## _cr06120 - 2006. The mission assessed the quality and effectiveness of bank supervision and was ## Source details **Canonical URL:** [_cr06120 - 2006. The mission assessed the quality and effectiveness of bank supervision and was](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06120.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06120.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06120.pdf.json) --- ### Executive summary and key outcomes - Real GDP growth: estimated 5.2 percent in 2005 following 4.4 percent in 2004. - Inflation: December-over-December inflation rate of 2.4 percent in 2005; BoI inflation target range 1–3 percent. - Unemployment: continues to fall from a high level; last quarter 2005 rate 8.8 percent. - Exchange rate regime: officially classified as floating as of June 9, 2005; sheqel broadly stable. - Capital inflows 2005: US$9.7 billion (direct and portfolio); foreign direct investment US$5.7 billion. - Balance of payments and reserves: - Current account: small surplus in 2005; Israel has run surpluses for the past three years. - Net external asset position (debt instruments): close to US$23 billion as of end-2005. - Foreign reserves: about US$27 billion (22 percent of GDP), covering roughly 90 percent of total gross short-term external debt or about 5 months of imports. - Public-sector external debt: about 25 percent of GDP; about 80 percent held by the Jewish Diaspora or backed by U.S. government guarantees. - Sovereign risk: risk premium on 10-year foreign-currency denominated sovereign bonds about 80 basis points over U.S. treasuries. ### Macro outlook and risks - Short-term projection: staff projects output to expand by slightly more than 4 percent in 2006−07, driven by private consumption and supported by employment and income growth. - Drivers and composition: - Exports rose by an average of 10 percent annually over the past three years (period ending 2005). - Private consumption strengthened; investment recovery expected to strengthen as corporate financial health improves. - Residential investment likely to lag due to high real estate sector leverage. - Inflation outlook: expected to pick up moderately as the output gap closes. - Main downside risks: - Weakness abroad (United States and Europe). - A sustained rise in oil prices. - Political volatility and deterioration in the security situation. - Reversal of capital inflows if favorable conditions fail to materialize. ### Fiscal policy, performance, and recommendations - 2005 fiscal outturn: - 2005 fiscal deficit target raised to 3.4 percent of GDP to allow for Gaza disengagement costs. - Estimated outturn deficit 1.9 percent of GDP in 2005. - Improvement of 1.5 percent of GDP relative to budget target: about 1.2 percent of GDP from lower expenditure and 0.3 percent of GDP from higher revenue. - Fiscal framework: - 2004 legislation limits central government fiscal deficit to no more than 3 percent of GDP and real expenditure growth to no more than 1 percent a year (real expenditure ceiling refers to budget-to-budget growth rates). - Public debt as a share of GDP remains very high; authorities urged to accelerate debt reduction and abstain from further tax cuts that would impede lowering public debt relative to GDP. - Political and budget process context: - Parliamentary elections scheduled for March 28, 2006; Knesset dissolved prior to approving the 2006 budget. - Government operating under 2005 budget framework allowing 1/12 of that budget to be spent each month until a new 2006 budget is approved. - Staff suggested a follow-up visit to assess the proposed new budget after the elections; authorities welcomed suggestion. - Staff recommendation: - More ambitious consolidation warranted (e.g., to achieve and maintain fiscal balance over the medium term) to achieve meaningful reduction in debt-to-GDP ratio. - Continue limiting growth of public expenditures to one percent a year and resist additional tax cuts that would impede debt reduction. - Develop a detailed medium-term budget plan and present mid-year reports on budget execution. ### Monetary policy stance and central bank issues - Policy rate history and stance 2004−05: - Interest rates lowered in 2004; policy rate kept unchanged at 3.5 percent for most of 2005. - September and October 2005: BoI raised rate by 25 basis points to 4 percent. - November 2005: BoI raised rate by a further 50 basis points (4.5 percent policy rate by end-2005). - 4.5 percent policy rate not changed in December 2005 but was increased by 25 basis points in January (year not specified in excerpt). - Staff assessment: - Stance appropriate but policy rate below the neutral rate and will have to rise over time as excess capacity is eliminated; authorities broadly agreed. - Authorities working to enhance policy tools and procedures for implementing inflation targeting; proposed new Bank of Israel Law will strengthen independence. - BoI increased transparency of the Inflation Report and emphasized inflation-forecast dynamics. - Staff-neutral rate view and estimates: - Staff view: neutral policy rate around 5.25 percent; current policy rate will need to rise as employment and output gaps close. - Excess capacity estimated at around 1 percent of GDP. ### Financial sector developments and supervision - System condition: - Strengthened with recovery, but credit risks remain high. - Problem loans average about 10 percent of total loans for the banking system. - Construction and real-estate sectors account for a significant share of banks’ problem loan exposure. - Banking performance and structure: - Risk-based capital adequacy ratios for the five largest banks range from 9.7 to 12.2 percent. - Through end-September 2005, banking system net income NIS5.3 billion or a 0.8 percent annualized return on assets compared to 0.6 percent for 2004. - Foreign currency funding averaged 43 percent of liabilities for the five largest banks. - Banking assets NIS 875 billion at end-September 2005 (1.7 times 2004 GDP). - Five largest banking groups account for 95 percent of system assets. - Capital market reforms and implications: - Knesset approved capital market reforms in mid-2005 requiring banks to divest mutual and provident funds and to restrict securities-related activities and market shares. - Sale of funds proceeded rapidly; banks sold most funds primarily to insurance companies within three months of legislation. - Reforms expanded corporate bond market and capital markets generally, providing more credit opportunities and investor choice. - Staff cautioned capital market reforms require enhanced supervisory and regulatory functions to mitigate systemic risk from transfer of mutual and provident funds to the non-bank sector. - Supervisory recommendations: - Refine supervisory and regulatory activities to focus on key risks from financial system transformation. - Undertake self-assessments against internationally recognized regulatory standards. - Move gradually toward a more sophisticated risk-based approach within Basel II framework; implementation will require significant resource commitment over a number of years and extensive dialogue with industry. - Enhance oversight of group-wide activities of Israeli banks and coordinate with host supervisors on AML/CFT, given foreign currency funding significance and identified AML deficiencies in foreign offices. - Undertake a self-assessment against the revised FATF Recommendations using the assessment methodology. ### Financial Soundness Indicators (selected series, in percent) - Regulatory capital to risk weighted assets: - 2000: 9.2; 2001: 9.4; 2002: 9.9; 2003: 10.3; 2004: 10.8; 2005 (As of end-June): 10.9 - Problem loans to total gross loans: - 2000: 6.9; 2001: 8.2; 2002: 9.8; 2003: 10.5; 2004: 10.5; 2005 (As of end-June): 10.3 - Return on assets: - 2000: 0.5; 2001: 0.2; 2002: 0.1; 2003: 0.4; 2004: 0.6; 2005 (As of end-June): 0.8 ### Poverty, social issues, and policy guidance - Poverty and inequality: - Incidence of poverty and income inequality increased despite strong economic recovery. - Poverty rate among families increased to 20.5 percent in 2005. - Child poverty rose to 34.1 percent in 2005. - Welfare payments for children declined from 4.7 percent of GDP in 2001 to 2.8 percent in 2004. - Policy responses and recommendations: - Advisory group (headed by Director General of the Ministry of Finance) examining policy options. - Prime Minister, Minister of Finance, and Central Bank Governor approved a seven-year initiative to combat poverty with total budget about NIS 14 billion (2.5 percent of GDP) to be spread over seven years. - Advisory group considering a negative income tax (NIT); four models under consideration at cost of NIS 1−2 billion per year. - Staff view: poverty alleviation measures should be within current fiscal framework, targeted, provide incentives to work, and be consistent with growth-promoting policies; ensure safety net for children, elderly, and disabled. ### Fiscal sustainability scenarios and key numeric projections - Debt dynamics under scenarios (selected): - Baseline scenario of 3 percent of GDP deficit and 4 percent real GDP growth: public debt to GDP ratio falls only slightly from about 101 percent today to about 95 percent by 2010. - If growth averaged only 2.8 percent: debt ratio would rise to 111 percent of GDP in five years. - With revenue/GDP elasticity of one, no new tax cuts, and binding limit on real expenditure growth, stock of public debt would fall by about 20 percent of GDP over five years compared to baseline scenario. - Medium-term projections (Table 5, selected lines): - GDP growth rate: 2005 = 5.2; 2006 = 4.2; 2007 = 4.2; 2008 = 4.0; 2009 = 4.1; 2010 = 4.3 - Public debt/GDP (end of period) — baseline: 2005 = 101.8; 2006 = 100.4; 2007 = 98.8; 2008 = 97.5; 2009 = 96.2; 2010 = 94.9 - Public debt/GDP (end of period) — alternative: 