The exchange rate has recently collapsed to a range of roughly 2.8 to 2.9 shekels per dollar. This is an economic earthquake passing beneath the public radar.
Leaders of the Israeli tech industry are cutting headcount brutally, explaining to the public and to investors that the arrival of artificial intelligence requires efficiency measures and workforce reductions. The dry data tell a completely different story. The budget hole created by the collapse of the dollar exchange rate is the central and direct cause of the elimination of development jobs in Israel.
The economic dynamic is simple and lethal: Israeli companies raise investment and generate revenue in dollars, but must pay engineers’ salaries and state taxes in shekels. A comprehensive review by the Growth Companies Forum, a body that sampled seven giant companies employing more than 10,000 workers combined, reveals alarming figures.
The cost of employing an Israeli programmer is currently 8.2% higher than the cost of employing a comparable American developer. In dollar terms, the cost of employing industry workers in Israel has jumped by 20% in the recent period.
The historic decline of the dollar from a level of 3.70 shekels to just 3.45 shekels cut 21 billion shekels from the sector’s contribution to GDP—a full percentage point of GDP. The current situation, in which the dollar is scraping the floor of 2.8 shekels, is sucking the oxygen out of Israel’s leading export industry.
The strong shekel, combined with government inaction, functions as a silent and cruel tax. Economist Milton Friedman aptly described how governments that freeze tax rates in a changing economic environment produce an aggressive increase in the tax burden on citizens and employers without enacting even a single new law.
Bank of Israel Governor Amir Yaron, Finance Minister Bezalel Smotrich and Budget Division officials sit with their arms folded in the face of this market distortion. The government continues to collect the same high labor taxes, completely ignoring the fact that the strengthening shekel is thoroughly eroding the profitability of employment in the country. The state gains high tax revenue in the short term, and destroys the engine of growth in the long term.
Company owners are rational actors operating under rigid laws of supply and demand. They identify the surge in costs, draw the conclusions, close positions in Tel Aviv and recruit workforces in Eastern Europe, India and South America under a remote-work model.
In other words, the Israeli government hands out a prize in the form of quality jobs to foreign programmers and punishes the local developer who bears the burden of taxes and reserve duty in the Israel Defense Forces. R&D jobs are fleeing the country, and Israel is left with hollowed-out management offices.
In discussions I hold with investors and CEOs, as well as in the economic episodes of the Hebrew-language podcast “Al Hamashmaut” (“On Meaning”), I regularly engage in a debate with critics of the government’s response—or lack thereof—to this situation and constantly return to the central, nagging question about the alternative. And the alternative path to government indifference is the taking of drastic steps, here and now.
The government must choose between pushing for a decisive military victory that would restore economic certainty and stabilize the currency, and pushing through an aggressive regulatory reform that would cut employment costs and reduce taxes. Continuing to drift as things stand means the systematic destruction of the industry that sustains the country.
The tech industry is now bleeding to death from a lethal combination of an extreme exchange rate and bureaucratic indifference. Treasury officials are choosing to preserve immediate tax revenue, while sacrificing the industry’s future.
Smotrich needs to wake up, lower taxes on labor and free the sector from regulatory strangulation. Passive waiting will lead to the closure of local development centers and their complete relocation to Bucharest and Bangalore.
Adv. Tamir Dortal is the creator of the “Al HaMashmaut” channel. Email: Tamir@mashma.net.
