US message to Israel gets louder: do more to salvage economy

Israeli officials like to play down their differences with the Reagan administration over what it will take to avert an economic collapse here. But as the government this week puts into effect its second set of wage-and-price controls, key American officials are signaling publicly that the Israelis are not moving far enough, fast enough.

What the Americans say is important because Israel is asking both for an emergency grant of $800 million and for an increase in economic aid for fiscal year 1986 to $1.9 billion. Israel's government has said that the grants are essential to its economic recovery program.

Last week the administration issued its most public criticism to date of Israel's attempts to control raging inflation, stem its drain of foreign currency reserves, and trim government deficits. Assistant Secretary of State Richard Murphy told Congress that Israel could not expect an increase in economic aid from the United States until the government makes more budget cuts and sharply devalues its currency, the shekel.

Mr. Murphy delivered the warning while Israeli Defense Minister Yitzhak Rabin was in Washington seeking increased military aid. In addition, the administration told Mr. Rabin it would ask Congress to approve $1.8 billion in military aid to Israel for next year, rather than the $2.2 billion the minister had sought.

The timing of the US's public message was embarrassing. It came just after the government had reached agreement on an eight-month extension of wage-and-price controls.

Prime Minister Shimon Peres had hailed Package Deal II as ``an almost unprecedented step in a democratic country . . . which I am convinced will bring about a cure for the entire economy.''

But the Americans -- chief among them Secretary of State George Shultz, himself an economist -- remain skeptical. They point to the failings of the first package deal as evidence that reality falls far short of the ideal within Israel's national unity government.

When the first package deal was announced in November, Finance Minister Yitzhak Modai spoke optimistically of cutting $1 billion from Israel's current budget. But a Finance Ministry official said last week that only about $200 million was actually cut.

On paper, the government's proposed budget for 1985-1986 will be cut by $2 billion, says Ephraim Devrath, director of international affairs for the Finance Ministry. ``But there is a lot of bargaining going on,'' he adds. ``It's a struggle. You need the cooperation of the ministers all year long in a national-unity government. Each minister argues that his budget cannot be cut more.''

Indeed, some Israeli officials seem sobered by the economy's continued slide under the first package deal.

The 1985 budget, Mr. Modai said drily after the Cabinet approved it, ``is another step toward curing the Israeli economy, or if not curing it, at least putting a stop to its deterioration.''

At the same time, Modai announced that the government will seek increased supervisory power for the treasury from Israel's parliament: ``We've learned from past experience that it is one thing to declare a cut in the budget . . . and another thing to see to it that nobody exceeds the figures . . . at his disposal.''

The fact is that bad news just keeps inundating the government. Last month, the nation's already dangerously low foreign currency reserves dropped by another 10 percent, to a mere $2.3 billion. The government-run radio reported last month that ``without a dramatic shift in Israel's balance of payments, the forecast is for such a low level of foreign currency reserves within a few months that Israel's economic stability and financial position in the world will be endangered.''

At the same time, the government has been printing shekels at a staggering rate to cover its foreign debts. In December, the government injected 101 billion shekels (more than $25 million) into the economy. Unemployment continues to rise, and as Package Deal I came to an end, consumers indulged in panic buying that cleared supermarket shelves of some products they suspected would cost substantially more after the second package deal went into effect.

Mr. Devrath maintained in an interview last week, however, that he is optimistic about prospects for recovery. He pointed to a decrease in Israel's trade deficit, an increase in exports, a decrease in public consumption, and an increase in private savings as positive signs in the midst of the gloom.

Israel and the United States, Devrath insists, do not disagree over what should be done to repair the economy. They only disagree over how quickly steps should be taken. Perhaps the most significant disagreement at the moment, Devrath says, is over the pace of devaluation of Israel's currency. The US favors a one-time massive devaluation, while the Israelis insist on a slow devaluation that will cushion the shock to wage earners.