IMF Executive Board Concludes 2022 Article IV Consultation with Israel
IMF News, March 21, 2022
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- Published: March 21, 2022
Executive summary and context
- The Executive Board concluded the Article IV consultation with Israel.
- Israel’s economy "has weathered the pandemic exceptionally well." Key supports included the Bank of Israel’s (BOI) monetary and prudential measures and fiscal measures for households, businesses, and the public health system.
- Israel implemented a "world-leading vaccination campaign" that helped mitigate the pandemic’s impact.
- The war in Ukraine had, "thus far," a limited impact on Israel’s economy given its low direct exposure to Ukraine and Russia, but "the economic outlook is subject to significant uncertainty."
Recent performance (2020–2021)
- After a mild downturn in 2020, "real GDP exceeded its pre-pandemic level reaching growth of 8.2 percent in 2021."
- Drivers of the recovery: consumption and the high-tech sector.
- Fiscal outcomes in 2021:
- Fiscal deficit: "4.3 percent of GDP."
- Public debt declined to "69 percent of GDP."
- External and labor market:
- Current account surplus: "4.6 percent of GDP," driven by exports of high-tech services.
- Unemployment declined to near pre-pandemic levels; job vacancies are high across all sectors.
- Banking sector: "Banks’ solid capital, liquidity, and asset quality" supported the economy.
Executive Board assessment, growth, and inflation
- Growth outlook:
- "The economic recovery is projected to solidify in 2022 and over the medium term."
- Growth will be supported by strong private consumption, investment, and net exports.
- Inflation and external position:
- "Inflation is projected to ease and stay within the BOI’s target band over the medium term."
- "The external position is assessed as moderately stronger than the level implied by medium‑term fundamentals and desirable policies."
- Policy posture: "The policy mix should remain agile in the face of high growth and still significant uncertainty."
Fiscal policy assessment and recommendations
- 2022 fiscal stance: "The planned 2022 fiscal stance is appropriate," with pandemic support targeted to most affected sectors and vulnerable groups.
- Medium-term fiscal path: aims "to put debt on a downward path" and to "rebuild pre-pandemic buffers."
- Implementation challenges and options:
- Authorities’ planned expenditure restraint "may be challenging to implement given Israel’s already low civil spending."
- Recommendation: a review of public spending efficiency.
- There is "scope to increase tax revenues by broadening the tax base and making the tax system more progressive."
- Such revenue measures "would also support a needed increase in growth-enhancing spending."
- Fiscal framework: "should be strengthened."
- A review should assess appropriateness of fiscal rules, the necessary size of fiscal buffers, ability to face exceptional events, and the potential usefulness of establishing an independent fiscal council.
Monetary policy and exchange rate guidance
- Inflation pressures: "Inflation pressures have risen, calling for commencing data-driven monetary policy tightening."
- Inflation has exceeded the BOI’s target range despite shekel appreciation.
- "Signs of underlying inflationary pressures are strong, and inflation expectations have increased quickly in line with CPI."
- Policy recommendations:
- "The conditions are in place for the BoI to start raising the policy rate gradually."
- "Foreign exchange purchases should taper off, allowing the shekel’s value to be determined by market forces, without precluding future purchases should appreciation pressures threaten to move inflation or inflation expectations below the target band."
Financial stability and housing
- "Emerging risks in the financial system need to be addressed."
- Housing risks: stress the need to advance structural measures to ease housing supply.
- Macroprudential policy: "Further tightening of macroprudential measures could help stem banks’ exposures to housing market risks and prevent potentially unsustainable borrowing."
- Regulatory architecture: Israel’s financial regulatory framework "has served the economy well," and establishing a committee to review it is welcome in view of greater competition and financial innovation.
Structural reforms and climate policy
- Structural reforms to foster productivity, labor reallocation, and inclusiveness:
- Expand and improve vocational training through active labor market policies.
- Better align different education streams with labor market needs.
- Continue efforts to reduce trade barriers and red tape to promote resource allocation, investment, and innovation.
- Accelerate digital and physical infrastructure to improve job accessibility.
- Climate-related policy:
- "Further efforts are needed meet the authorities’ climate objectives."
- Options cited include larger increases in carbon prices and providing greater regulatory and fiscal support for Israel’s innovative green technologies.
Selected economic indicators and key statistics (highlights from 2017–2023 table)
- Real GDP (percent change):
- 2017: 4.4
- 2018: 4.0
- 2019: 3.8
- 2020: -2.2
- 2021: 8.1
- 2022 (projection): 5.0
- 2023 (projection): 3.6
- Private consumption (percent change):
- 2019: 3.9
- 2020: -9.2
- 2021: 11.7
- 2022 (projection): 6.6
- 2023 (projection): 4.8
- Gross national saving (percent of GDP):
- 2017: 24.7
- 2018: 27.6
- 2019: 27.3
- 2020: 27.0
- 2021: 26.7
- Foreign saving (percent of GDP):
- 2017: -3.6
- 2018: -2.8
- 2019: -3.4
- 2020: -5.4
- 2021: -4.6
- 2022 (projection): -4.5
- 2023 (projection): -4.2
- Gross capital formation (percent of GDP):
- 2017: 21.1
- 2018: 21.9
- 2019: 21.3
- 2020: 22.1
- 2021: 22.7
- 2022 (projection): 22.5
- 2023 (projection): 22.4
- Public finance (central government, percent of GDP):
- Revenues and grants:
- 2017: 26.3
- 2018: 25.2
- 2019: 24.5
- 2020: 26.6
- 2021: 24.4
- 2022 (projection): 24.2
- Total expenditure:
- 2017: 28.2
- 2018: 28.1
- 2019: 34.1
- 2020: 31.0
- 2021: 28.0
- 2022 (projection): 27.5
- Overall balance:
- 2017: -1.9
- 2018: -2.9
- 2019: -3.7
- 2020: -11.4
- 2021: -4.4
- 2022 (projection): -3.2
- General government debt (percent of GDP):
- 2017: 60.2
- 2018: 60.4
- 2019: 59.5
- 2020: 71.7
- 2021: 69.0
- 2022 (projection): 67.1
- 2023 (projection): 66.4
- Current account balance (percent of GDP):
- 2017: 5.4
- 2018: 4.6
- 2019: [table lists only through 2018 in prose; current account in table shows earlier values]
- Foreign reserves (eop, US$ billions):
- 2017: 113.0
- 2018: 115.3
- 2019: 126.0
- 2020: 173.3
- 2021: 213.0
- 2022 (projection): 243.9
- 2023 (projection): 256.6
- Exchange rate and effective indices:
- NIS per U.S. dollar (period average):
- 2017: 3.60
- 2018: 3.59
- 2019: 3.56
- 2020: 3.44
- 2021: 3.23
- 2022 (projection): 3.12
- Nominal effective exchange rate (2005=100):
- 2017: 118.7
- 2018: 118.3
- 2019: 123.2
- 2020: 128.8
- 2021: 134.6
- 2022 (projection): 138.8
- 2023 (projection): 139.7
- Real effective exchange rate (2005=100):
- 2017: 108.2
- 2018: 106.0
- 2019: 108.9
- 2020: 111.3
- 2021: 114.0
- 2022 (projection): 115.6
- 2023 (projection): 116.2
- Terms of trade (2010 = 100):
- 2017: 104.6
- 2018: 95.3
- 2019: 98.7
- 2020: 99.5
- 2021: 92.8
- 2022 (projection): 92.7
- 2023 (projection): 94.0
Source: IMF Executive Board Concludes 2022 Article IV Consultation with Israel (Press Release No. 22/82).
