IMF Executive Board Concludes 2009 Article IV Consultation with Israel

Public Information Notice (PIN) No. 10/10
January 25, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Israel is also available

On January 15, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Israel.1


The economy expanded rapidly following the 2001–03 downturn, with growth averaging over
5 percent in 2004–07. Supported by strong exports and contained government spending, the external current account remained in significant surplus while the exchange rate was largely stable. Inflation stayed close to the target band, before soaring fuel prices led to its sharp upward climb after mid-2007. Driven by strong fiscal tightening efforts, and also aided by rapid economic growth, the central government fiscal accounts steadily improved from a deficit of 5¼ percent of GDP in 2003 to balance in 2007, whereas public debt was lowered from 99 percent of GDP to below 80 percent of GDP during the period.

Trends changed, however, in the latter half of 2008, as the deepening global financial crisis took its toll. Exports and growth slowed, reducing growth to 4 percent and the current account surplus to 1 percent of GDP for the year. Alongside, unhindered operation of automatic stabilizers pushed the central government deficit up to 2¼ percent of GDP in 2008. Banks—with robust balance sheets—remained relatively resilient, although non-bank financial institutions and the domestic corporate bond market were strained. In this context, Israel’s “safe haven” appeal rose and capital inflows surged, leading the real effective exchange rate to rise by some 15 percent between end-2007 and mid-2008.

Strong policy measures were adopted in response to the impact of the global crisis. Near-term fiscal targets for expenditure and deficit were relaxed in the 2009–10 budget, even though an increase in some excises and a temporary 1 percentage point rise in the Value Added Tax (VAT) rate—programmed to be reversed at end-2010—acted as a partial offset. With headline inflation and inflation expectations rapidly falling and shekel appreciating, the Bank of Israel rapidly reduced policy rates from 4.25 percent in February 2008 to 0.5 percent in April 2009, and adopted unconventional monetary measures—intervening in the foreign exchange (FX) market and purchasing long-dated government bonds. Targeted efforts to relieve financial market strains were also taken, including setting up public-private bond funds and offering guarantees for bank capital raising.

In part reflecting this policy support, growth returned in the second quarter of 2009 and signs of a sustained recovery have strengthened in recent months. In this context, fiscal receipts have surprised on the upside, likely bringing the central government deficit to 5 percent of GDP and debt to about 80 percent of GDP for 2009, both better than budgeted. Inflation expectations have recently risen back to within the target band and the current account surplus has rebounded strongly on the back of reviving exports. Against this background, the Bank of Israel discontinued its pre-announced FX interventions and government bond purchases in Summer 2009, and began raising policy rates for September 2009, to 1.25 percent for January 2010. And on the fiscal side, the authorities reduced the VAT rate by half a percentage point to 16 percent from end-December, bringing forward by one year half of the cut that had been planned for end-2010.

Executive Board Assessment

Directors observed that the resilience of the Israeli economy during the global crisis reflected strong policy responses, robust fundamentals, prudent bank supervision, public debt reduction, and structural reforms in recent years.

Directors cautioned, however, that the global outlook remains highly uncertain, and the slower medium-term global growth would have adverse implications for Israel’s potential growth rate. They therefore agreed that long-term anchors in Israel’s policy frameworks should be strengthened to allow a flexible response of policies to short-term developments and to stimulate long-term supply. Directors welcomed the various steps that have been taken in this direction--including the adoption of a declining target path for fiscal deficits, the recent tightening of the monetary stance, steps towards adoption of the new Law for the Bank of Israel, and various actions to bolster prudential supervision.

At the same time, Directors recognized that challenges remain. The credibility of the new deficit ceiling rules has yet to be fully established. Public debt is high and is expected to rise in the near term before resuming its downward track. Although economic growth has resumed relatively early, upward pressures on the shekel could pose new risks. In this light, Directors underscored that further efforts are needed to address downside risks—notably, moderation in the forthcoming public sector wage settlements, including as a signal to private sector settlements.

Directors noted the importance of strengthening the fiscal framework. Steps to reconcile aggregate spending ceilings with the sum of undertakings on specific programs should be a priority. A reform of the fiscal rules—with the adoption of a framework anchored by explicit medium-term debt targets—would help establish the priority assigned to debt reduction and allow fiscal flexibility in the short term. This should be accompanied by multi-year spending ceilings with appropriate countercyclical properties. Strengthened medium-term budget planning would reinforce credibility and improve spending efficiency.

