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What will Israel do with  billion US aid?

What will Israel do with $10 billion US aid?

President Joe Biden has made an unprecedented visit to Israel for a US leaders during a war meeting with Prime Minister Benjamin Netanyahu, among others. Speaking before he left, Biden pledged that he would ask Congress to approve “the transfer of unprecedented aid to Israel.” According to a report in the “New York Times”, Israel asked the US for $10 billion emergency aid.

This proposal would need to be approved by Congress and according to reports would be integrated into legislation for additional aid to Ukraine. What is known about all this so far leaves many open questions. Is it only military aid or does it include civilian economic aid as well. As far as military aid is concerned, does it include money or specific weapons, and what is the time frame in question for delivery? Is it immediate aid or designed to replenish inventory. Also, what about the equipment that was brought to Israel at the outbreak of the war?

Regardless of the details, this is a large amount – equivalent to three years of US military assistance, and equivalent, according to estimates, to about half of the Israeli annual security budget. Over the years, US aid has been granted beyond annual amount, but experts explain that such a large amount of aid has not been granted for decades, probably since the Yom Kippur War.

The precedent

Dr. Sasson Hadad, who served as financial advisor to the IDF chief of staff (2014-2017) explained in an article in 2021 that Israel had received the largest cumulative foreign aid given by the US since World War II. Between the establishment of the State of Israel in 1948 and 2019, the aid amounted to about $135 billion, of which $100 billion was military aid.

Until 1973 the aid included loans but since 1984 it has only been in grants. Since 1999, economic aid has been anchored in decade-long agreements, and civilian aid was gradually reduced and then canceled.

In 2016, the most recent agreement was signed, amounting to about $38 billion per decade (2019-2028), which was higher than the previous agreement. The annual aid grant amounts to $3.3 billion plus an additional $500 million to finance the US-Israeli missile defense program, with Israel investing a matching amount.

Dr. Sasson told “Globes” that US assistance in 1973 during the Yom Kippur War airlift was the most extensive that Israel has ever received, and that when he was financial advisor to the Chief of Staff during Operation Protective Edge in 2014, special assistance was given on a much smaller scale.

The content of procurement

“Procurement is in practice implemented by the US,” explains Moti Besser, who was financial advisor to the IDF Chief of Staff (1997-2000). “A grant like this of $10 billion spread over several years and adjusted for deals would allow the procurement of combat aircraft and perhaps also refueling jets but we have to be very thoughtful in taking advantage of this.”

In the past, the IDF wanted to save shekels by using the dollar aid to also buy low-tech such as uniforms, boots and the like, thus harming local industry that is mainly in development areas. I guess they weaned themselves off this, but sometimes when there is a crisis, they try to keep as many shekels as possible for salary payments and industrial purchases for essential things, and use the dollar aid funds for low-tech procurement.”

On the content of procurement, Besser explains that it depends on what the Israelis ask for, “Aircraft deals are always deals that are spread over several years because of the pace of production, so it is likely that the procurement will be spread over five years. And is the US also including Iron Dome missiles? We have fired several thousand missiles that are worth several hundred million dollars.”

The experts “Globes” spoke to explained that in previous agreements the US did not dictate the content of Israeli procurement, but there were various restrictions. For example, because most of the aid money is in dollars, an economic distortion was created in Israeli preferences that led the US to limit the purchase of food, construction materials and more recently also the purchase of fuel.

Another “New York Times” report states that the package Senator Chuck Schumer has begun discussing with Israel includes Iron Dome interceptor missiles, 155 millimeter shells, and precision guided missiles.

The economic significance

Former Ministry of Finance budget division head David Milgrom says that the US aid is not exceptional, “There were the guarantees (in the early 1990s) when the country had difficulty in raising foreign currency loans, despite friction with the Shamir government at the time. More substantial aid was given in 1985 with the stabilization plan that the Americans were very involved in formulating. In terms of military economic aid, I don’t remember there being anything like this.”

Milgrom says, “This is considered a lot of money in budget terms. It’s about NIS 40 billion, while the entire defense budget is NIS 80 billion. It’s about tens of percent of the defense budget. On the other hand, the US economy is dozens of times larger than Israel’s, and as far as I understand, the US wants to breastfeed just as much as the Israelis are asking to be fed. They understood that there should be aid here because it is a special situation and inventories need to be replenished. It is in the American interest that we succeed against Hamas, and it does not seem necessary to engage in lobbying, as was the case in other situations.”

Prof. Esteban Klor of the Hebrew University Faculty of Economics and a senior INSS researcher says there has not been such a large amount of aid since the Yom Kippur War. “Military operations in the last 20 years did not require such assistance because the security events did not have significant effects on the economy. Operation Protective Edge (2014), which was significant, had a short-term effect, but the current war is an economic event of a different magnitude. We see decreases in investments that are unlikely to return, the mobilization of the reserves that is extensive and we do not know how long the war will last and whether it will escalate to additional fronts. Therefore, even if the aid is only security and not civil, it will be able to help divert budgetary resources to other needs.”

Israeli industry

The impact of US aid on Israel’s defense industry is a critical issue. In his article, Dr. Sasson explains that the industry has great advantages in procurement in the US as part of defense aid funds, which are reflected in mutual procurement concluded in deals. It is possible that this procurement money that Israel requested will also be subject to similar negotiations. Israel’s defense industry companies have indeed benefited in recent years from the fact that 25% of US aid can be converted into shekels for the purchase of Israeli-developed technologies, but by 2028 this conversion capacity will be completely reduced.

Milgrom explains that there are collaborations between Israeli and US industries. “The order goes out to the US company, but the Israeli company also benefits from it, so it is integrated although not fully,” he explains. Besser believes that Israel’s defense companies will not be harmed due to agreements on mutual procurement.

Managing the money and supervision

In fact, most of the management and supervision is carried out by the Americans. Besser explains, “The budget is managed separately and will not be included with the general military aid that Israel receives. It was built by an affiliate of the US Ministry of Defense and the approval process is semi-political because it is Congress that actually approved the amount. In fact, the defense establishment sits with the administration and constructs exactly the contents of the aid request, and together they come, hand in hand, to Congress, because there were years when Israel went directly to Congress and this created a buffer against the administration.”

Besser adds that even after the budget is approved, it is monitored by congressional committees in a closed and reported framework. “The payment is made by the Pentagon directly to the companies. We summarize the cash flow, there are milestones and then the money is transferred directly.”

Besser explains that the US State Department has a dedicated budget for military assistance “They also know how to allocate money for special assistance, the systems there are very skilled at this and any such special assistance is required by the approval of Congress. The Republicans have an image of being more supportive of Israel, but in an event like this in which a Democratic administration is providing assistance to Israel, I don’t see that there will be any problem in approving it.”

Published by Globes, Israel business news – en.globes.co.il – on October 19, 2023.

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