IMF Staff Conclude Visit to Israel

IMF News, May 24, 2019

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An IMF staff team led by Craig Beaumont visited Israel from May 19-23, 2019 to discuss macroeconomic, financial, and structural policy issues, in preparation for the annual Article IV consultation to be held later in 2019.
End-of-Mission press releases convey preliminary findings after a visit; the views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

Output rose by 3.2 percent in the year to the first quarter of 2019; similar growth is expected for 2019 as a whole.
Export growth, led by hi‑tech services, declined little despite a weakening global economy.
Fixed investment slowed as falls in housing construction outweighed strong machinery spending.
Job creation exceeded 2 percent in 2018, driven by 3.5 percent gains for women, keeping unemployment at historic lows of about 4 percent.
Business sector wage rises increased to 4.3 percent in 2018, from 2.9 percent in 2017.
Monetary policy remains accommodative, with the policy rate at 0.25 percent following a hike in the last quarter of 2018.
Inflation has risen from low levels, to remain just above the floor of the 1-3 percent target range since mid-2018. A further increase in inflation is expected in the next few years, although the outlook is subject to risks from global growth and inflation and uncertainties around the net impact of rising wages and increased competitive pressures in Israeli markets.
The Bank of Israel has indicated that future interest rate rises will be gradual and cautious.

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

Fiscal outcomes and risks:
- Israel’s budget deficit reached 3 percent of GDP in 2018 despite very low unemployment, lifting debt to 61 percent of GDP.
- The deficit is expected to rise to 3.5 percent or more in 2019, and current policies imply further deficit increases in coming years.
- Leaving debt on a rising path will constrain Israel’s ability to use fiscal policy to cushion shocks to the economy.
Recommended fiscal targets and measures:
- The budget deficit should be reduced to 2.5 percent of GDP to ensure that the debt ratio stabilizes.
- The budget for 2020 will need to take revenue and spending measures to avert increases in public debt burdens and to facilitate reforms to boost growth.
- Adopt high-quality structural measures to cut tax benefits, raise revenues, and improve spending efficiency in the 2020 budget.

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

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

IMF staff statement, May 24, 2019.

צוות קרן המטבע הבינלאומית מסכם ביקור בישראל
- צוות קרן המטבע הבינלאומית מסכם ביקור בישראל (Markdown version)
- צוות קרן המטבע הבינלאומית מסכם ביקור בישראל (PDF)