Via IMF (Den Internationale Valutafond)

IMF Staff Conclude Visit to Israel

May 24, 2019

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

    • Fiscal deficits are expected to rise in 2019 and coming years under current policies. The budget for 2020 will need to take revenue and spending measures to avert increases in public debt burdens and to facilitate reforms to boost growth.
    • The establishment of the Financial Stability Committee is welcome. Any new legislation on banking supervision should protect the operational independence of the supervisor to safeguard its effectiveness.
    • Faster productivity growth is needed to sustain Israel’s robust economic performance, calling for a package of reforms to reduce regulatory red tape, enhance transport infrastructure, and upgrade education and training.

An International Monetary Fund (IMF) staff team led by Craig Beaumont
visited Israel from May 19-23, 2019 to discuss macroeconomic, financial,
and structural policy issues, in preparation for the annual Article IV
consultation to be held later in 2019.

At the end of the visit, Mr. Beaumont issued the following statement:

“Israel’s solid macroeconomic performance continues, with output rising by
3.2 percent in the year to the first quarter of 2019, and similar growth is
expected for 2019 as a whole. Export growth, led by hi‑tech services,
declined little despite a weakening global economy, but fixed investment
slowed as falls in housing construction outweighed strong machinery
spending. Job creation exceeded 2 percent in 2018, driven by 3.5 percent
gains for women, keeping unemployment at historic lows of about 4 percent.
The tight labor market pushed business sector wage rises up to 4.3 percent
in 2018, from 2.9 percent in 2017.

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“Monetary policy remains accommodative, with the policy rate at 0.25
percent following a hike in the last quarter of 2018. Inflation has risen
from low levels, to remain just above the floor of the 1-3 percent target
range since mid-2018. A further increase in inflation is expected in the
next few years, although this outlook is subject to risks from global
growth and inflation, together with uncertainties around the net impact of
rising wages and increased competitive pressures in Israeli markets. In
that context, it is appropriate that the Bank of Israel has indicated that
future interest rate rises will be gradual and cautious.

Unlike in many advanced economies, Israel’s banks did not become a burden
on the budget or a drag on growth during the global financial crisis.
Earlier IMF reports noted that banking supervision in Israel follows a very
rigorous and comprehensive approach, contributing importantly to this
financial stability. By approving legislation for the Financial Stability
Committee which recently became operational, the Knesset has helped close
regulatory and supervisory gaps across the financial system. Looking
forward, any new legislation should remain consistent with international
principles for effective bank supervision, especially by preventing
government or political interference that compromises the operational
independence of the supervisor. The Bank of Israel releases information on
its supervisory activities through various channels, and it should continue
to enhance this public transparency and its engagement with the Knesset,
while safeguarding confidential information on specific institutions,
companies, and individuals.

“Israel’s budget deficit is on a rising path, reaching 3 percent of GDP in
2018 despite very low unemployment, lifting debt to 61 percent of GDP. Even
with strong efforts to keep spending close to budget allocations, the
deficit is expected to rise to 3.5 percent or more in 2019, and current
policies imply further deficit increases in coming years. Leaving debt on a
rising path will constrain Israel’s ability to use fiscal policy to cushion
shocks to the economy. The budget deficit should therefore be reduced to
2.5 percent of GDP to ensure that the debt ratio stabilizes. Israel’s
healthy economic position supports making timely progress to this target in
the budget for 2020, through the adoption of high-quality structural
measures to cut tax benefits, raise revenues, and improve spending

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“Since the mid-2000s, Israel’s growth has averaged 3.7 percent thanks to
rises in the working age population and in participation, but labor
productivity contributed only 0.8 percentage points on average. Although
there is scope to increase employment rates in the Arab and Haredi
populations, demographics will slow the average pace of job creation in
coming decades.
Faster productivity gains must therefore be ignited to sustain solid
increases in Israeli household incomes
. Much further progress is needed on cutting regulatory costs and
uncertainties that lower business investment, including through
digitalization of government. Productivity lost in traffic should be
reduced by charging congestion fees and boosting investment in transport
infrastructure. Deep reforms of education and training are crucial to
upgrading the skills of those already employed as well as those of the
Haredi and Arab populations. Building on measures taken in recent years,
expanding the Earned Income Tax Credit and the support for childcare can
help contain poverty while also boosting employment and productivity.

The mission team thanks the Israeli authorities and other counterparts for
candid and insightful discussions and their warm hospitality.”

IMF Communications Department


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