2006 = 98.6; 2007 = 93.9; 2008 = 88.6; 2009 = 82.2; 2010 = 74.7 - Current account/GDP: 2005 = 0.8; 2006 = 0.1; 2007 = 0.9; 2008 = 1.4; 2009 = 2.0; 2010 = 2.7 - Foreign reserves (US$ billions): 2005 = 27.5; 2006 = 27.6; 2007 = 28.1; 2008 = 29.0; 2009 = 30.1; 2010 = 32.0 ### Box 2 — Israel: Multi-Year Tax Plan (approved July 25, 2005) — key measures and fiscal cost - Key measures: - Lower top marginal income tax rate from 49 percent to 44 percent by 2010. - Cut corporate tax rate from 34 percent to 25 percent by 2010. - Reduce VAT rate from 17 percent to 16.5 percent. - Establish a uniform 20 percent capital gains tax rate. - Widen the tax base and strengthen enforcement through proposal for taxation of trusts. - Schedule of tax cuts (income and corporate tax rates 2006–2010): - Income tax rate: 49 48 47 46 44 (2006 2007 2008 2009 2010) - Corporate tax rate: 31 29 27 26 25 (2006 2007 2008 2009 2010) - Fiscal cost: - Estimated at NIS 11.2 billion (or 0.4 percent of GDP annually over the five-year period). - Annual Cost Relative to Current Trajectory (NIS billions, 2005 prices) — selected lines: - Personal income tax: -0.8 -1.8 -4.0 -5.6 -8.1 -1.5 (2006 2007 2008 2009 2010 total) - Cutting VAT to 16.5%: -1.2 -1.2 -1.2 -1.2 -1.2 -0.2 - Cutting corporate tax to 25%: -0.4 -0.4 -1.3 -1.8 -2.3 -0.4 - Capital: unification of rates at 20%: 0.6 0.6 0.6 0.6 0.4 0.1 ### Monetary policy modeling and Box 3 scenarios (baseline and alternatives) - Baseline assumptions and forecasts (Baseline Forecast on February 14, 2006): - Baseline predicated on assumption of an output gap of 0.7 percent of GDP in 2006Q1 that closes by 2007. - Under baseline: current policy rate of 4.75 percent is below neutral rate of 5.25 percent and will have to rise as output gap closes. - Baseline forecast (selected): - Policy Rate: 2006Q1 4.75, 2006Q4 5.00, 2007 5.21 - Inflation: 2006Q1 3.6, 2006Q4 2.1, 2007 2.0 - Sheqel per $US: 2006Q1 4.60, 2006Q4 4.53, 2007 4.49 - GDP Gap: 2006Q1 -0.7, 2006Q4 -0.3, 2007 -0.1 - Alternative scenario deviations from baseline (selected effects): - Weaker sheqel and higher neutral rate (neutral rate 50 basis points higher) — deviations 2006Q1 / 2006Q4 / 2007: - Policy Rate: 0.6 / 1.2 / 0.8 - Inflation: 0.3 / 0.5 / 0.2 - Sheqel (%∆): 1.6 / 1.2 / 0.9 - Output Gap: 0.0 / 0.0 / 0.0 - More excess capacity (output gap 1 percent larger) — deviations 2006Q1 / 2006Q4 / 2007: - Policy Rate: -0.4 / -0.2 / -0.1 - Inflation: 0.0 / -0.1 / 0.0 - Sheqel (%∆): 0.1 / 0.4 / 0.5 - Output Gap: -1.0 / -0.1 / 0.1 - 50% hike in oil prices — deviations 2006Q1 / 2006Q4 / 2007: - Policy Rate: 0.3 / 0.8 / 0.7 - Inflation: 0.3 / 0.4 / 0.2 - Sheqel (%∆): -0.5 / -1.6 / -1.8 - Output Gap: 0.0 / -0.2 / -0.4 - Staff developed a small simulation model to construct baseline forecasts and risk assessments and received feedback from authorities. ### Institutional reforms and BoI governance - Proposed new Bank of Israel Law approved by government in 2005; parliamentary approval required after March elections. - Key principles: - Creation of a monetary committee responsible for interest rate decisions. - Formation of a management board responsible for oversight of administrative matters. - Establishment of price stability as primary policy objective. - Staff view: other policy goals (e.g., growth) should be considered only insofar as they do not undermine primacy of price stability. ### Supervisory, AML/CFT, and regulatory capacity issues - AML/CFT and supervisory findings: - Scope for BoI to enhance oversight of group-wide activities and foreign offices after foreign regulators identified AML program deficiencies. - Given significance of foreign currency funding, weak controls in overseas operations pose AML/CFT vulnerability. - Recommendation: greater coordination with host supervisors and self-assessment against revised FATF Recommendations. - Regulatory capacity needs: - Many proposed pieces of legislation yet to be enacted; regulations for non-bank financial institutions and their regulators’ budgets require Knesset Finance Committee approval. - Supervisors of insurance companies, provident funds, pension funds and mutual funds require additional resources for research, data collection, and on-site inspections. ### Data, statistics, and technical assistance - Data ROSC mission: Israel has a well-developed macroeconomic statistical system but with shortcomings in timeliness, methodology, and classification of monetary statistics. - Need to enhance source data for national accounts, producer prices, and government finance statistics. - Israel subscribes to the SDDS and is in full observance of SDDS requirements for data coverage, periodicity and timeliness, and for dissemination of advance release calendars. - Quota and Fund positions (selected): - Quota: 928.20 SDR Millions (100.00 percent) - Fund holdings of currency: 787.04 (84.79 percent) - Reserve position in Fund: 141.17 (15.21 percent) - SDR holdings: 13.04 (12.26 percent) ### Selected exact figures and indicators (verbatim) - Real GDP growth: 4.4 percent in 2004; an estimated 5.2 percent in 2005. - Exports: rose by an average of 10 percent annually over the past three years (period ending 2005). - Policy rate levels and changes: unchanged at 3.5 percent for most of 2005; raised by 25 basis points to 4 percent in September and October; raised by a further 50 basis points in November (4.5 percent policy rate by end-2005); the 4.5 percent policy rate was not changed in December but was increased by 25 basis points in January. - Inflation: December-over-December inflation rate of 2.4 percent in 2005; BoI inflation target range 1–3 percent. - Fiscal targets and outcomes: 2004 law limits central government fiscal deficit to no more than 3 percent of GDP and real expenditure growth to no more than 1 percent a year; 2005 fiscal deficit target raised to 3.4 percent of GDP; estimated outturn deficit 1.9 percent of GDP in 2005. - Fiscal adjustment decomposition (2005 vs. budget target): improvement of 1.5 percent of GDP, of which about 1.2 percent of GDP from lower expenditure and 0.3 percent of GDP from higher revenue. - Capital inflows in 2005: US$9.7 billion (direct and portfolio); foreign direct investment US$5.7 billion. - Net external asset position (debt instruments): close to US$23 billion as of end-2005. - Foreign reserves: about US$27 billion (22 percent of GDP), covering roughly 90 percent of gross short-term external debt or about 5 months of imports. - Public-sector external debt: about 25 percent of GDP. - U.S. government guarantees program: eligible to issue US$9 billion of sovereign guaranteed debt spread between 2003 and 2007; as of end-October, 2005, remaining balance US$4.6 billion, of which US$2.6 billion is available immediately. - Sovereign bond risk premium: about 80 basis points over U.S. treasuries on 10-year foreign-currency denominated sovereign bonds. - Banking problem loans: average about 10 percent of total loans. - Banking assets: NIS 875 billion at end-September 2005 (1.7 times 2004 GDP). - Poverty statistics: family poverty rate 20.5 percent in 2005; child poverty 34.1 percent in 2005. - Poverty-reduction initiative: total budget about NIS 14 billion (2.5 percent of GDP) over seven years. - BoI policy rate (BoI set at 4.75 percent for February 2006 in BoI statement). ### Staff appraisal and Executive Board recommendations (selected) - Overall assessment: - Economy strong and outlook favorable, but key challenges remain: reducing public debt stock, strengthening financial supervision, and alleviating poverty. - Growth driven by high technology exports and private consumption; prudent policies, favorable global environment, and improved security situation supported recovery. - Priorities: - Seize strong fiscal outturns to reduce deficit sustainably to well below 3 percent of GDP and achieve meaningful decline in public debt. - Maintain expenditure and deficit ceilings in 2006 budget and avoid additional tax cuts once a new government is formed. - Reinforce Bank of Israel independence via updated BoI law, enhance monetary policy models and communication, and monitor pass-through from oil prices and exchange rate movements. - Continue supervisory vigilance of systemically important financial institutions; enhance cooperation with foreign counterparts on AML/CFT. - Poverty measures should be within fiscal envelope, targeted, incentivize work, and protect vulnerable groups. - Consultation cycle: - Recommendation that the next Article IV consultation be held on the standard 12-month cycle; last Article IV consultation concluded on April 18, 2005. *Italic: Excerpt from IMF staff report (2006) — _cr06120 - 2006. The mission assessed the quality and effectiveness of bank supervision and was* ### 2006. The mission assessed the quality and effectiveness of bank supervision and was ### _cr06120 - 2006. The mission assessed the quality and effectiveness of bank supervision and was ### Executive summary and key outcomes - Real GDP growth accelerated to an estimated 5.2 percent in 2005, following 4.4 percent in 2004. - Inflation: December-over-December inflation rate reached 2.4 percent in 2005. - Unemployment: continues to fall, albeit from a high level. - Exchange rate regime: officially classified as floating as of June 9, 2005; the sheqel has remained broadly stable. - Capital inflows: record US$9.7 billion of direct and portfolio investment in 2005 (an increase of 66 percent over 2004); foreign direct investment of US$5.7 billion in 2005. - Balance of payments and reserves: - Current account: small surplus in 2005; Israel has run surpluses for the past three years. - Net external asset position (on debt instruments): close to US$23 billion as of end-2005. - Foreign reserves: about US$27 billion (22 percent of GDP), covering roughly 90 percent of total gross short-term external debt or about 5 