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Israelis Shift Plans for US Loans

Israel now wants to use US loan guarantees, up for approval this week on Capitol Hill, to fund infrastructure and stimulate its economy

FOR Israel, a year-long wait for the United States to approve $10 billion in loan guarantees is almost over. But even as Congress prepares to give its final approval, probably this week, Israel's plans for spending the money, which would be borrowed from commercial banks, are changing.

When the guarantees were proposed last fall, officials of Israel's Likud government wanted to use them to borrow money to fund part of its national budget and to build thousands of housing units to accommodate immigrants from the former Soviet Union.

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Since then two developments have altered Israel's spending priorities:

* The number of immigrants has dropped dramatically in recent months, shrinking the demand for new housing.

* At the same time, a new Israeli government, elected last June, plans to harness the US-guaranteed loans to the new task of reviving a sluggish economy.

"We totally changed the attitude about the guarantees," Israeli Finance Minister Avraham Shohat told reporters in Washington last week. "In the previous budget [a portion of] the money of the guarantees was inside the budget as part of covering the deficit.... We hope to [use it to] serve only the economic growth of Israel."

The accent on economic growth is reflected in Israel's 1993 budget, passed two weeks ago, which reduces deficits and taxes; cuts funding for 15,000 housing units, including 7,500 in the occupied West Bank and Gaza Strip; and boosts spending on infrastructure, including roads, communications, and water projects.

Mr. Shohat says part of the $10 billion Israel hopes to borrow over the next five years will be used to defray the costs of the infrastructure, which are expected to double over the next three years. The new loans will also be used to expand credit and thus stimulate economic growth, expand exports, and generate more foreign exchange, which could be used to buy equipment abroad and shrink the government's $17 billion foreign debt.

"We think of the loan guarantee not just as a financial resource," says Yacov Frenkel, governor of Israel's central bank, speaking at a forum sponsored by the Washington Insitute for Near East Policy. "We think of it as a safety net, as the mechanism that will enable us to lengthen planning horizons for investors, exporters, and anyone else who has to make long-term plans.

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"The [loans] would be the main source of financing our future investments," adds Aaron Fogel, director-general of Israel's Finance Ministry. An expanding economy would have the ancillary benefits of attracting more foreign investment and more immigrants from the former Soviet Union, thousands of whom have resisted migrating to Israel because of the absence of jobs.

Israel's jobless rate has climbed to more than 11 percent, partly because of the influx of 450,000 immigrants during the past two and a half years.

The Bush administration initially rejected Israel's request for the loan guarantees because of former Prime Minister Yitzhak Shamir's policy of expanding Jewish settlements in the West Bank and Gaza. The US opposes settlements as an obstacle to Middle East peacemaking.

The way for approval of the guarantees was cleared when Israel's new Labor Party government cut back on settlement activity and adopted a more conciliatory position in peace talks with Arab states.

Under legislation now wending its way through Congress, the guarantees would be spread out over five years in increments of up to $2 billion. They can be suspended at any time by the president without congressional approval and would be reduced by the amount Israel spends to build settlements.

The legislation would bar Israel from spending any of the US-guaranteed money for construction in the occupied territories. But the constraint is regarded as meaningless since Israel could always spend domestic funds freed up by the new loans.

"Money's fungible so it doesn't matter what [the law] says it can or cannot be used for," says Rep. David Obey (D) of Wisconsin, chairman of the subcommittee that oversees US foreign aid.

At an August meeting in Kennebunkport, Maine, President Bush and Prime Minister Yitzhak Rabin privately agreed to set aside 7 percent of the loan amount as a hedge against default, with the two sides sharing the bill.

After key lawmakers balked at the idea of burdening US taxpayers, the US set a figure of 4.5 percent, which Israel will deposit in an escrow account held by either the Treasury or State Department. The money would be returned if the loans are repaid.

The exact amount of the "set-aside" is a matter of consequence to Israel since it sends a signal to international financial markets about Israel's creditworthiness.

"For us it's very important," says Mr. Frenkel. "It's an implicit rating of the economy. The higher the number, the higher the risk."

The caution and relative secrecy with which such details have been worked out have been important to President Bush.

"It's an election year and Bush has a reputation for bashing Israel," notes one administration source. "He wants to make sure that whatever is done is done as deliberately and carefully as possible, with no leaks."

A foreign aid conference bill containing the loan guarantees is expected to be voted by the full House and Senate this week. Foreign aid is always unpopular, especially in an election year when thousands of Americans are out of work. On the other hand, most lawmakers will be eager to cast a vote for Israel to win favor with the US's strong pro-Israel lobby.

"There are two ways to look at it," says a knowledgeable congressional source. "You can say the loan guarantee is held captive to the foreign aid bill. But you can also say the foreign aid bill will ride on the coattails of the loan guarantee because Israel is a sacred cow in an election year."

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