IMF Executive Board Concludes 2008 Article IV Consultation with Israel

Public Information Notice (PIN) No. 09/22
February 18, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Israel is also available.

On February 13, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Israel.1


The economy grew rapidly following the 2001-03 downturn. Real GDP growth averaged over 5 percent in 2004-07, as strong export of goods and services spurred private consumption and investment. In this context, the current account remained in strong surplus.

Fiscal and monetary policies reflected and supported strong and stable growth. The central government fiscal accounts steadily improved from a deficit of 5.4 percent of GDP in 2003 to balance in 2007, and public debt was lowered from 100 percent of GDP to under 80 percent of GDP during 2003-07. Inflation climbed steadily after mid-2007, surpassing the upper bound (3 percent) of the inflation target in December 2007. In response, the Bank of Israel (BoI) raised policy rates by 75 basis points between August 2007 and February 2008, to 4¼ percent.

External economic vulnerabilities are contained, with gross debt assets exceeding gross debt liabilities in the short term and overall. In the context of strong capital inflows—reflected in a 15 percent real appreciation of the shekel since mid-2007 back to its long run level—the authorities implemented a pre-announced program of reserve accumulation to attenuate external vulnerabilities further.

Trends changed in the Fall of 2008 as the deterioration of global financial conditions and the weakening of export markets took their toll. Exports and growth slowed, lowering the annual external current account surplus to 1¼ percent of GDP, and reducing growth to some 4¼ percent for the year. Alongside, fiscal revenue fell short in the fourth quarter, raising the central government deficit to 2.1 percent of GDP in 2008, with public debt at about 77½ percent of GDP. In this context, with the prospective global growth slowdown reversing earlier food and energy price inflation and associated inflation expectations, the BoI rapidly reduced policy rates-to 1 percent in February 2009. Inflation fell to 3.3 percent in January 2009 from the high of 5.5 percent in September 2008.

Israel's banking sector appears robust with interbank liquidity undisturbed. But, as globally, equity and domestic corporate bond markets weakened in 2008. Several measures to relieve credit strains have been announced, including the establishment of public-private corporate bond funds and expanding guarantees for credits to small and medium enterprises.

As the global crisis continues to unfold, activity is set to decelerate further, with inflationary pressures easing significantly alongside. And with fiscal revenues weakening in this context, fiscal deficits and public debt are set to rise.

Executive Board Assessment

Executive Directors welcomed the robust and balanced economic growth since 2003, underpinned by sound macroeconomic policies, and supported by a stable banking sector and favorable global conditions. Directors noted, however, that global strains and weakness in the corporate bond market weigh on credit and growth prospects, and accordingly, activity is set to slow markedly in 2009-10. Thus, significant economic challenges lie ahead, with the high level of public debt remaining a vulnerability.

Directors underscored that the immediate policy priority is to support credit flows, combined with contingency planning for tail events. In this context, they welcomed the recently announced plans to establish public-private funds to purchase corporate bonds, and recommended that these funds focus their activities on bond refinancing and new bond issues from solvent firms, in order to maximize the impact on credit flows to firms. Clearly defined terms of reference would ensure transparency and accountability.

While acknowledging the resilience of the banking sector to date, Directors called for a careful review of the legal procedures governing public interventions in, and assistance for, banks, with a view to ensuring adequate capacity to deal with any systemic stress in banks. Reform of the supervisory organizational structures and the introduction of an explicit deposit insurance scheme should remain under consideration, with the aim of implementing them once the current crisis has eased. Directors welcomed steps to enhance information-sharing and cooperation among the regulatory agencies, and encouraged further efforts to strengthen the supervision of the rapidly growing nonbank financial sector.

Directors commended the authorities for their disciplined budget execution in recent years, which had delivered strong budget outturns, secured significant debt reduction, and accordingly prepared fiscal policy for a supportive role in the current circumstances. In the near term, they agreed that automatic stabilizers should be allowed to operate fully, and welcomed efforts to bring forward planned infrastructure projects. While leaving the underlying structural fiscal balance close to its 2008 outturn, this would require a relaxation of the budget deficit ceiling. However, in light of the potential fiscal risks from the financial sector, the still-high debt ratio, and the need to maintain room for further fiscal maneuver if the economic outlook deteriorates further, Directors cautioned against further relaxation at this stage.

Directors emphasized the need to strengthen further the medium-term fiscal framework, anchored by a medium-term public debt goal and associated expenditure ceilings. The specifics of such a framework should balance the need for flexibility, given the uncertain global environment, with the need for sufficiently firm mechanisms to guide the political process. A debt objective defined over the medium term, supported by rolling multi-year ceilings on nominal annual spending, could strike this balance appropriately, although some Directors also saw merit in an automatic error correction mechanism and caps on real expenditures.

Noting that inflation is expected to fall sharply, Directors supported the recent decisive reductions in policy rates to forestall the risk of a protracted undershooting of the inflation target. There remains some room for further monetary easing, given the prospect of low inflation expectations and the constrained fiscal space. In this regard, Directors stressed the need for close monitoring of key indicators to ensure a timely response and maintain market confidence.