months of imports. - Public-sector external debt: about 25 percent of GDP; about 80 percent of this debt is held by the Jewish Diaspora or backed by U.S. government guarantees. - Sovereign risk: risk premium on 10-year foreign-currency denominated sovereign bonds about 80 basis points over U.S. treasuries. ### Macro outlook and risks - Short-term growth projection: staff projects output to expand by slightly more than 4 percent in 2006−07, driven by private consumption and supported by employment and income growth. - Drivers and composition: - Strong export growth (exports rose by an average of 10 percent annually over the past three years). - Private consumption strengthened; investment recovery expected to strengthen as corporate financial health improves. - Residential investment likely to lag due to high real estate sector leverage. - Inflation outlook: expected to pick up moderately as the output gap closes. - Main downside risks: - Weakness abroad, especially in the United States and Europe. - A sustained rise in oil prices. - Political volatility and deterioration in the security situation. - Reversal of capital inflows if favorable conditions fail to materialize. ### Fiscal policy, performance, and recommendations - Fiscal performance 2005: - Initially allowed 2005 fiscal deficit target raised to 3.4 percent of GDP to allow for Gaza disengagement costs. - Outturn deficit estimated at 1.9 percent of GDP in 2005. - Of the estimated 1.5 percent of GDP improvement relative to budget target, about 1.2 percent of GDP attributed to lower expenditure and 0.3 percent of GDP to higher revenue. - Fiscal framework and concerns: - 2004 legislation limits central government fiscal deficit to no more than 3 percent of GDP and real expenditure growth to no more than 1 percent a year (real expenditure ceiling refers to budget-to-budget growth rates). - Public debt as a share of GDP remains very high; authorities urged to accelerate debt reduction and to abstain from further tax cuts that would impede lowering public debt relative to GDP. - Political context: - Parliamentary elections scheduled for March 28, 2006. - Knesset dissolved prior to approving the 2006 budget; government operating under 2005 budget framework allowing 1/12 of that budget to be spent each month until a new 2006 budget is approved. - Staff suggested a follow-up staff visit to assess the proposed new budget after the elections; authorities welcomed this suggestion. ### Monetary policy stance and central bank issues - Policy rate history and stance in 2004−05: - Interest rates were lowered in 2004; policy rate kept unchanged at 3.5 percent for most of 2005. - In September and October 2005, BoI raised the rate by 25 basis points to 4 percent. - In November 2005, BoI raised the rate by a further 50 basis points (resulting in a 4.5 percent policy rate by end-2005). - The 4.5 percent policy rate was not changed in December 2005 but was increased by 25 basis points in January (year not specified in excerpt). - Staff assessment: - The stance of monetary policy is appropriate, but staff view is that the policy rate is below the neutral rate and will have to rise over time as excess capacity is gradually eliminated; authorities broadly agreed. - Authorities are working to enhance policy tools and procedures for implementing inflation targeting; proposed new Bank of Israel Law will strengthen the independence of the central bank. - BoI has increased transparency of the Inflation Report, giving more attention to the dynamics of the inflation forecast. ### Financial sector developments and supervision - Financial system: indicators have strengthened but credit risks remain high. - Capital markets: rapid development has introduced new regulatory and supervisory challenges. - Staff recommendations and authorities’ response: - Staff encouraged refinement of supervisory and regulatory activities to focus on key risks arising from financial system transformation. - Authorities shared this view and are taking action, including introducing new laws and regulations and developing proactive enforcement approaches. - Staff cautioned that actual implementation of Basel II will require a significant resource commitment. - Capital market reforms: - Banks’ divestiture of mutual and provident funds has increased competition in these instruments. - Fund noted that capital market reforms require enhanced supervisory and regulatory functions to mitigate systemic risk from transfer of mutual and provident funds to the non-bank sector. ### Poverty, social issues, and policy guidance - Despite the strong economic recovery, the incidence of poverty and income inequality have increased. - Authorities are considering remedial measures. - Staff recommendation for poverty alleviation measures: - Measures should be within the current fiscal framework. - Measures should be targeted, provide the right incentives to work, and be consistent with growth-promoting policies. ### Political and institutional context - Political developments: - Fallout from the Gaza disengagement significantly altered the political landscape; resignation of the finance minister and creation of a new centrist party. - Prime Minister Sharon’s illness increased political turmoil; Deputy Prime Minister and Minister of Finance Ehud Olmert served as Acting Prime Minister in the run-up to March 28 elections. - Budget process impact: - Dissolution of the Knesset prior to approval of the 2006 budget led to temporary operation under a 1/12th rule based on the 2005 budget. ### Selected exact figures and indicators (verbatim from source) - Real GDP growth: 4.4 percent in 2004; an estimated 5.2 percent in 2005. - Exports: rose by an average of 10 percent annually over the past three years (period ending 2005). - Policy rate levels and changes: unchanged at 3.5 percent for most of 2005; raised by 25 basis points to 4 percent in September and October; raised by a further 50 basis points in November (4.5 percent policy rate by end-2005); the 4.5 percent policy rate was not changed in December but was increased by 25 basis points in January. - Inflation: December-over-December inflation rate of 2.4 percent in 2005; BoI inflation target range 1–3 percent. - Fiscal targets and outcomes: 2004 law limits central government fiscal deficit to no more than 3 percent of GDP and real expenditure growth to no more than 1 percent a year; 2005 fiscal deficit target raised to 3.4 percent of GDP; estimated outturn deficit 1.9 percent of GDP in 2005. - Fiscal adjustment decomposition (2005 vs. budget target): improvement of 1.5 percent of GDP, of which about 1.2 percent of GDP from lower expenditure and 0.3 percent of GDP from higher revenue. - Capital inflows in 2005: US$9.7 billion (direct and portfolio); foreign direct investment US$5.7 billion. - Net external asset position (debt instruments): close to US$23 billion as of end-2005. - Foreign reserves: about US$27 billion (22 percent of GDP), covering roughly 90 percent of gross short-term external debt or about 5 months of imports. - Public-sector external debt: about 25 percent of GDP. - U.S. government guarantees program: eligible to issue US$9 billion of sovereign guaranteed debt spread between 2003 and 2007; as of end-October, 2005, remaining balance US$4.6 billion, of which US$2.6 billion is available immediately. - Sovereign bond risk premium: about 80 basis points over U.S. treasuries on 10-year foreign-currency denominated sovereign bonds. *Italic source: Excerpt from IMF staff report (2006) — _cr06120 - 2006. The mission assessed the quality and effectiveness of bank supervision and was* ### 10. While the economic recovery has led to a strengthening of the financial system, ### _cr06120 - 10. While the economic recovery has led to a strengthening of the financial system, ### Financial system condition and banking-sector performance - Economic recovery has strengthened the financial system, but the banking system continues to hold a stubbornly high level of problem loans. - Problem loans as a percentage of total loans averages about 10 percent for the banking system. - Construction and real-estate sectors, in a persistent slump since the 2001−02 recession, account for a significant share of banks’ problem loan exposure. - Risk-based capital adequacy ratios for the five largest banks range from 9.7 to 12.2 percent. - Through end-September 2005, the banking system reported net income of NIS5.3 billion or a 0.8 percent annualized return on assets compared to a 0.6 percent rate for 2004. - Banks expect one-time gains from divestiture of their funds management businesses that temporarily will augment income. - Foreign currency funding averaged 43 percent of liabilities for the five largest banks. ### Financial Soundness Indicators (Israel) — selected series (In percent) - Regulatory capital to risk weighted assets: - 2000: 9.2 - 2001: 9.4 - 2002: 9.9 - 2003: 10.3 - 2004: 10.8 - 2005 (1/ As of end-June): 10.9 - Problem loans to total gross loans: - 2000: 6.9 - 2001: 8.2 - 2002: 9.8 - 2003: 10.5 - 2004: 10.5 - 2005 (1/ As of end-June): 10.3 - Return on assets: - 2000: 0.5 - 2001: 0.2 - 2002: 0.1 - 2003: 0.4 - 2004: 0.6 - 2005 (1/ As of end-June): 0.8 - Source: Bank of Israel. (Note: Problem loans definition and collateral treatment described in source footnote.) ### Capital market reforms and market structure changes - Knesset approved capital market reforms in mid-2005 aiming to foster a stable, competitive financial system with well-developed capital markets. - Main reform measures included: - Requirement that banks divest mutual and provident fund business. - Regulations on banks’ securities-related activities to reduce potential conflicts of interest. - Restrictions on maximum market share of individual firms. - Sale of mutual and provident funds proceeded rapidly; banks sold most funds, primarily to