Israel Gas-Fund Law Shows ‘Dutch Disease’ Awareness, Kandel Says

The creation of an Israeli sovereign wealth fund for revenue from natural-gas discoveries will help the government manage currency-market expectations, a top adviser to the prime minister said. A draft law creating the fund was approved in principle today by the Cabinet, said Eugene Kandel, head of the National Economic Council. While the fund will probably enjoy income only in 2016 or 2017, the government is rushing to prepare the framework for its operation now, he said.

Prospects for a natural-gas boom from fields discovered off Israel’s Mediterranean coast have helped strengthen the shekel by 3 percent this year, making it the fourth-best performer after the Mexican peso, the Brazilian real and the New Zealand dollar among 31 major currencies tracked by Bloomberg. Bank of Israel Governor Stanley Fischer bought foreign currency to weaken the shekel last week, acting for the first time since July 2011.

“The reason we are doing it now is because we want to manage the expectations of various currency markets, to show that we understand what ‘Dutch Disease’ is and we are going to take care of its consequences,” Kandel said on a conference call with reporters today.

The term “Dutch disease” was coined by the Economist magazine to describe a surge in income from new natural-gas fields in the Netherlands during the 1960s that triggered a currency gain and eroded earnings for the country’s other exporters. The term has since been applied to similar situations from Venezuela to Russia to describe how natural-resource discoveries can hurt industry.


Reporting by  Alisa Odenheimer and Calev Ben-David; Editing by Andrew J. Barden; Published by Bloomberg BusinessWeek.

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