Total credit to the general public shrank in August for the second month running, the Bank of Israel said today.

Credit contracted by 0.2% to NIS 675.6 billion, continuing a trend begun in July.

The drop in total credit attests to a decline in domestic business activity, and to the credit crunch at some of Israel's retail banks.

Analysis of the distribution of investment between shekel and dollar credit shows that the main drop was in dollar-denominated credit. In August, credit granted in dollars shrank by 1.5% to $149.5 billion, while credit granted in shekels (linked and unlinked) increased by 0.4% to NIS 456.7 billion.

Part of the discrepancy was caused by the shekel's 0.4% appreciation during August, the central bank noted.

For the first eight months of 2002, total credit to the general public increased by 7.4%, after rising 7.5% in the previous year.

Since 1991, total credit to the general public has expanded by 550%, from NIS 96.8 billion at the end of 1991.

Credit has been growing much faster than GDP, a trend that worries the Bank of Israel, since the debt to GDP has been burgeoning commensurately. Last week the Bank of Israel announced that Israel's debt to GDP ratio climbed to 103% during the first half of 2002, its highest level since the early 1990s.

The lavish lending habits of the banks are also evident in their financial statements, which show increasing provision for doubtful debt.

The Bank of Israel data also shows a 1% drop in the means of payment to NIS 31.4 billion in August, after a 1.8% drop in July.

During the last 12 months the means of payment has increased by 8.3%.