insurance companies, within three months of passage of legislation. - Authorities also took actions that led to expansion in the corporate bond market and capital markets generally, providing more credit opportunities for businesses and more choice for investors. ### Fiscal policy: framework, recent actions, and staff recommendations - New 2004 budgetary framework based on two rules: - Cap on growth rate of budgeted real expenditures of 1 percent a year. - Ceiling on the deficit of 3 percent of GDP. - When growth is strong, the deficit ceiling becomes non-binding and scope emerges to use revenue over-performance to reduce public debt or cut taxes. - A 5-year tax reduction package was enacted early in 2005; staff urged revenue over-performance be used to reduce deficit and debt. In practice, both happened because of unexpected favorable one-off shocks to expenditure late in the year. - For 2006: - Authorities reiterated commitment to fiscal consolidation and noted the budget adhered to the 1 percent ceiling on growth in real expenditure and the 3 percent of GDP ceiling on the deficit. - Staff noted a 3 percent of GDP deficit outturn in 2006 would be expansionary relative to the estimated 1.9 percent deficit in 2005. - Authorities observed 2005 fiscal over-performance reflected one-off factors estimated at 1.2 percent of GDP in expenditure reduction. - Debt sustainability implications and scenarios: - Under baseline scenario of 3 percent of GDP deficit and 4 percent real GDP growth, public debt to GDP ratio would fall only slightly, from about 101 percent today to about 95 percent by 2010. - If growth averaged only 2.8 percent, the debt ratio would rise to 111 percent of GDP in five years. - With a revenue/GDP elasticity of one, no new tax cuts, and the binding limit on real expenditure growth, the stock of public debt would fall by about 20 percent of GDP over five years compared to the baseline scenario. - Staff recommendation: more ambitious consolidation is warranted (e.g., to achieve and maintain fiscal balance over the medium term) to achieve meaningful reduction in debt-to-GDP ratio. - Staff stressed authorities should resist additional measures (such as the mid-2005 tax cuts) that would impede lowering public debt-to-GDP; authorities argued stronger growth would finance multiyear tax reductions, but staff was unconvinced and asked for possible offsetting measures. - Authorities indicated no plans for additional tax reductions as regards 2006. - Debate exists on the best medium-term rule for expenditure growth; some officials favor a target closer to Israel’s population growth rate (about 1.7 percent), while staff stressed adhering to the original 1 percent ceiling to cement credibility. ### Box 2 — Israel: Multi-Year Tax Plan (approved July 25, 2005) — key measures and costs - Key measures: - Lowering the top marginal income tax rate, from 49 percent to 44 percent by 2010. - Cutting the corporate tax rate, from 34 percent to 25 percent by 2010. - Reducing the VAT rate from 17 percent to 16.5 percent. - Establishing a uniform 20 percent capital gains tax rate. - Widening the tax base and strengthening enforcement through a proposal for taxation of trusts. - Schedule of Tax Cuts (income and corporate tax rates 2006–2010): - Income tax rate: 49 48 47 46 44 (2006 2007 2008 2009 2010) - Corporate tax rate: 31 29 27 26 25 (2006 2007 2008 2009 2010) - Fiscal cost: - Estimated at NIS 11.2 billion (or 0.4 percent of GDP annually over the five-year period). - Annual Cost Relative to Current Trajectory (NIS billions, 2005 prices) — selected lines: - Total (% GDP) — Personal income tax: -0.8 -1.8 -4.0 -5.6 -8.1 -1.5 (2006 2007 2008 2009 2010 total) - Cutting VAT to 16.5%: -1.2 -1.2 -1.2 -1.2 -1.2 -0.2 - Cutting corporate tax to 25%: -0.4 -0.4 -1.3 -1.8 -2.3 -0.4 - Capital: unification of rates at 20%: 0.6 0.6 0.6 0.6 0.4 0.1 - Authorities confident plan will be financed through stronger growth and progressiveness of tax brackets. ### Medium-term fiscal management and budget practices - Introduction of a medium-term budget framework with detailed expenditure breakdown consistent with overall expenditure ceiling is unlikely in the near term. - Staff: multi-year budgeting reinforces fiscal consolidation, minimizes expenditure growth, strengthens adjustment, and would raise government credibility and lessen political pressures to deviate from ceiling. - Authorities agreed in principle with multi-year budgeting but were concerned about reduced budget flexibility. - Staff stressed importance of presenting mid-year reports covering budget execution and progress on economic agenda. ### Monetary policy, inflation targeting, and modeling - Policy rate has risen with higher inflation but remains accommodative. - Over past two years, both headline and core CPIs increased at a gradual pace; inflation expectations remained within target range. - Rise in oil prices has not yet resulted in appreciably higher consumer prices; authorities to monitor pass-through from oil prices to wages and core inflation. - Historically strong pass-through from sheqel/dollar exchange rate to inflation; exchange rate developments and impact on prices should be closely monitored. - Other factors (high unemployment and excess capacity in the construction sector) argued against aggressive tightening. - Staff view: neutral policy rate around 5.25 percent; current policy rate will need to rise as employment and output gaps close. - Excess capacity currently estimated at around 1 percent of GDP. - Importance of monitoring core inflation, inflation expectations, and other slack indicators due to uncertainty in output-gap estimates. - BoI historically relied on market-based inflation expectations; increased emphasis on communicating BoI’s own inflation views and developing a model-based forecast framework is a priority. ### Box 3 — Israel: Inflation Targeting, Modeling, and Risk Assessment — baseline and alternative scenarios - Baseline assumptions and forecasts (Baseline Forecast on February 14, 2006): - Baseline predicated on assumption of an output gap of 0.7 percent of GDP in the first quarter of 2006 that closes by 2007. - Under baseline: current policy rate of 4.75 percent is below neutral rate of 5.25 percent and will have to rise as output gap closes. - Baseline forecast: - Policy Rate: 2006Q1 4.75, 2006Q4 5.00, 2007 5.21 - Inflation: 2006Q1 3.6, 2006Q4 2.1, 2007 2.0 - Sheqel per $US: 2006Q1 4.60, 2006Q4 4.53, 2007 4.49 - GDP Gap: 2006Q1 -0.7, 2006Q4 -0.3, 2007 -0.1 - Major sources of uncertainty: size of the risk premium (level of neutral rate), size of the output gap, future price of oil. - Alternative scenario deviations from baseline (selected outcomes): - Weaker sheqel and higher neutral rate (neutral rate 50 basis points higher) — deviations from baseline 2006Q1 / 2006Q4 / 2007: - Policy Rate: 0.6 / 1.2 / 0.8 - Inflation: 0.3 / 0.5 / 0.2 - Sheqel (%∆): 1.6 / 1.2 / 0.9 - Output Gap: 0.0 / 0.0 / 0.0 - Effects of more excess capacity (output gap 1 percent larger) — deviations 2006Q1 / 2006Q4 / 2007: - Policy Rate: -0.4 / -0.2 / -0.1 - Inflation: 0.0 / -0.1 / 0.0 - Sheqel (%∆): 0.1 / 0.4 / 0.5 - Output Gap: -1.0 / -0.1 / 0.1 - Effects of 50% hike in oil prices — deviations 2006Q1 / 2006Q4 / 2007: - Policy Rate: 0.3 / 0.8 / 0.7 - Inflation: 0.3 / 0.4 / 0.2 - Sheqel (%∆): -0.5 / -1.6 / -1.8 - Output Gap: 0.0 / -0.2 / -0.4 - Staff developed a small simulation model to construct baseline forecasts and risk assessments and received feedback from authorities; the model organizes policy discussions and aids in communicating policy logic. ### Institutional reforms - Proposed new Bank of Israel Law approved by government in 2005; parliamentary approval required after March elections. - Key principles of proposed law: - Creation of a monetary committee responsible for interest rate decisions. - Formation of a management board responsible for oversight of administrative matters. - Establishment of price stability as a primary policy objective. - Staff agreed other policy goals (e.g., growth) should be considered only insofar as they do not undermine primacy of price stability. ### Financial sector stability and concentration - Israel has a large and highly concentrated banking system; five largest banking groups account for 95 percent of system assets. - Banking assets were NIS 875 billion at end-September 2005 (1.7 times 2004 GDP). - Positive signs: capital ratios increased and system profitability recovered to pre-recession levels, though remaining weak. - Problem loans remained elevated, particularly in construction and real estate sectors, which have not yet fully felt impact of recovery. - Authorities have taken steps such as increased bank provisioning. - Staff recommended further action to encourage banks to be more proactive in lowering problem loan levels, including greater use of charge-offs and loan sales. *Italic: Source — _cr06120 (excerpt) — IMF country report content provided in the source document.