## Statement by J. de Beaufort Wijnholds, Executive Director for Israel

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**Canonical URL:** [Statement by J. de Beaufort Wijnholds, Executive Director for Israel](https://www.imf.org/-/media/websites/imf/imported-publications/external/np/a4pilot/2000/_stm0057.pdf)

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### Developments in 1999 and early 2000
- 1999 returned the inflation environment to the 4 percent level prevailing before the fall of 1998; prices during 1999 increased by only 1.3 percent.
- Bank of Israel (BoI) interest-rate actions:
  - BoI raised its interest rate in fall 1998 to prevent renewed inflation acceleration.
  - Starting February 1999, BoI consistently decreased its nominal interest rate by a total of 2.3 percentage points through December 1999.
  - During January–March 2000, BoI decreased interest rates by another 1.3 percentage points.
- Inflation targets and outcomes:
  - Inflation returned closer to the inflation target of 4 percent set for 1999.
  - In late 1999 and early 2000, inflation declined further and reached a level consistent with the 3 to 4 percent target set for 2000 and 2001.
- Fiscal results:
  - 1999 budget deficit was 2.25 percent of GDP, slightly above the government’s 2 percent target, but lower than the revised projected deficit and on a declining trend.
- Real economy and labor market:
  - GDP growth rebounded from the second half of 1999 and industrial production expanded.
  - Expansion driven by domestic demand and non-residential investment.
  - Hi‑tech exports peaked at 70 percent of industrial exports in 1999.
  - Preliminary figures: demand for workers increased substantially in the last quarter of 1999; full-time employment grew markedly; part-time employment decreased.
- External integration and financial market developments:
  - Following liberalization of capital flows in May 1998 and the policy of non-intervention and a free-floating exchange rate, Israel became integrated into global economic and financial systems.
  - Foreign direct investment increased rapidly reaching an all time high.
  - Israel’s credit rating has been stable since 1995 with Moody’s and S&P granting a positive outlook last month.
  - Entry of foreign institutions: Citibank and Merrill Lynch opened branches in Israel; Intel made its largest cash acquisition.
- Monetary-policy framework effects:
  - Shorter monetary policy transmission period.
  - Less automatic pass-through from exchange rate changes into prices.
  - Greater accounting by firms of exchange rate risk.
  - Enhanced public integration of the inflation-targeting regime.

### Fiscal policy (year 2000 intentions and measures)
- Overall objective:
  - Continue gradual reduction of budget deficit, government expenditures, and government debt as a share of GDP.
- 2000 budget aims:
  - Use revenues exceeding projections to further reduce the deficit beyond the Budget Reduction Law requirement (which defines the deficit at its maximum permissible level).
  - Promote economic activity led by the business sector and reduce government share in the economy.
  - Reduce current expenditures and increase investment outlays in transportation infrastructure by a total of 40 percent, compared to 1998.
  - Investments to be allocated to roads, railways, and public transportation.
- Tax reform:
  - Plan to rationalize the tax system through extensive reforms by broadening the tax base to bolster revenue and improve income distribution.
  - A public committee is expected to finalize details at end‑April.

### Monetary policy (framework, targets, and risks)
- Inflation targeting:
  - Authorities committed to an inflation target of 3 to 4 percent for 2000 and 2001.
  - Monetary easing contingent on the inflation environment for the coming two years remaining consistent with the 3 to 4 percent target range.
- Interest-rate strategy:
  - Continued reduction in nominal interest rates seen as the way to lower real interest rates and support economic activity, provided inflation stays within target.
- Identified risks to the inflation outlook:
  1. Remaining uncertainty on the inflation and financial sector fronts regarding a possible abrupt change in the composition of the assets and liabilities portfolio held by the public, especially given the continued trend of increasing interest rates worldwide.
  2. Risk generated from potential budget overruns and possible excessive wage increases.
  3. Continuing existence of a high inflation culture indicating that the risk of exceeding the inflation targets is still greater than the downside risk.
- Institutional and transparency improvements:
  - BoI bases interest-rate decisions on a wide spectrum of indicators: growth rate in M1, exchange rate developments, inflation expectations from capital markets, price trends abroad, fiscal developments, and the economic activity level.
  - BoI publishes a bi-annual inflation report and has initiated publication of the inflation expectation figures it uses in decisions.
  - Recent monetary policy announcements have indicated an interest-rate path and highlighted an interest-rate benchmark to help the public form inflation outlooks.
- Target horizon:
  - The explicit inflation target horizon extended from one year to 2 years to improve monetary policy reaction to deviations and to benefit from more strongly anchored inflation expectations over a longer horizon.
- Institutional recommendation:
  - Government could improve the monetary framework by reaffirming BoI operational autonomy and adopting comprehensive amendments to the central bank law along lines recommended by the Levin Committee, emphasizing operational independence and ensuring a Monetary Policy Commission of experts free of political interference or conflicts of interest.

### Structural reforms and privatization
- Objectives:
  - Promote higher growth and lower inflation by enhancing the role of the private sector, increasing competition, improving economic efficiency, and accelerating privatization.
- Planned actions for 2000:
  - Implement a wide-ranging structural reform agenda across principal sectors (as detailed in para. 26 of the Staff report).
  - Continue momentum of privatization, including disposing of remaining state holdings in several banks in 2000.
  - Reduce degree of concentration in the financial system, including breakup of large banking groups and separation of provident and mutual funds under their control to create a more competitive environment and attract more foreign banks.

### Banking system and prudential measures
- System health:
  - The banking system in Israel is sound and healthy.
- Post-1998 adjustments:
  - Following exchange rate depreciation in fall 1998, banks and customers substantially increased hedging of foreign currency exposure.
  - BoI enhanced prudential supervision and made reporting requirements on credit denominated in foreign currency more stringent.
  - In early 1999 BoI increased the minimum capital adequacy ratio from 8 percent to 9 percent.
  - At end-1999, the actual average ratio held by the five major banking groups was well above the minimum required by regulation.

*Source: Statement by J. de Beaufort Wijnholds, Executive Director for Israel, March 22, 2000 (document _stm0057).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/np/a4pilot/2000/_stm0057.pdf_