{
  "title": "Israel: Staff Concluding Statement of the 2017 Article IV Mission",
  "publication": "IMF News, February 8, 2017",
  "sourceUrl": "https://www.imf.org/en/news/articles/2017/02/08/mcs02082017-israel-staff-concluding-statement-of-the-2017-article-iv-mission",
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  "summary": "Israel’s economy grew solidly in 2016 with early estimates of 3.8 percent growth in 2016, partly reflecting one-off factors (notably a surge in vehicle purchases).",
  "publishDate": "2017-02-08",
  "sections": [
    {
      "heading": "Recent developments and outlook",
      "content": "- Israel’s economy grew solidly in 2016 with early estimates of 3.8 percent growth in 2016, partly reflecting one-off factors (notably a surge in vehicle purchases).\n- Job creation was strong, at almost 3 percent in 2016, helping reduce the unemployment rate to 4.4 percent by the fourth quarter.\n- CPI inflation was ‑0.2 percent in 2016; core inflation was 0.4 percent.\n- Near-term outlook: real GDP growth around 3 percent in 2017, and expected to remain around 3 percent in the medium term.\n- Risks to the outlook:\n  - Regional tensions and uncertain trading partner growth.\n  - Domestic constraints from infrastructure or skills bottlenecks.\n  - Insufficient progress closing labor participation and productivity gaps for the Haredi (Ultra‑Orthodox Jewish) and Israeli‑Arab populations."
    },
    {
      "heading": "Monetary policy",
      "content": "- Inflation dynamics:\n  - Inflation expected to increase gradually, but timing uncertain.\n  - Upward pressures: rising wage growth, higher foreign inflation and commodity prices.\n  - Downward pressures: lower import prices partly due to shekel appreciation; narrowing margins (competition, internet purchases).\n- Policy recommendation:\n  - Maintain accommodative monetary policy pending a durable rise in inflation and inflation expectations.\n  - Avoid premature tightening; wait until inflation is heading back toward the 1-3 percent target band on a durable basis.\n- Observations:\n  - BOI’s accommodative stance in 2015-16 was appropriate given foreign spillovers and helped keep long-term inflation expectations near the center of the 1-3 percent target band.\n  - Some decline in short- and medium-term expectations argues for caution."
    },
    {
      "heading": "Housing and macroprudential policies",
      "content": "- Recent developments:\n  - Real housing prices doubled since 2007 and rose almost 8 percent on average in 2016.\n  - Housing completions have not kept pace with household formation; affordability is low with house price-to-income ratios significantly above many other countries.\n  - Growing share of households rent; rising rents reduce disposable income, affecting low‑income households most.\n- Recent reforms and assessment:\n  - Bringing relevant authorities under the Ministry of Finance is expediting land planning.\n  - Housing Cabinet actions address financing and urban renewal impediments; these should be expanded where supply is most needed.\n  - Buyer’s Price scheme helps some households buy a first house but benefits relatively few lottery winners and incurs significant off‑budget fiscal cost.\n  - Some recent tax measures may dampen near-term price rises through investor sales, but without supply changes price trends likely persist.\n- Policy recommendations to durably expand supply:\n  - Correct municipal incentives that discourage land release and timely building permits (residential property taxes are well below commercial rates).\n  - Improve public transport to relieve housing shortages in major centers.\n  - Reduce construction costs and build times by streamlining building regulations and opening residential construction to foreign competition.\n  - Charge taxes on undeveloped privately held land to promote development.\n  - Continue BOI macroprudential monitoring; measures have helped avoid excessive household debt."
    },
    {
      "heading": "Financial sector policies",
      "content": "- Supervisory strength and reforms:\n  - Israel’s banking system robustness stems from rigorous BOI supervision.\n  - A shift toward more risk‑focused supervision is welcome to lower compliance costs.\n  - Establishment of an independent Capital Markets, Insurance, and Savings Authority is notable.\n  - Implement Solvency II for insurance to ensure sector resilience.\n  - Legislation for the Financial Stability Committee should be enacted to improve regulator coordination and information sharing.\n- Measures to improve efficiency and competition:\n  - Banking ID card available to improve customer information; a credit register is in development.\n  - Policies enabling electronic banking and expanded access to payment systems; increased sharing of IT infrastructure.\n  - Separation of credit card companies from the two largest banks to promote competition, while keeping BOI supervision.\n  - Enact securitization legislation to facilitate funding of payment companies.\n- Policy recommendations for financial stability and competition:\n  - Establish deposit insurance with appropriate coverage limits and enhance bank resolution tools before lowering minimum capital requirements for bank entry.\n  - Safeguard operational independence of financial regulators to reduce regulatory uncertainty and avoid deterring new entrants."