* ### 25. The staff encouraged the authorities to refine their supervisory and regulatory ### 25. The staff encouraged the authorities to refine their supervisory and regulatory ### Supervisory and regulatory reform: findings and recommendations - Staff encouraged authorities to refine supervisory and regulatory activities focusing more on key risks in the changing financial system. - Undertaking self assessments against key internationally recognized regulatory standards would help address new challenges more effectively. - Staff agreed with BoI decision to gradually move towards the more sophisticated risk-based approach within the framework of Basel II. - Staff cautioned that implementation of Basel II will require a significant resource commitment of staff over a number of years and more extensive dialogue with industry. - There is scope for the BoI to enhance oversight of group-wide activities of Israeli banks, particularly after foreign regulators identified deficiencies in the AML programs in foreign offices of Israeli banks. - Given the significance of foreign currency funding of Israeli banks, weak controls in banks’ overseas operations pose an AML/CFT vulnerability; staff recommended greater coordination with host supervisors. - Recommendation: authorities should undertake a self assessment against the revised Financial Action Task Force (FATF) Recommendations using the assessment methodology. ### Capital markets developments and regulatory capacity - Ongoing reforms in the capital markets have gone well to date, including forcing banks to divest mutual and provident funds, contributing to increased competition and market efficiency. - Rapid changes resulted in new participants selling new products under new rules, with financial advisors operating under a new regime. - Risk identified: provident funds’ asset portfolios shifted away from “risk-free” government bonds to newer capital market instruments, radically changing their risk profile and potentially leaving investors unaware of higher risk. - Authorities recognize these risks and agreed on the need to strengthen supervision, regulation, and enforcement. - Status concerns: - Many proposed pieces of legislation have yet to be enacted. - New regulations for non-bank financial institutions—and the budgets of their regulators—require prior approval of the Knesset Finance Committee. - Regulatory infrastructure needs further attention, particularly greater independence and additional resources. - Supervisors of insurance companies, provident funds, pension funds and mutual funds require additional resources to research effects of new developments, collect and analyze information, and conduct on-site inspections. ### Poverty and social issues: evolution and policy response - Despite a strong economic recovery, incidence of poverty increased in 2005 in part due to cuts in social spending. - Key statistics: - Poverty rate among families increased to 20.5 percent in 2005. - Child poverty rose to 34.1 percent in 2005. - Poverty gap and income inequality have increased over the past five years. - Welfare payments for children declined from 4.7 percent of GDP in 2001 to 2.8 percent in 2004. - Poverty measurement note: measured as households living below half the median disposable income, standardized by family size. - Policy actions: - An advisory group headed by Director General of the Ministry of Finance is examining policy options to reduce the poverty rate. - In mid-December, the Prime Minister, Minister of Finance, and the Central Bank Governor approved a seven year initiative to combat poverty with a total budget of about NIS 14 billion (2.5 percent of GDP) to be spread over the seven years. - The advisory group is considering the introduction of a negative income tax (NIT); four different models are being considered at a cost of NIS 1−2 billion per year, but no specific details have been announced. - Staff view: any poverty alleviation measures should be within the current fiscal envelope, be targeted, provide the right incentives to work, and be consistent with growth-promoting policies; an appropriate safety net is important to protect children, the elderly, and the disabled. ### Other structural and data issues - Economic reform agenda for 2006 reiterates continued dedication to structural reforms, including privatization (Bank Leumi privatized in 2005), streamlining the public sector, increasing competition in electricity and water distribution, and intentions to privatize the oil refineries. - Staff support reforms but note that for natural monopoly sectors a proper, independent regulatory mechanism must be in place. - Data ROSC mission concluded Israel has a well-developed macroeconomic statistical system but with shortcomings that may impede accurate and timely analysis: - Deficiencies in timeliness, methodology, and classification of monetary statistics. - Need to enhance source data for national accounts, producer prices, and government finance statistics. - Staff noted need for adequate and sustained resources at the Central Bureau of Statistics to improve scope and timeliness of data compiled under its mandate. ### Staff appraisal: macroeconomic stance and priorities - Overall assessment: - The Israeli economy is strong and the outlook favorable, but key challenges remain: reducing the public debt stock, strengthening financial supervision, and alleviating poverty. - Growth has been driven by high technology exports and private consumption, supported by prudent policies, a favorable global environment, and improved security situation. - Inflation remains in check; unemployment continues to fall; the sheqel has been relatively stable; REER reflects underlying fundamentals. - Capital market development has accelerated, creating new supervisory and regulatory challenges; banking indicators have strengthened but credit risks remain high. - Fiscal policy recommendations: - Continue limiting growth of public expenditures to one percent a year. - Seize the opportunity from strong fiscal outturns in 2005 and strong growth to reduce the deficit sustainably to well below the 3 percent of GDP ceiling to achieve a meaningful decline in the public debt stock. - Maintain the expenditure and deficit ceilings in the 2006 budget and avoid additional tax cuts once a new government is formed. - Debt sustainability exercise: the recommended approach would lead to a reduction in the public debt-to-income level of about 20 percent over the next 5 years when compared to a strategy of holding the fiscal deficit to 3 percent of GDP. - Develop a detailed medium-term budget plan and present mid-year reports on budget execution to strengthen transparency and planning. - Monetary policy and BoI governance: - Inflation targeting and a floating exchange rate have served Israel well. - Increased emphasis on developing macroeconomic models at the BoI is welcome and central to a forward-looking monetary policy and improved communication. - Proposed new Bank of Israel law will strengthen central bank independence; creation of a Monetary Committee and a Management Board should aid objectives; adoption by the Knesset is overdue. - Financial sector supervision: - Continued supervisory vigilance of systemically important financial institutions is essential. - Authorities could benefit from self assessments against key internationally recognized regulatory standards. - Basel II implementation will require a significant resource commitment. - Enhance BoI oversight through cooperation with foreign counterparts, especially on anti-money laundering matters. - Poverty policy: - Welcomed efforts to alleviate poverty; recommended measures should be within the fiscal envelope, targeted, incentivize work, and be consistent with growth-promoting policies; ensure a safety net for vulnerable groups. - Data and statistics: - Israel has subscribed to the Special Data Dissemination Standards and its macroeconomic statistical system is generally adequate for Fund surveillance, but remaining shortcomings need to be addressed. *IMF staff report content (section 25 and related passages).* ### 40. It is recommended that the next Article IV consultation be held on the standard 12- ### _cr06120 - 40. It is recommended that the next Article IV consultation be held on the standard 12-month cycle. ### Recommendation on Consultation Cycle - It is recommended that the next Article IV consultation be held on the standard 12-month cycle. - The last Article IV consultation was concluded on April 18, 2005. - Israel is on the standard 12-month consultation cycle. ### Macroeconomic trends and recent performance (selected highlights from figures and text) - Real GDP growth (selected years shown visually for 1985−2005): Israel and OECD series plotted (no single summary value in source text). - Recent indicators, 2001−05: - Economic expansion driven primarily by exports and consumption. - Labor market improvements: Unemployment rate data series for 2001Q3–2005Q3; participation rate and rising real wages (y-o-y change; 12-month moving average). - Inflation: CPI (y-o-y) and Core CPI show inflation ticking upward with inflation expectations contained (1 year ahead and 3 years ahead series shown). - Fiscal developments, 1996–2005 (central government): - Central government revenue and expenditure series plotted (percent of GDP). - Fiscal deficit displayed for central government and general government. - Public debt series (percent of GDP) plotted (1996–2005). ### External sector and financial indicators (selected highlights) - External indicators, 2001−05: - Exports have outpaced imports (trade volume indices, y-o-y change; four-quarter moving average). - Tourist arrivals (thousands, seasonally adjusted) increased, supporting export services. - Current account balance (percent of GDP) steadily improving (2001–05). - Financial account (percent of GDP) shows continued foreign capital inflows (FDI, portfolio investment). - Real Effective Exchange Rate (2001=100) and NIS/US$ exchange rate series show improved competitiveness position in check and broadly stable NIS/US$. - Financial sector, 2000−05: - Cost of capital down significantly: Bank of Israel policy rate and implicit real interest rate series. - Monetary aggregates expanding: M1 and M2 (y-o-y change; 12-month moving avg). - 10 Year Government Bond Spreads over 10 year US Treasury Bond declined. - Stock market (TA 100) rose to record levels. ### Public and external debt sustainability (figures and scenario notes) - Public debt sustainability (Figure 6): public debt in percent of GDP plotted for baseline and multiple shock scenarios (growth shocks, primary balance shock, interest rate shock, combined shocks, real depreciation and contingent