By Steven Scheer
JERUSALEM (Reuters) - Israel needs economic and political reforms including a peace deal with the Palestinians for its economy to grow rapidly over the long term, its former central bank Governor Stanley Fischer told Reuters.
Fischer, who stepped down on Sunday after eight years as governor of the Bank of Israel, also said ultra-Orthodox Jews should play a bigger role in the economy.
Israel's economy grew relatively strongly throughout his term in office, riding out global financial and economic crisis, and commentators have dubbed him the 'responsible adult' among the country's policymakers.
Fischer has at times intervened to weaken the shekel currency. He said its current exchange rate reflected Israel's economic strength and advocated reforms in tax, regulation and the housing sector and efforts to boost exports to China to keep the economy growing.
The Bank of Israel estimates Israel's potential growth rate is about 3.3 percent but Fischer believes it could reach between 4 and 5 percent if Israel implemented such reforms and made peace with Palestinians and with its neighbors.
"Having peace would make growth more rapid," he said in an interview, but added: "We grew very handsomely between 2003 and 2008 without peace and we recovered very well from recession without peace."
Fischer, 69, has taught U.S. Federal Reserve Chairman Ben Bernanke and European Central Bank President Mario Draghi. He has also been a professor at Massachusetts Institute of Technology, first managing director at the International Monetary Fund and vice chairman of Citigroup <C.N>.
He challenged the tradition among ultra-Orthodox Jews than men should not work but rather engage in religious studies.
"It can't continue for very long," said Fischer.
He also advocated changes in the housing sector, regulation "and a tax system that appears to be quite complicated".
Fischer has long urged the government, which owns most of the country's land, to allocate more for housing to contain fast-rising home prices because central bank steps to make mortgages more expensive has failed to cool the market.
During his eight years in office, economic growth averaged 4.3 percent and inflation 2.5 percent a year, unemployment dropped sharply and public debt slid to 73.1 percent of gross domestic product from 93.9 percent.
"The numbers are good but not great," Fischer said of the economy's current performance.
Israel's economy grew 3.2 percent in 2012 but is forecast to grow 2.8 percent, excluding the start to natural gas production, in 2013 and 2.5 percent in 2014.
Fischer, is leaving two years before the end of his term, has been mentioned as a possible successor to Bernanke but has given only cryptic responses when asked about this. He was released from hospital last Wednesday after being treated for dehydration and fatigue.
He said he was not sure what he would do next but was considering a return to academic life as well as government work.
He said Israel should keep boosting exports to China, but not at the expense of its main trading partners in Europe and the United States.
"China presents a real growth opportunity and we are doing really well in India already," Fischer said.
Since 2008, Fischer has battled a strong shekel, mostly by buying dollars and recently with rate cuts.
"This is a strong economy and I expect the shekel is strong," Fischer said, rejecting the notion that it is too strong. "We have a slight surplus in the balance of payments so it's hard to say the shekel is overvalued."
The shekel has weakened to 3.64 per dollar from a 21-month high in May of 3.55.
"It sounds like (the rate) is about right. We think we are in the vicinity," Fischer said.
Fischer championed change at the Bank of Israel, such as a six-person monetary policy committee set up in 2011 to decide on interest rates. He said Israel also needs a financial stability board and a merger of the various regulatory bodies.
Pending approvals, Jacob Frenkel, 70, will succeed Fischer in a few months. Frenkel, a close friend of Fischer for more than 40 years, is chairman of JPMorgan International <JPM.N> and served as Bank of Israel governor from 1991 to 2000, when inflation was double digit and Frenkel jacked up interest rates.
Fischer said Frenkel's instincts are to keep inflation low. "It's only when that is attained we can go to other targets (like supporting economic growth) and that's not very far from what Jacob thinks as far as I know," Fischer said.
(Reporting by Steven Scheer; Editing by Ruth Pitchford)