    },
    {
      "heading": "Fiscal policy",
      "content": "- 2016 performance:\n  - Central government deficit: 2.1 percent of GDP (below the 2.9 percent target).\n  - General government debt declined by almost 2 percentage points to 62 percent of GDP.\n- 2017–18 budget and outlook:\n  - Central government deficit targets for both 2017 and 2018 raised to 2.9 percent of GDP, from 2½ and 2¼ percent respectively.\n  - In practice, the deficit is likely to be about 2¾ percent of GDP in 2017‑18 given prudent revenue projections and firm spending control.\n  - On existing commitments, deficits of about 3 percent of GDP can be expected in later years.\n  - Debt ratio projected to rise 1½ percentage points in the next five years, to above the advanced economy median.\n- Policy priorities and recommendations:\n  - Fiscal policy should do more to support growth potential via reforms in education and vocational training, and increased resources for implementation.\n  - Timely implementation and likely increased investment in public transport to address road congestion and productivity threats.\n  - Contain pressures on healthcare resources while recognizing public service queue issues; recent steps to contain private insurer pressures are appropriate even at some budgetary cost.\n  - Protect fiscal buffers while funding investments by:\n    - Adhering to the multi‑year defense budget; defense spending is 6 percent of GDP and 20 percent of central government spending.\n    - Raising efficiency in central government administration and improving public procurement.\n    - Enhancing revenues by scaling back tax benefits (total 5 percent of GDP), replacing blanket VAT exemptions with targeted transfers, and improving revenue administration.\n  - Fiscal target:\n    - Aim to keep the central government deficit around 2 percent of GDP on average over the cycle (equivalent to 3 percent of GDP for general government on a Government Finance Statistics basis).\n    - A somewhat higher deficit could be appropriate temporarily to accommodate upfront reform costs with clear benefits for potential growth.\n  - If the deficit is below target in 2017, authorities should lock in overperformance and avoid tax cuts or spending increases without offsets.\n- Medium-term framework:\n  - Improvements: enhanced commitment controls (the Numerator rule) and an expenditure review procedure for 2017‑18.\n  - Political commitment is critical: government must observe the Numerator rule and include concrete measures in budgets to close deviations from fiscal rules.\n  - Set clear criteria that limit changes in spending and deficit ceilings to exceptional cases."
    },
    {
      "heading": "Structural reforms",
      "content": "- Inclusiveness and labor participation:\n  - Haredi and Israeli‑Arabs together make up 26 percent of the population but 43 percent of primary school children.\n  - Continued progress needed to raise labor participation of Haredi men and Israeli‑Arab women and to close education and skills gaps.\n- Product and market reforms:\n  - Review and modernize regulation to achieve public policy goals at lower cost; consider “one‑stop shop” for timely administration.\n  - State enterprise reform (notably in electricity) to reduce economy‑wide costs and make efficient use of natural gas.\n  - Lower barriers to external competition: expand quota increases and tariff cuts (especially on food), simplify import procedures, align Israeli standards with other advanced economies, and ease restrictions hindering foreign competition in services.\n- Targeted actions to reduce participation and productivity gaps:\n  - Skills: expand promising innovative employment programs for Haredi men and Israeli‑Arab women (currently 0.2 percent of GDP) with close employer coordination.\n  - Jobs: increase investments in connecting Haredi and Israeli‑Arab towns to main roads and public transport; support local business development and access to financing.\n  - Support for working poor:\n    - Minimum wage has risen to about 51 percent of average wages.\n    - Priority is to substantially increase the Earned Income Tax Credit (EITC), which currently averages just 7 percent of the minimum wage, at a total fiscal cost of 0.1 percent of GDP.\n    - Expand EITC eligibility, including lowering the minimum earnings threshold, to strengthen families’ capacity to support education and health and to reinforce work incentives."
    },
    {
      "heading": "Closing",
      "content": "- The mission team thanks the Israeli authorities and other counterparts for the excellent discussions and warm hospitality.\n\nIsrael: Staff Concluding Statement of the 2017 Article IV Mission\n\n---\n\n\n References\n\n- Israel and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2017/02/08/mcs02082017-israel-staff-concluding-statement-of-the-2017-article-iv-mission"
    }
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    "Published: February 8, 2017",
    "Israel’s economy grew solidly in 2016 with early estimates of 3.8 percent growth in 2016, partly reflecting one-off factors (notably a surge in vehicle purchases).",
    "Job creation was strong, at almost 3 percent in 2016, helping reduce the unemployment rate to 4.4 percent by the fourth quarter.",
    "CPI inflation was ‑0.2 percent in 2016; core inflation was 0.4 percent.",
    "Near-term outlook: real GDP growth around 3 percent in 2017, and expected to remain around 3 percent in the medium term.",
    "Risks to the outlook:",
    "Inflation dynamics:",
    "Policy recommendation:",
    "Observations:",
    "Recent developments:",
    "Recent reforms and assessment:",
    "Policy recommendations to durably expand supply:",
    "Supervisory strength and reforms:",
    "Measures to improve efficiency and competition:",
    "Policy recommendations for financial stability and competition:",
    "2016 performance:",
    "2017–18 budget and outlook:",
    "Policy priorities and recommendations:",
    "Medium-term framework:",
    "Inclusiveness and labor participation:",
    "Product and market reforms:",
    "Targeted actions to reduce participation and productivity gaps:",
    "The mission team thanks the Israeli authorities and other counterparts for the excellent discussions and warm hospitality.",
    "[Israel and the IMF](http://www.imf.org/external/country/ISR/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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