liabilities shocks). Notes: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance in combined scenarios. - One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2006 in specified scenario (real depreciation defined as nominal depreciation minus domestic inflation based on GDP deflator). - Figures in boxes represent average projections for the respective variables in the baseline and scenario being presented; ten-year historical average for the variable is also shown. - External debt sustainability (Figure 7): external debt in percent of GDP under baseline and shocks (current account shock, combined shock, real depreciation shock, non-interest current account shock, growth shock). Notes: - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2006 in the specified scenario. ### Key quantitative indicators and fiscal/sectoral statistics (Table 1 and Table 2 extracts) - Demographic and social: - Population (2005) 1/6.3 million - GDP per capita (2004) US$20,800 - Life expectancy at birth (2005) 79.3 - Male (2005) 77.2 - Female (2005) 81.6 - Infant mortality rate (2005) 7 per 1,000 live births - Physicians per 1,000 people (2001) 3.91 - Population per sq. km. (2003) 308.1 - Selected national accounts aggregates (levels, 1995 and 2005 as shown in table columns): - Private consumption: 1995 = 52.5 (billions of U.S. dollars) 58.6 percent of GDP; 2005 = 72.9 (billions) 59.4 percent of GDP - Public consumption: 1995 = 26.3 / 29.3% of GDP; 2005 = 34.9 / 28.5% of GDP - Gross capital formation: 1995 = 23.7 / 26.4% of GDP; 2005 = 15.0 / 12.2% of GDP - Exports of goods and services: 1995 = 27.6 / 30.8% of GDP; 2005 = 56.8 / 46.3% of GDP - Imports of goods and services: 1995 = 40.4 / 45.1% of GDP; 2005 = 63.3 / 51.6% of GDP - GDP: 1995 = 89.6 / 100.0; 2005 = 122.7 / 100.0 - Annual percent changes (selected, 2001–2006p/2006 projections): - Private consumption growth: 2001 = 2.9; 2002 = 1.0; 2003 = 0.9; 2004 = 5.0; 2005 = 4.0; 2006p = 4.0 - Real GDP: 2001 = -0.3; 2002 = -1.2; 2003 = 1.7; 2004 = 4.4; 2005 = 5.2; 2006p = 4.2 - Unemployment rate (in percent): 2001 = 9.3; 2002 = 10.3; 2003 = 10.8; 2004 = 10.3; 2005 = 9.1; 2006p = 8.7 - CPI (end period): 2001 = 1.4; 2002 = 6.5; 2003 = -1.9; 2004 = 1.2; 2005 = 2.4; 2006p = 2.0 - Interest rates and monetary aggregates: - BOI policy rate (average, in percent): 2001 = 6.8; 2002 = 6.8; 2003 = 7.5; 2004 = 4.2; 2005 = 3.7; (note in footnote: The Bank of Israel set the policy rate at 4.75 percent for February 2006.) - Private sector credit (period average): 2001 = 13.1; 2002 = 7.2; 2003 = -5.5; 2004 = 3.9; 2005 = 10.7 (as of Nov. 2005) - Narrow money (M1) (period average): 2001 = 14.2; 2002 = 15.6; 2003 = 0.5; 2004 = 18.0; 2005 = 21.3 (as of Nov. 2005) - Broad money (M3) (period average): 2001 = 15.5; 2002 = 6.1; 2003 = 2.2; 2004 = 4.6; 2005 = 8.7 (as of Oct. 2005) - Public finance (percent of GDP, selected years): - Central government revenue: 2001 = 37.1; 2002 = 39.2; 2003 = 37.1; 2004 = 37.0; 2005 = 37.3; 2006 (proposed budget) = 36.8 - Central government expenditure: 2001 = 41.5; 2002 = 43.0; 2003 = 42.7; 2004 = 40.8; 2005 = 39.2; 2006 (proposed budget) = 39.8 - Central government balance: 2001 = -4.4; 2002 = -3.8; 2003 = -5.6; 2004 = -3.8; 2005 = -1.9; 2006 = -3.0 - General government balance: 2001 = -3.9; 2002 = -4.2; 2003 = -6.5; 2004 = -5.1; 2005 = -2.7; 2006 = -3.5 - General government debt (percent of GDP): 2001 = 95.8; 2002 = 104.5; 2003 = 106.4; 2004 = 105.4; 2005 = 102.0; 2006 = 100.4 - Balance of payments (selected, percent of GDP or USD values where indicated): - Trade balance (percent of GDP): 2001 = -2.7; 2002 = -3.5; 2003 = -2.0; 2004 = -1.6; 2005 = -3.1; 2006 = -3.0 - Current account (percent of GDP): 2001 = -1.4; 2002 = -1.2; 2003 = 0.7; 2004 = 1.3; 2005 = 0.8; 2006 = 0.1 - Foreign direct investment (percent of GDP): 2001 = 3.2; 2002 = 1.7; 2003 = 3.5; 2004 = 1.4; 2005 = 3.4; 2006 = 3.3 - Exchange rate and terms of trade: - NEER (period average) changes and REER (period average) changes shown (percent changes for years 2001–2005). - Exchange rate (period average NIS/US$): 2001 = 4.21; 2002 = 4.74; 2003 = 4.55; 2004 = 4.48; 2005 = 4.49 (Dec. 2005) ### Central government budget composition (Table 2 highlights, percent of GDP) - Revenue (excluding repayment of credit): 2001 = 37.1; 2002 = 39.2; 2003 = 37.1; 2004 = 37.0; 2005 = 37.0; 2006 = 36.8 - Domestic revenue: 2001 = 34.7; 2002 = 34.2; 2003 = 33.2; 2004 = 34.0; 2005 = 33.9; 2006 = 34.4 - Tax: 2001 = 30.6; 2002 = 29.8; 2003 = 28.6; 2004 = 28.9; 2005 = 29.2; 2006 = 29.4 - On income and profits (percent of GDP): 2001 = 17.8; 2002 = 16.2; 2003 = 15.2; 2004 = 15.2; 2005 = 15.2; 2006 = 15.4 - On domestic goods and services: 2001 = 12.8; 2002 = 13.6; 2003 = 13.5; 2004 = 13.7; 2005 = 13.9; 2006 = 14.0 - Expenditure (excluding lending and public hospitals): 2001 = 41.5; 2002 = 43.0; 2003 = 42.7; 2004 = 40.8; 2005 = 39.2; 2006 = 39.8 - Current expenditure: 2001 = 39.8; 2002 = 41.1; 2003 = 40.6; 2004 = 38.4; 2005 = 36.7 - Wages (percent of GDP): 8.6; 8.8; 8.7; 8.6; 8.2 (2001–2005) - Subsidies & transfers: 14.8; 14.4; 14.5; 13.9; 13.1 (2001–2005) - Interest: 5.8; 5.6; 6.5; 6.1; 6.6 (2001–2005) - Capital expenditure: 2001 = 1.7; 2002 = 1.8; 2003 = 2.1; 2004 = 2.4; 2005 = 3.7 - Budget deficit (percent of GDP): 2001 = 4.4; 2002 = 3.8; 2003 = 5.6; 2004 = 3.8; 2005 = 3.4; 2006 = 1.9 (estimate) and 3.0 (budget) - Financing composition (percent of GDP, 2001–2006 series in table): - Domestic (net) financing shows variability including negative and positive items listed for each year. - Foreign (net) financing and sale of assets and change in cash balances reported in table. ### Balance of payments projections and memoranda (Table 3 highlights) - Current account balance (in billions of U.S. dollars, projections 2002–10): - 2002 = -1.3; 2003 = 0.8; 2004 = 1.5; 2005 = 1.0; 2006 = 0.2; 2007 = 1.3; 2008 = 2.1; 2009 = 3.1; 2010 = 4.4 - Merchandise exports, f.o.b. (billions USD): 2002 = 27.5; 2003 = 30.1; 2004 = 36.6; 2005 = 39.3; 2006 = 42.9; etc. - Merchandise imports, f.o.b. (billions USD): 2002 = 31.2; 2003 = 32.3; 2004 = 38.5; 2005 = 43.1; 2006 = 46.8; etc. - Gross external debt (percent of GDP, memorandum): 2002 = 65.1; 2003 = 64.6; 2004 = 60.8 (as of Sept. 2005 series) - GDP (in billions of U.S. dollars): 2002 = 110.4; 2003 = 116.9; 2004 = 123.7; 2005 = 131.3; 2006 = 139.6; projections through 2010 shown. ### Indicators of external and financial sector vulnerability (Table 4 highlights) - Broad money (percent change, 12-month basis): 2001 = 15.5; 2002 = 6.1; 2003 = 2.2; 2004 = 4.6; 2005 = 8.7 (Oct. 2005) - Private sector credit (percent change, 12-month basis): 2001 = 13.1; 2002 = 7.2; 2003 = -5.5; 2004 = 4.9; 2005 = 10.1 (Oct. 2005) - Gross official reserves (US$ billions; e.o.p.): 2001 = 23.5; 2002 = 24.2; 2003 = 26.5; 2004 = 27.2; 2005 = 27.5 (Dec. 2005) - Official reserves in months of imports GNFS: 2001 = 6.5; 2002 = 6.8; 2003 = 7.2; 2004 = 6.3; 2005 = 5.4 (Sept. 2005) - Total gross external debt/GDP (in percent): 2001 = 57.2; 2002 = 65.1; 2003 = 64.6; 2004 = 63.5; 2005 = 60.8 (Sept. 2005) - Total net external debt/GDP (in percent): 2001 = 0.1; 2002 = -2.0; 2003 = -5.6; 2004 = -9.7; 2005 = -16.8 (Sept. 2005) - Country risk ratings (S. & P. / Moody's): 2001–2005 = A- / A2 - Exchange rate (per US$, period average): 2001 = 4.21; 2002 = 4.74; 2003 = 4.55; 2004 = 4.48; 2005 = 4.49 (Dec. 2005) - Change in Stock Market Index (in percent): 2001 = -6.6; 2002 = -19.9; 2003 = 55.4; 2004 = 17.6; 2005 = 32.8 (Dec. 2005) ### Medium-term scenarios and projections (Table 5) - GDP growth rate (2002−10 series): 2002 = -1.2; 2003 = 1.7; 2004 = 4.4; 2005 = 5.2; 2006 = 4.2; 2007 = 4.2; 2008 = 4.0; 2009 = 4.1; 2010 = 4.3 - Inflation (average): 2002 = 5.7; 2003 = 0.7; 2004 = -0.4; 2005 = 1.3; 2006 = 2.4; 2007 = 2.0; 2008 = 2.0; 2009 = 2.0; 2010 = 2.0 - Fiscal deficit/GDP — Central government balance (baseline) 1/: - 2002 = -3.8; 2003 = -5.6; 2004 = -3.8; 2005 = -1.9; 2006 = -3.0; 2007 = -3.0; 2008 = -3.0; 2009 = -3.0; 2010 = -3.0 - Central government balance (alternative) 3/: - 2002 = -3.8; 2003 = -5.6; 2004 = -3.8; 2005 = -1.9; 2006 = -1.2; 2007 = -0.2; 2008 = 0.8; 2009 = 1.8; 2010 = 2.8 - Public debt/GDP (end of period) — baseline 2/: - 2002 = 104.5; 2003 = 106.4; 2004 = 105.4; 2005 = 101.8; 2006 = 100.4; 2007 = 98.8; 2008 = 97.5; 2009 = 96.2; 2010 = 94.9 - Public debt/GDP (end of period) — alternative 3/: - 2002 = 104.5; 2003 = 106.4; 2004 = 105.4; 2005 = 101.8; 2006 = 98.6; 2007 = 93.9; 2008 = 88.6; 2009 = 82.2; 2010 = 74.7 - Current account/GDP (2002−10): 2002 = -1.2; 2003 = 0.7; 2004 = 1.3; 2005 = 0.8; 2006 = 0.1; 2007 = 0.9; 2008 = 1.4; 2009 = 2.0; 2010 = 2.7 - Foreign reserves (in billions of U.S. dollars): 2002 = 24.2; 2003 = 26.5; 2004 = 27.2; 2005 = 27.5; 2006 = 27.6; 2007 = 28.1; 2008 = 29.0; 2009 = 30.1; 2010 = 32.0 - Notes on scenarios: - Baseline scenario (06'-10') assumes real expenditure growth of 1 percent and a deficit of 3.0 percent of GDP, with revenue as the residual. - Illustrative alternative scenario (06'-10') assumes real expenditure growth of 1 percent and a revenue/GDP elasticity of one, with the fiscal balance as the residual. - If the central government budget is constrained to be in balance over 2008−10, the public debt / GDP would decline to 80.2 percent by 2010. ### IMF–Israel relations, data, and institutional notes (Appendices I–II) - Membership and Fund relations: - Israel became a member of the Fund on July 12, 1954. - Accepted the obligations of Article VIII, Sections 2, 3, and 4 on September 21, 1993. - Subscribes to the SDDS and is in full observance of SDDS requirements for data coverage, periodicity and timeliness, and for the dissemination of advance release calendars. - IMF financial positions and projections: - Quota: 928.20 SDR Millions (100.00 percent) - Fund holdings of currency: 787.04 (84.79 percent) - Reserve position