Article

With a Stronger Economy, Israel Should Focus on Reducing Public Debt

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
May 2006
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After performing well in 2004, Israel’s economy expanded at a faster pace in 2005, thanks to a favorable global environment, improved security, and prudent policies. Real GDP grew at about 5.2 percent in 2005, inflation has remained in check, and unemployment has continued to fall. The exchange rate, balanced by robust economic activity and relatively low interest rates, has been broadly stable.

Recent macroeconomic policies and structural reforms have opened up the economy, increased its competitiveness, and attracted foreign investment, according to the IMF’s annual review. Efforts to bring down the public debt have improved confidence in Israel’s macroeconomic outlook. The authorities are committed to maintaining future fiscal deficits below 3 percent of GDP and to limiting government expenditure growth. Monetary policy has been accommodative despite recent increases in the policy interest rate. Proposed legislation would strengthen the central bank’s independence and help maintain price stability.

Israel
2002200320042005Proj

20061
(percent change, unless otherwise indicated)
Real GDP–1.21.74.45.24.2
Consumer price index (end period)6.5-1.91.22.42.0
Unemployment rate
(percent of labor force)10.310.810.39.18.5
Central government balance
(percent of GDP)2–4.2–6.5–5.1–2.7–3.5

National accounts and balance of payments indicators reflect the latest estimates from the Central Bureau of Statistics.

Based on proposed 2006 budget.

Data: Bank of Israel, Annual Report; Central Bureau of Statistics; and IMF, International Financial Statistics, and staff estimates and projections.

National accounts and balance of payments indicators reflect the latest estimates from the Central Bureau of Statistics.

Based on proposed 2006 budget.

Data: Bank of Israel, Annual Report; Central Bureau of Statistics; and IMF, International Financial Statistics, and staff estimates and projections.

To boost competition and efficiency, the authorities have pursued structural reforms, including privatization in key sectors and reform of the capital market. A rapidly changing financial system, however, requires greater scrutiny, and the authorities are committed to refining their supervisory and regulatory activities.

The IMF’s Executive Board noted that there was further scope to enhance growth and reduce vulnerabilities, especially to external shocks. Directors encouraged the authorities to capitalize on Israel’s strong growth and favorable fiscal situation in 2005 to reduce the deficit to well below 3 percent of GDP, thereby reducing the public debt. Such fiscal consolidation would underpin lower real interest rates and lead to greater private investment, lower future taxes, and stronger medium-term growth.

The authorities should also strive to ensure financial sector stability in a context of relatively high credit risk and rapid capital market development. Directors noted that the level of problem loans remains high, and rapid capital market development has introduced new supervisory and regulatory challenges. They welcomed the measures taken to reduce banks’ exposure to credit risk and increase their provisioning but stressed the need for continued supervisory vigilance of systemically important financial institutions.

For more information, please refer to IMF Public Information Notices Nos. 06/21 (Maldives) and 06/33 (Israel) on the IMF’s website (www.imf.org).

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