabinet has been unable to fully implement $1 billion in budget cuts voted at its first meeting last September, much less make the even deeper cuts that Israeli economists and American officials agree are necessary.

The proposed budget for 1985 suggests that government spending will be cut by $1.8 billion, but the figure is based on a misleading extrapolation of 1984 budget levels, the Jerusalem Post charged in an editorial Monday. The real cut is no more than $800 million, and even that hinges on budget battles whose outcome is still in doubt.

Those budget cuts that were implemented have been virtually wiped out by increased government subsidies under the package deal for fuel, electricity, bread, public transportation, water and other items.

The cost of subsidies went up by an “alarming” $200 million during the three months of the freeze, according to Hebrew University economist Eitan Sheshinsky.

That, in turn, required the government to print more shekels to cover its bills, building up inflationary pressure that will explode next month, barring some new agreement.

Another problem is that shekel prices were frozen last November based on an exchange rate of 527 to the dollar. Since then, the value of the Israeli currency has dropped by more than 20%, to 665 to the dollar today. That means businessmen are now paying the equivalent of 665 shekels for $1 worth of imported goods or components that they can sell for only 527 shekels.

The black market rate for the dollar has climbed to more than 800 shekels, an economically unhealthy premium of more than 20%.

The challenge of “package deal II” is to permit prices to rise enough to reduce government subsidies and allow manufacturers to recover at least part of their cost increases without triggering a return to last year’s three- and four-digit inflation rates.