in Fund: 141.17 (15.21 percent) - Net cumulative SDR allocation: 106.36 (100.0 percent) - SDR holdings: 13.04 (12.26 percent) - Outstanding purchases and loans: None - Financial arrangements: None - Projected payments to Fund (charges/interest, forthcoming totals): 2006 = 2.82; 2007 = 2.83; 2008 = 2.84; 2009 = 2.83; 2010 = 2.83 (table shows Principal blank and Charges/Interest values) - Exchange rate arrangement: - As of June 9, 2005 Israel’s exchange rate regime is officially classified as floating. - The NIS has been floating in practice since 1997 when the Bank of Israel stopped intervening to protect the crawling band. - ROSCs and technical assistance: - ROSCs conducted: Financial System Stability Assessment (2000, issued Aug 2001); Fiscal Transparency ROSC (2003, issued Mar 2004); AML/CFT ROSC (2003, issued June 2005); Data Module ROSC conducted in 2005, expected issuance in March 2006. - IMF technical assistance provided to the Palestinian Authority in the WBG in areas including tax and customs administration, expenditure management, bank supervision and restructuring, payments systems, central bank organization, financial sector legislation, national accounts and monetary statistics. - A resident representative has been in the WBG since early 1996. - Statistical issues (Appendix II): - Israel is a subscriber to the Special Data Dissemination Standard. - Periodicity, timeliness, and coverage of economic data are generally adequate for surveillance. - The methodology underlying the reported overall annual fiscal balance is not in conformity with internationally accepted practice as interest costs exclude the inflation component of such payments; authorities are gradually moving toward standard methodology. - Data submitted for the 2004 Government Finance Statistics Yearbook present cash and accrual data for revenue and expense following GFSM 2001 format, but no data on transactions and stocks of financial assets and liabilities were submitted. - Within-year monthly reports on central government operations cover only main aggregates without breakdown by composition. - Table of Common Indicators Required for Surveillance (as of February 10, 2006) lists data frequencies and latest observation dates across exchange rates, reserves, monetary, fiscal, external, and other series (dates and frequencies provided in table). ### Selected vulnerability indicators and recent snapshots (from indicator tables) - Broad money (percent change, 12-month basis): Oct. 2005 = 8.7 - Private sector credit (percent change, 12-month basis): Oct. 2005 = 10.1 - Terms of trade (percent change, average): Jun. 2005 = 2.7 - Current account balance: Dec. 2005 = 0.8 (percent of GDP) - Capital and financial account balance: Sept. 2005 = -1.0 (percent of GDP) - Inward portfolio investment (debt securities etc.): Sept. 2005 = -2.2 - Other investment (loans, trade credits etc.): Sept. 2005 = -2.1 - Inward foreign direct investment: Sept. 2005 = 0.3 - Gross official reserves (US$ billions; e.o.p.): Dec. 2005 = 27.5 - Official reserves in months of imports GNFS: Sept. 2005 = 5.4 - Ratio of foreign reserves to Broad Money: Oct. 2005 = 0.36 - Total gross external debt/GDP (percent): Sept. 2005 = 60.8 - Total net external debt/GDP (percent): Sept. 2005 = -16.8 - Exchange rate (per US$, period average): Dec. 2005 = 4.49 - REER appreciation (+) (period average): Oct. 2005 = -0.9 - Change in Stock Market Index (percent): Dec. 2005 = 32.8 - Share of foreign exchange credit in total credit to the public (e.o.p.): Jun. 2005 = 26.5 - Share of foreign deposits in total deposits of the public (e.o.p.): Jun. 2005 = 33.4 - Share of foreign currency liabilities in total liabilities (e.o.p.): Jun. 2005 = 29.1 *Source: IMF staff report content as provided in the supplied document excerpts.* ### 1. This statement contains information on recent economic developments in Israel that ### _cr06120 - 1. This statement contains information on recent economic developments in Israel that ### Recent data updates - The Central Bureau of Statistics (CBS) released the 2005 national accounts on March 15th. - The Bank of Israel (BoI) kept its policy rate unchanged at 4.75 percent for the month of March. - The February CPI registered a monthly rise of 0.6 percent (3.1 percent yoy). - The unemployment rate fell 0.1 percent in the last quarter of 2005, reaching 8.8 percent; preliminary trend data indicate the unemployment rate declined to 8.7 percent in January. - The CBS released 2005 balance of payments data showing a current account surplus of US$2.4 billion (1.9 percent of GDP), up from US$1.8 billion (1.5 percent of GDP) in 2004. ### Growth and composition of GDP (2005) - Real GDP grew by 5.2 percent in 2005 (same as the staff report estimate). - Composition changes (Real Growth Rates 2005 — Estimate vs Actual): - GDP: 5.2 (Estimate) 5.2 (Actual) - Private consumption: 4.0 (Estimate) 3.9 (Actual) - Public consumption: 2.7 (Estimate) 2.0 (Actual) - Fixed capital formation: 1.0 (Estimate) 2.4 (Actual) - Imports of G&S: 4.4 (Estimate) 4.0 (Actual) - Exports of G&S: 7.0 (Estimate) 5.6 (Actual) - Table 1 highlights sectoral and macro indicators (selected 2000−06 excerpts): - Private consumption (2005): 3.9; projected 2006p: 4.0 - Public consumption (2005): 2.0; 2006p: 2.0 - Fixed capital formation (2005): 2.4; 2006p: 5.8 - Imports of goods and services (2005): 4.0; 2006p: 5.3 - Exports of goods and services (2005): 5.6; 2006p: 7.1 - Real GDP (2005): 5.2; 2006p: 4.2 ### Monetary policy and inflation - BoI policy rate: unchanged at 4.75 percent (BoI statement noted U.S. and Europe likely to raise rates in March but did not see need to increase the interest-rate gap with the United States at present). - BoI view: the interest rate gap is an important determinant of exchange rate behavior and consequent inflationary pressures but there is not a unique gap level needed to maintain inflation within the government target range. - BoI outlook: expectations of increased interest rates globally and narrowing of Israel’s output gap “increase the probability that interest rates in Israel will rise somewhat during the remainder of the year.” - CPI developments: - February monthly rise: 0.6 percent (3.1 percent yoy), with about half the increase attributed to energy-related items. - Prior three monthly CPI declines: 0.3 percent, 0.2 percent, and 0.1 percent (November 2005−January 2006). - Staff baseline forecast: points to a moderate overshooting of the inflation target band—on a year-over-year basis—during the first half of 2006, before inflation returns to within the band in the third quarter of 2006. - Table 1 price indicators: - CPI (end period) 2005: 2.4; 2006p: 2.0 - CPI (period average) 2005: 1.3; 2006p: 2.4 - Core CPI (excluding housing, fruit and vegetables, end period) 2005: 1.8; 2006p: 1.2 - BOI policy rate (average) 2005: 3.7; 2006p (reflects latest policy rate 4.75 percent set in February 2006): 4.8 ### Labor market - Unemployment: - Last quarter of 2005 unemployment rate: 8.8 percent (fell 0.1 percent). - CBS preliminary trend for January: 8.7 percent. - Staff projection for 2006 average unemployment rate: 8.5 percent. - Labor absorption: labor market absorbed 93,000 new employees in 2005 (as noted in authorities’ statement). ### External sector and balance of payments - 2005 current account: surplus of US$2.4 billion (1.9 percent of GDP), compared with US$1.8 billion (1.5 percent of GDP) in 2004. - Capital flows: 2005 saw record-high foreign direct and portfolio investments; net capital exports increased in 2005 to US$4.5 billion (reflecting removal of several restrictions on institutional investors’ investments abroad and reduction of the tax rate differential on investments in Israel and abroad). - Table 1 balance of payments indicators (2005 and 2006p): - Trade balance (percent of GDP) 2005: -3.2; 2006p: -2.9 - Current account (percent of GDP) 2005: 1.9; 2006p: 0.9 - Foreign direct investment (percent of GDP) 2005: 4.9; 2006p: 3.3 ### Fiscal developments and public debt - Public debt: about 100 percent of GDP noted as a large stock of public debt. - Authorities’ fiscal strategy: - Government establishing credible commitment to maintain future deficits below 3 percent of GDP and to limit government expenditure growth, in real terms, to no more than 1 percent a year. - Authorities intend to make implementation of the multi-year tax reduction plan approved in 2005 conditional on a continuation of the downward-moving debt-to-GDP ratio. - Table 1 public finance (percent of GDP): - Central government revenue 2005: 37.3; 2006p: 36.8 - Central government expenditure 2005: 39.2; 2006p: 39.8 - Central government balance 2005: -1.9; 2006p: -3.0 - General government balance 2005: -2.7; 2006p: -3.5 - General government debt 2005: 102.0; 2006p: 100.4 - Executive Board encouraged using strong growth and favorable fiscal outturn in 2005 to reduce the deficit to well below the 3 percent of GDP ceiling to achieve a meaningful decline in public debt. - Directors emphasized: - Limit growth of real public expenditures to one percent a year should be continued. - Importance of abstaining from further unplanned tax cuts and allowing automatic stabilizers to operate fully should revenues over-perform. - Adoption of a multi-year budgetary framework and a detailed spending plan to enhance credibility. - A few Directors called for a review of fiscal rules to ensure additional consolidation in good years. ### Financial sector, supervision, and structural reforms - Directors’ assessment: - Banking system has strengthened, but level of problem loans remains high. - Rapid capital market development introduced new supervisory and regulatory challenges. - Continued supervisory vigilance of systemically important financial institutions is essential. - Need to pay close attention to the division of supervisory responsibilities