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What is the New Israel shekel (ILS)?

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The name "shekel" was derived from an ancient unit of weight that amounts to approximately one ounce or 12 grams.

The New Israel shekel , issued by the Bank of Israel, was introduced on September 4, 1985. It replaced the "old" shekel, at a rate of one new shekel per 1000 "old" shekel. The "old" shekel replaced the Israeli pound on February 24, 1980, at a rate of one shekel per 10 pounds.

Since January 1, 2003, the New Israel shekel has been a freely convertible currency as all capital controls have been removed. A floating exchange rate regime with inflation had been implemented in 1992. Since then, all capital controls have been moved making a free convertible currency.

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What does it look like?

Political Structure

Israel is a parliamentary democracy, consisting of legislative, executive and judicial branches. Its institutions are the Presidency, the Knesset (parliament), the Government (cabinet), the Judiciary and the State Comptroller.

The system is based on the principle of separation of powers, with checks and balances, in which the executive branch (the government) is subject to the confidence of the legislative branch (the Knesset) and law guarantees the independence of the judiciary.

Prominent Figures Currently the head of state is the President Moshe Katsav. The Prime Minister is Ariel Sharon. The acting central bank governor, the Bank of Israel, is Stanley Fischer since May 1, 2005.

Unique Characteristics

Like many other foreign currencies, the value of the Israeli New shekel is dependent on many external factors including U.S. interest rates. However, higher U.S. interest rates values have a particular effect on the Israeli New shekel. It is estimated that for every one percent drop in the value of the Israel New shekel against the U.S. dollar adds .3 percentage points to annual inflation. Higher U.S. interest rates throughout 2005 have caused the value of the Israeli New shekel against the dollar to reach an eight month low.

Key Economic Factors

Consumer Price Index: The CPI is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by earners in urban areas. The CPI can be used to track changes in prices of goods and services, and is an index often used to measure the level of inflation in a country.

The history of the CPI in Israel goes back to 1942, when amidst the Second World War, the Mandatory government decided to freeze all prices, wages and rents. After this move, however, it soon became obvious that market forces were stronger than government policy; prices were still creeping upward. To compensate employees for this increase in prices without simultaneously "unfreezing" wages, the government decided to link salaries to the CPI, assuring that neither wages would rise faster than inflation nor that an individual's purchasing power would decline. The Manufacturer's Association and Histadrut (labor federation) were soon signed regarding this agreement, and this linkage is today considered one of the most fundamental components of Israeli economic history.

Like all central banks, the Bank of Israel has always considered inflation to be the primary issue to be addressed; however, it has not always been successful in its endeavors. Key examples of this failure are in the 1970s and 80s, when hyperinflation plagued?rising from 13% in 1971 to a monstrous 445% in 1984 and generally during wars and extensive waves of immigration, when the Bank has failed to offset the inflationary effects of the government's deficit spending.

While the fight against inflation has been strong in the last decade- due to the Economic Stabilization Policy and other efforts- challenges still lie ahead. High inflation is viewed as the norm, after decades of double digit price increases?and more importantly, any signal of increasing inflation, has a prompt effect on markets and their participants. The persistence of monopolies and other non-competitive market situations creates inefficiencies and high prices in the economy, and as a small, trade-reliant economy, Israel is more vulnerable to imported inflation than a bigger economy.

Imports (namely, of oil): Israel produces almost no oil and imports nearly all of its oil needs (which in 2003, amounted to 279,000 bbl/d). Traditionally, major oil import sources have included Egypt, the North Sea, West Africa, and Mexico; and, in more recent years, imports from Russia and the Caspian region have increased as well. Given the scope of its imports, it is extremely important to track Israel's import numbers?most specifically, in the sphere of oil.
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