Directors agreed that inflation targeting and the flexible exchange rate regime have served the Israeli economy well, and they welcomed steps to reinforce these frameworks, supported by effective communication. Directors commended the authorities for the pre-announced accumulation of reserves, which bolsters credibility while abjuring discretionary intervention. Directors also welcomed the proposed new draft Bank of Israel Law, which aims to strengthen the governance of the monetary policy decision-making process.

Israel: Selected Economic and Financial Indicators, 2004−09

(Percent change, unless otherwise indicated)
  2004 2005 2006 2007 1/ 2008 1/ 2009 1/

National accounts indicators (constant prices)


Domestic demand

3.1 4.8 4.1 6.7 3.2 0.6

Private consumption

5.4 3.9 4.0 6.7 4.6 1.2

Public consumption

-1.8 1.7 2.7 2.9 0.1 -0.7

Gross capital formation

3.1 12.7 6.5 12.0 2.8 0.6

Fixed capital formation

0.9 2.9 9.9 15.5 3.8 0.7

Imports of goods and services

11.8 3.5 3.6 11.7 2.8 -0.7

Exports of goods and services

17.5 4.3 6.1 8.5 5.3 -0.9

Real GDP

5.0 5.1 5.2 5.4 4.3 0.5

Output Gap

-0.1 0.5 1.2 2.0 1.8 -1.4

Savings and investment (current prices, percent of GDP)


Gross capital formation

17.4 18.8 19.0 20.1 20.1 20.1

Of which: public 2/

2.2 2.0 1.8 2.0 1.8 3.7


18.6 20.1 21.9 24.8 25.1 28.6


21.1 20.9 21.7 23.6 24.1 27.6


-2.6 -0.8 0.2 1.2 1.0 1.0

Labor market indicators


Israeli civilian labor force

3.6 5.4 3.8 5.5 5.2 0.1


3.1 3.8 3.1 4.3 3.8 1.2

Unemployment rate (percent)

10.4 9.0 8.4 7.3 6.0 7.0

Real wages 3/

2.5 1.0 1.3 1.7 -0.4 ...

Business sector 3/

1.5 1.5 1.7 1.4 -0.8 ...

Public sector 3/

4.6 0.0 0.3 2.2 0.6 ...



CPI (end period)

1.2 2.4 -0.1 3.4 3.8 -0.1

CPI (period average)

-0.4 1.3 2.1 0.5 4.7 1.5

CPI (excluding housing and energy, end period)

-1.0 0.7 1.7 1.3 4.5 ...

Interest rates (average, percent): BOI policy rate 4/

4.2 3.7 5.1 3.9 3.7 ...

Money and credit (period average)


Private sector credit 3/

3.9 7.1 4.3 6.7 12.0 ...

Narrow money (M1) 5/

18.0 17.5 13.7 15.3 15.2 ...

Broad money (M3) 3/

4.6 7.9 7.4 12.9 5.3 ...

Public finance (percent of GDP)


Central government revenue

35.1 35.3 35.2 35.4 30.0 30.0

Central government expenditure

38.7 37.1 36.2 35.4 32.1 34.2

Central government balance 6/

-3.6 -1.9 -1.0 0.0 -2.1 -4.2

General government revenue

44.3 43.9 44.7 44.1 40.9 40.9

General government expenditure

49.8 48.7 46.5 44.9 43.7 45.8

General government balance 7/

-5.5 -4.8 -1.8 -0.8 -2.8 -4.9

General government primary balance

1.5 2.7 3.3 3.9 1.9 -0.2

General government structural primary balance

1.4 2.0 2.2 2.3 0.3 -0.4

General government debt

98.2 94.2 85.6 79.5 77.6 80.9

Balance of payments


Trade balance (percent of GDP)

-2.5 -3.1 -2.7 -3.7 -4.0 -2.3

Current account (percent of GDP)

2.1 3.0 5.6 2.8 1.2 2.5

Foreign direct investment (percent of GDP)

1.9 3.2 9.9 5.9 2.5 2.4

Foreign reserves (end period, billions of U.S. dollars) 5/

27.2 28.5 29.6 29.0 41.4 ...

Exchange rate and terms of trade indices


NEER (period average) 8/

-3.3 -0.8 0.4 3.9 9.4  

REER (period average) 8/

-6.0 -2.2 0.0 1.8 13.1  

Terms of trade (index, 2000=100)

96.0 96.5 95.2 93.2 ...  

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

1/ IMF staff projections.

2/ Capital expenditure of the central government.

3/ Data for 2008 as of October.

4/ Data for 2008 as of December.

5/ Data for 2008 as of November.

6/ National definition, cash basis.

7/ International definition, accrual basis. On the difference between central and general government deficits during 2003-06: much of it is accounted for by the difference between accrual and cash bases accounting. On the latter, the key factor is the CPI indexation component that is paid on all NIS debt when it matures and is recorded below the line in the central government balance, but above the line in the general government balance when it accrues.

8/ Data for 2008 as of November.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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