Israel: IMF Executive Board Concludes 2018 Article IV Consultation

IMF News, May 1, 2018

Source details

Canonical URL: Israel: IMF Executive Board Concludes 2018 Article IV Consultation

Israel recorded real GDP growth of 3.4 percent in 2017, “supported by solid domestic demand and higher global growth.”
Growth is expected to reach about 3.4 percent in 2018 and remain around this level in the next few years owing to the completion of major projects; staff projection: Real GDP 2018 = 3.3 percent (table projection).
Unemployment declined steadily to below four percent in early 2018.
Inflation developments:
- Overall CPI (percent change, end of period): 2017 = 1.5 percent; projection 2018 = 2.0 percent.
- Overall CPI (percent change, average): 2017 = 1.3 percent; projection 2018 = 1.8 percent.
External and exchange rate:
- External position assessed as broadly in line with fundamentals.
- Exchange rate flexibility recommended as the first line of defense; foreign exchange intervention should be limited to addressing disorderly market conditions.

Directors endorsed the staff appraisal concluding that Israel’s strong macroeconomic conditions offer an opportunity to implement further reforms to sustain strong and inclusive growth.
Short- to medium-term growth: Growth of almost 3½ percent in 2017; expected to remain at about 3½ percent in the next few years before moderating to around three percent.
Long-term risks: A rise in the population share of groups with lower labor productivity and participation and sizable infrastructure needs could weigh on growth potential and raise poverty.
Monetary policy: The Bank of Israel (BoI) has held the policy rate at 0.1 percent since February 2015; monetary policy should remain accommodative pending a durable rise in inflation and inflation expectations.
Financial stability and regulation: Reinforcing the financial stability framework is critical; legislation to establish the FSC is urgent to avoid oversight gaps.

Approve legislation to establish the FSC to avoid gaps in financial system oversight.
Entry by new banks encouraged, with appropriate deposit insurance and resolution arrangements to contain fiscal costs from potential failure.
Banking supervision should operationalize a risk-focused approach; adoption of Solvency II by the CMISA is welcome.
Harmonize regulations in areas of overlapping activity to avert regulatory arbitrage.
Safeguard the operational independence of financial regulators.
Strengthen measures to enhance competition; slowdown in housing construction despite high prices calls for reforms to make supply more responsive and improve housing affordability.

2017 fiscal deficit: two percent of GDP—but 2.9 percent excluding one-off revenues.
Public debt declined to 61 percent of GDP (table: General Government debt 2017 = 60.9, projection 2018 = 61.5).
Recommendations:
- Fiscal policy should support growth potential while building buffers.
- Expansion of disability benefits should be coupled with reform of eligibility requirements and testing for new entrants to protect labor participation and contain fiscal costs.
- Adhering to the former deficit target of 2.5 percent of GDP is preferable to gradually reduce debt in normal times.
- Ensure the Buyer’s Price program is temporary.
- Strengthen public investment management and develop an integrated long-term national infrastructure strategy through 2030.
- If public investment is increased, any rise in the public debt ratio should be modest and temporary; PPP liabilities should be managed carefully and reported in line with international best practices.
- Revenues should be the main source of non-debt financing, focusing on reducing tax benefits.

Business environment:
- Fundamental upgrades are critical, especially reducing bureaucratic bottlenecks.
- Continue reforms (including electricity sector); replace trade barriers on agricultural products with targeted subsidies.
- Implement a “one-stop shop” to assess regulatory requirements within a reasonable period; subject all proposals for new regulations to robust regulatory impact assessments.
- Make court procedures more efficient; consider a specialized court for complex antitrust cases.
Education and labor market:
- Deep reforms of education and training to reduce gaps in labor productivity and participation.
- Measures include higher standards for teachers, covering core subjects at all grades in Haredi schools, improving Hebrew teaching in Arab schools, and extending the short school day.
- Enhance vocational training and expand active labor market policies.
- To raise female labor participation and work hours: expand childcare support (especially for younger children) and continue increases in the female retirement age without introducing new incentives for early retirement.
- Promote locating workplaces near communities and enhancing public transportation.
Redistribution and poverty:
- Substantially expand the EITC and implement it more effectively to reduce inequality and poverty while containing fiscal costs by making transfers more targeted.

Real GDP (percent change): 2014 = 3.5; 2015 = 2.6; 2016 = 4.0; 2017 = 3.4; 2018 projection = 3.3.
Domestic demand and components (percent change): Private consumption 2016 = 6.1; Gross fixed investment 2016 = 11.9.
Unemployment rate (percent): 2014 = 5.9; 2015 = 5.3; 2016 = 4.8.
Gross national saving (percent of GDP): 2014 = 24.2; 2017 = 23.7; 2018 projection = 24.3.
Foreign saving (percent of GDP): 2014 = -4.0; 2017 = -3.0; 2018 projection = -2.8.
Gross capital formation (percent of GDP): 2017 = 20.7; 2018 projection = 20.9.
Central government revenues and grants (percent of GDP): 2017 = 26.9; 2018 projection = 25.9.
Central government total expenditure (percent of GDP): 2017 = 28.9; 2018 projection = 28.8.
Overall central government balance (percent of GDP): 2017 = -2.9.
General Government debt (percent of GDP): 2014 = 66.1; 2015 = 64.2; 2016 = 62.3; 2017 = 60.9; 2018 projection = 61.5.
Foreign currency external debt (percent of GDP): 2014 = 14.9; 2017 = 12.8.
Exports of goods and services (percent of GDP): 2017 = 29.2; 2018 projection = 30.0.
Imports of goods and services (percent of GDP): 2017 = 27.5; 2018 projection = 29.0.
Foreign reserves (eop, US$ billions): 2014 = 86.1; 2017 = 113.0; 2018 projection = 120.6.
NIS per U.S. dollar (period average): 2017 = 3.60.
Nominal effective exchange rate (2005=100): 2017 = 119.1.
Real effective exchange rate (2005=100): 2017 = 109.7.

The BoI has held the policy rate at 0.1 percent since February 2015 and signaled that policy will remain accommodative as long as necessary to entrench inflation within the 1–3 percent target range.
It is proposed that the next Article IV consultation with Israel take place on the standard 12-month cycle.

International Monetary Fund. Israel: IMF Executive Board Concludes 2018 Article IV Consultation, May 1, 2018.