to prevent regulatory arbitrage. - Directors saw scope for supervisory authorities to enhance oversight through cooperation and coordination with foreign counterparts, especially in anti-money laundering. - Encouraged authorities to review practices given the revised Financial Action Task Force (FATF) recommendations. - Structural reforms: - Progress noted in privatization and a major reform of the capital market. - Directors welcomed efforts to enhance public sector efficiency and measures to alleviate poverty, while stressing measures should be accommodated within the current fiscal envelope and be well-targeted. - Importance of ensuring a safety net to protect children, the elderly, and the disabled. ### Executive Board overall assessment and recommendations - Economic performance: Directors welcomed continued improvement—strong export performance and economic growth, falling unemployment, inflation expectations in check, and broadly stable exchange rate. - Policy priorities urged by Directors: - Strengthen fiscal position and reduce high public debt. - Ensure financial sector stability amid relatively high credit risk and rapid capital market development. - Continue limiting growth of real public expenditures to one percent a year. - Avoid unplanned tax cuts; condition tax reductions on continued debt-to-GDP decline. - Adopt multi-year budgetary framework and detailed spending plans. - Reinforce Bank of Israel independence via passage of an updated Bank of Israel law to enhance transparency, accountability, and achievement of price stability. - Monitor pass-through from oil prices and exchange rate movements; be prepared to raise rates as the output gap closes. - Enhance monetary policy analytical framework and communication, including development of new macroeconomic models at the Bank of Israel. - Strengthen supervisory coordination domestically and with foreign counterparts; review anti-money-laundering practices per revised FATF recommendations. *Italic: IMF Public Information Notice No. 06/33; Executive Board concluded the Article IV consultation with Israel on March 22, 2006.* ### 3.9 percent increase––mainly in the trade and services sectors. The unemployment rate ### _cr06120 - 3.9 percent increase––mainly in the trade and services sectors. The unemployment rate ### Labor market - Employment rose by 3.9 percent, mainly in the trade and services sectors. - The unemployment rate declined from 9.7 percent at the end of 2004 to 8.8 percent in the last quarter of 2005. - The labor participation rate increased. ### Fiscal issues - Fiscal policy placed within a medium-term framework for the years 2005-2010 anchored in 2004 legislation. - Framework stipulations: - Budget deficit ceiling of 3 percent of GDP. - Real growth in public expenditure of no more than 1 percent a year. - 2005 budget adjustments and outcome: - The budget deficit ceiling for 2005 was temporarily increased by 0.4 percent of GDP to allow for one-time spending related to the disengagement; the contingency was unnecessary. - The 2005 budget balance recorded the lowest deficit in the past five years, amounting to only 1.9 percent of GDP compared to 3.9 percent in the previous year. - Improvement attributed mainly to lower-than-budgeted government spending while revenues were broadly in line with earlier projections, despite tax cuts introduced mid-year. - This is the third consecutive year of such underspending. - Debt developments: - General government debt ratio contracted by 3.8 percent of GDP to 102 percent of GDP in 2005, following a moderate decline in the previous year. - The high level of public debt underlines the need for further reduction. - Policy stance and intentions: - Authorities reiterate commitment to firm fiscal retrenchment; budget deficit rule not exceeding 3 percent of GDP should be regarded as a ceiling and not a target. - The proposed 2006 budget, approved by the government, adheres to the budget deficit and expenditure real growth restrictions aimed at continuing to reduce the debt to GDP ratio. - Given currently high tax rates, authorities intend to continue implementing an agreed multi-year tax reduction plan. - Implementation of tax reform is conditional on a continuation of the downward-moving debt-to-GDP ratio and could be postponed in the event of a sharp or unforeseen decline in revenues. ### Monetary issues - Staff view: current monetary stance accommodative and appropriate. - External conditions in 2005: relatively low foreign interest rates, decline in emerging markets’ risk premium, surge in capital inflows. - Bank of Israel (BoI) policy rate movements: - Reduced policy rate to a historically lowest level of 3.5 percent and maintained this low rate for eight consecutive months (February-September). - Starting in October 2005, BoI gradually raised its interest rate cumulatively by 1.25 percentage points to 4.75 percent. - Inflation: - CPI rose by 2.4 percent in 2005, slightly more than during the previous year, and within the target range of price stability (1-3 percent). - CPI excluding housing, fruit and vegetables (core CPI) rose by 1.8 percent in 2005, 0.3 percentage points less than during the previous year. - Increased inflationary pressures mainly attributed to global increase in energy prices, rapid economic activity reducing excess capacity, and depreciation of the NIS against the US dollar, particularly in H2 2005. - Continued price adjustments and continued narrowing of Israel’s excess production capacity expected to exert upward pressure on prices in 2006. - Risks highlighted by BoI: - Changes in foreign interest rates and the interest rate gap between the US and Israel. - Geo-political uncertainty. - Possible reversal in capital flows to emerging markets. - Exchange rate developments. - Rapid economic growth. - Policy framework and analytical capacity: - Within inflation targeting, authorities use several forward-looking market indicators to formulate monetary policy. - Efforts to improve macroeconomic statistical models and better understand monetary policy transmission mechanism. - Authorities appreciate recent cooperation between BoI and the Fund’s staff that enhanced analytical capacity. ### Financial and banking sector - Market structure changes: - Legislation forcing divestiture of banks’ holdings in mutual and provident funds enacted and implemented in 2005. - Within three months after the legislation, a significant part of the banks’ mutual and provident funds had been sold to domestic insurance companies or foreign investors. - New market configuration reflects significant change and reveals vulnerabilities that need to be reduced. - Capitalization and risk management: - Banking system capital ratio raised from 9.5 percent in 2000 to 11.5 percent in 2005. - Authorities note capital levels remain relatively low compared to international peers. - Banks’ higher earnings and one-time revenues from divestiture provide an opportunity to further improve capital ratios. - Measures taken to reduce risks of problem loans include extensive on-site inspections and enhancing banks’ internal procedures for detecting, classifying and provisioning problem loans. - Authorities confident there are no immediate risks to financial stability despite considerable level of problem loans. - A recent stress testing on the problem loan portfolio showed endurance of the banking system despite heavy losses under extreme scenarios. ### AML/CFT - 2005 developments: - "Prohibition of Financing Terrorism" enacted. - Banking Supervision Directive modified to implement guidelines for customer identification to combat financing of terrorism and for treating risks in check deposits. - Criteria of countries bearing high risk elaborated and a list of countries requiring heightened scrutiny of money transfers furnished. - Action taken to encompass credit card companies in the Directive on combating the financing of terrorism. - Compliance concerns and measures: - Authorities and staff agree more needs to be done to ensure appropriate compliance with legal and regulatory requirements for AML/CFT, particularly in foreign offices of Israeli banks. - Banking Supervision department recently undertook measures to strengthen foreign offices' compliance with host country legal and regulatory requirements and with internal procedures and regulations of a banking group. ### Structural reforms and poverty reduction - Reforms to boost competition and efficiency: - Privatization progress in 2005: - Privatization of Israel Discount Bank (previously completed). - Privatization in 2005 of Bank Leumi, one of the country's two largest banks and the last publicly-owned bank, to international institutional investors. - Agreement between the Ministry of Finance and Hahistadrut to separate the three seaports with an intention to privatize them in the future. - Split of the Ports Authority into three separate companies expected to enhance competition, raise productivity and significantly reduce labor costs. - Measures to improve transportation infrastructure by transforming the public works department, Maatz, into a state-owned company. - Ongoing efforts to privatize Israel Military Industries (Taas) and the Oil Refineries company (Bazan). - Poverty and social policy: - Extensive cuts in welfare payments in recent years led to a significant rise in measured poverty. - Consensus among political parties on need for post-election policies targeted at reducing poverty, particularly among working, low-income families. - Considered measures include the “Earned Income Tax Credit” (EITC) plan, a subsidy to low wage working families. - Note on measurement: - Poverty in Israel is based on a relative measure and not on an absolute one. *Source: IMF staff report content provided in the PDF chapter/section.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06120.pdf_