{
  "title": "Israel -- 2007 Article IV Consultation Concluding Statement of the IMF Mission",
  "publication": "IMF News, December 9, 2007",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs120907",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2007-12-09",
  "sections": [
    {
      "heading": "Mission overview and key judgment",
      "content": "- The economy is performing exceptionally well, requiring continuation of strong economic policies.\n- Sound policies and unprecedented global growth have driven the improvement; however, public debt is \"not much lower than before the latest recession\" and vulnerability to shocks remains high.\n- Priority policy needs:\n  - More public debt reduction to safeguard the government's ability to respond to difficult times.\n  - Further improvements to the financial sector framework to enhance resilience."
    },
    {
      "heading": "Economic developments and prospects",
      "content": "- Growth outlook:\n  - Real GDP growth expected \"around 4 percent from 2008,\" compared with \"about 5½ percent in 2007.\"\n  - Domestic conditions supportive: broad-based GDP growth; rising real incomes including for the poor; improved corporate profitability and balance sheets; good employer–trade union cooperation; solid competitiveness.\n  - External conditions weakening: global financial turmoil and high oil prices reduce demand in key export markets; risks lie on the downside.\n- Inflationary pressures:\n  - Likely to mount given rising global inflation; slowing productivity; robust labor demand; accelerating housing services prices.\n  - Offsetting factors: subdued wage pressures and appreciation of the sheqel (NIS) against the US dollar (US$), though these are likely to weaken.\n  - Unemployment falling to levels where supply bottlenecks appear; higher wage growth is likely.\n  - External current account is retreating from unprecedented highs, diminishing medium-run pressure for NIS appreciation.\n  - Link between NIS/US$ exchange rate and housing services prices is weakening."
    },
    {
      "heading": "Monetary policy developments and framework",
      "content": "- Policy stance:\n  - Higher interest rates are \"probably needed\" for inflation to stay within the \"1-3 percent target range\" over the medium run.\n  - Uncertainty about external demand and higher corporate bond risk premia argue for caution in raising rates.\n  - Well-anchored inflation expectations provide time to assess incoming developments.\n- Policy implementation and communication:\n  - Conduct of monetary policy judged \"exemplary\" by stability of inflation expectations.\n  - Support for publishing quarterly inflation reports and releasing a model-based inflation and interest rate forecast.\n  - Suggested enhancements: clarify role of forecasts in decision making; clarify relationship between forecasts for different macro variables (notably the exchange rate); clarify the monetary policy horizon.\n  - Recommendation for \"swift adoption of the draft Bank of Israel law\" to strengthen institutional foundations."
    },
    {
      "heading": "Fiscal policy challenges and institutions",
      "content": "- Shorter-run requirements: maintaining a strong fiscal policy\n  - Fiscal performance: higher-than-budgeted tax revenue allocated to debt reduction; well-managed expenditure.\n  - Central government budget likely close to balance by end-2007, implying a general government deficit of \"roughly 1 percent of GDP\" on an internationally comparable basis.\n  - Central government deficit ceiling of \"1.6 percent of GDP\" should be treated as a ceiling, not a target.\n  - Maintain strict compliance with the \"1.7 percent expenditure growth ceiling\" and allocate revenue overperformance to debt reduction to keep central government budget close to balance.\n  - Debt reduction lowered interest payments by \"some NIS 10 billion.\"\n- Longer-run objectives: securing the welfare of younger generations\n  - Demographic and labor force projections:\n    - Labor force growth may decelerate \"from around 2½ percent per annum during 2000-05 to around 1½ percent during 2010-15.\"\n    - Projections suggest that by \"2050 only about 2-3 people in the workforce will support each retiree,\" down from \"more than 4 people today.\"\n  - Implications: lower economic growth and upward pressure on public spending; debt service consumes \"the equivalent of about half of all welfare spending.\"\n  - Policy prescription:\n    - Continue rapid public debt reduction; prioritize debt reduction over tax cuts.\n    - Objective to achieve \"at least the much safer 60 percent ratio by 2015\" from current \"82 percent public debt to GDP ratio.\"\n    - Achieving this would require keeping central government accounts in balance, implying a general government deficit of \"about 1 percent of GDP on an internationally comparable basis through 2015.\"\n    - Scope exists to simplify the comparatively complex tax system, including by reducing tax exemptions.\n  - Fiscal governance improvements:\n    - Budget documentation should include multi-year scenario analysis of conjunctural and other risks and a long-term fiscal sustainability analysis.\n    - Strengthen fiscal surveillance, combine better budget analysis, strong rules, and independent, nonpartisan fiscal evaluation."
    },
    {
      "heading": "Financial sector developments and framework",
      "content": "- Progress to date:\n  - Ambitious reforms fostering a stronger and more diversified financial system; financial soundness indicators improving though capital and solvency levels remain lower than in many advanced economies.\n  - Shift in financing away from banks to bond markets and institutional investors.\n  - Authorities progressing toward international standards: preparing for Basel II and Solvency II; introducing risk-based supervision; strengthening insurance regulation; securities regulator progress; primary dealer system for government bond market; work on repo market and securitization; introduction of real time gross settlement.\n- Main remaining challenges (five key issues):\n  - Need for regulators to build expertise to support the more complex regulatory system; requires greater recruitment flexibility and competitive pay scales.\n  - Risk that rapid regulatory change may be inconsistent with high-quality implementation; major regulatory initiatives should undergo careful cost-benefit analysis.\n  - Need for appropriate balance between principles-based and rules-based approaches to avoid stifling market entry, innovation, and accountability.\n  - With more competition comes more risk; require strong capacity to manage and resolve financial stress, supplementing the Memorandum of Understanding with financial crisis scenarios to identify gaps.\n  - Insurance supervisor needs independence to set solvency standards, enforce managerial changes, resolve failing institutions, and perform group-wide supervision.\n- International integration:\n  - Israel's formerly closed financial system is opening to the world; a coherent vision to guide international integration is recommended as a key task of the capital markets committee.\n\nSource: Israel -- 2007 Article IV Consultation Concluding Statement of the IMF Mission (December 9, 2007).\n\n---\n\n\n References\n\n- Israel and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs120907"
    }
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    "Published: December 9, 2007",
    "The economy is performing exceptionally well, requiring continuation of strong economic policies.",
    "Sound policies and unprecedented global growth have driven the improvement; however, public debt is \"not much lower than before the latest recession\" and vulnerability to shocks remains high.",
    "Priority policy needs:",
    "Growth outlook:",
    "Inflationary pressures:",
    "Policy stance:",
    "Policy implementation and communication:",
    "Shorter-run requirements: maintaining a strong fiscal policy",
    "Longer-run objectives: securing the welfare of younger generations",
    "Progress to date:",
    "Main remaining challenges (five key issues):",
    "International integration:",
    "[Israel and the IMF](http://www.imf.org/external/country/ISR/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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