Israel has had a balance of payments deficit throughout its existence, primarily because of its heavy defense burden and the costs associated with immigration. This deficit has been covered by capital transfers in the form of loans and, in recent years, grants. These grants historically have come from Diaspora Jewry. Since 1974 the United States government has become by far the most important source of financial support, at first in the form of loans, but since 1979 in the form of grants.

The balance of payments position fluctuated widely, following major shifts in economic policy. Between 1980 and 1983, the civilian portion of the import deficit rose rapidly, with a mounting increase in the foreign debt. In 1984 and 1985, these trends reversed themselves as increased United States grants halted the rise in foreign debt and capital exports.

At the end of 1986, Israel's net foreign debt totaled about US$19 billion. The size of this debt was less of a burden than it would appear, however, because US$10 billion of it was owed to the United States government and had a long repayment period. A further US$5.5 billion was owed primarily to Diaspora Jewry (see table 11, Appendix A).

In August 1986, the Israeli exchange rate was pegged to a fivecountry currency basket. The exchange rate remained fixed until January 1987. This policy, combined with a US$750 million United States emergency grant-in-aid and a reduction in oil prices, led to increased stabilization of Israel's inflation. In the first quarter of 1988, the dollar-NIS exchange rate stood at NIS1.60=US$1.00.

Data as of December 1988