Given economic recovery and the history of high inflation, Directors welcomed the steps taken to begin withdrawal from unconventional monetary policy measures—including preprogrammed foreign exchange intervention—and to increase interest rates. They noted the authorities’ commitment to avoid targeting specific levels of the exchange rate. Discretionary interventions should be formally terminated, for all but the most exceptional market circumstances, once the policy interest rate is well above its effective floor on a sustained basis. Directors urged an early completion of all steps to adopt the Bank of Israel Law.

While noting that the Israeli banking system has weathered the crisis well, Directors saw scope for a further strengthening of the banking prudential framework. Comprehensive banking stress tests, regular publication of a financial stability report by the Bank of Israel, and closer coordination among various regulators would all strengthen transparency and stability. Some Directors recommended consideration of a formal deposit insurance scheme.

Directors welcomed the priority attached by the authorities to effective supervision of the non-banking sector, noting a need to strengthen the budget, staff, and autonomy of the non-bank regulators. In this context, separation of the pension and insurance regulator from the Ministry of Finance would reflect international best practice. Regular publication of risk analyses by non-bank regulators was also encouraged.

Israel: Selected Economic and Financial Indicators, 2005−10
(Percent change, unless otherwise indicated)
  2005 2006 2007 2008 2009 1/ 2010 1/

National accounts indicators (constant prices)


Domestic demand

4.8 4.1 6.2 2.8 -1.1 2.8

Private consumption

3.5 4.3 6.3 3.6 1.2 2.3

Public consumption

1.6 3.0 3.4 2.1 1.8 1.8

Gross capital formation

13.8 5.2 10.1 1.4 -11.7 6.0

Fixed capital formation

4.0 11.3 15.3 4.4 -3.3 4.0

Imports of goods and services

3.5 3.3 11.9 2.4 -13.7 6.3

Exports of goods and services

4.3 6.0 9.3 5.2 -10.8 5.4

Real GDP

5.1 5.3 5.2 4.0 0.1 2.5

Labor market indicators


Unemployment rate (percent)

9.0 8.4 7.3 6.2 7.8 7.4

Real wages 2/

1.0 1.3 1.7 -0.7 -2.6



CPI (end period)

2.4 -0.1 3.4 3.8 2.6 2.1

CPI (period average)

1.4 2.1 0.5 4.6 3.6 2.3

CPI (excluding housing and energy, end period)

0.7 1.9 1.3 4.5

Interest rates (average, percent): BOI policy rate 3/

3.7 5.1 3.9 3.7 0.8

Money and credit (period average)


Private sector credit 4/

7.1 4.3 6.7 9.2 1.2

Narrow money (M1) 5/

17.5 13.7 15.3 14.1 55.2

Broad money (M3) 4/

7.9 7.4 12.9 8.0 15.2

Public finance (percent of GDP)


Central government revenue

35.1 35.2 35.4 31.6 29.1 29.8

Central government expenditure

37.0 36.2 35.4 33.8 34.2 33.9

Central government balance 6/

-1.9 -1.0 0.0 -2.2 -5.1 -4.1

General government balance 7/

-4.8 -1.8 -0.8 -2.8 -5.7 -4.7

General government debt

93.5 84.4 78.1 76.8 79.9 80.9

Balance of payments


Trade balance (percent of GDP)

-3.1 -2.6 -3.4 -3.6 -1.9 -2.2

Current account (percent of GDP)

3.1 5.0 2.8 1.0 3.3 2.0

Foreign direct investment (percent of GDP)

3.2 10.1 5.4 4.8 2.3 2.2

Foreign reserves (end period, billions of U.S. dollars) 3/

28.3 29.4 28.8 42.7 61.5

Exchange rate and terms of trade indices


NEER (period average) 5/

-0.7 0.4 3.9 11.4 -5.7

REER (period average) 5/

-2.0 0.0 1.8 12.3 -2.5

Terms of trade (index, 2000=100)

100.0 98.6 96.4 97.9

Sources: Bank of Israel, Annual Report; Central Bureau of Statistics; IMF, International Financial Statistics; and IMF staff estimates and projections.
1/ IMF staff projections.
2/ Data for 2009 as of August.
3/ Data for 2009 as of November.
4/ Data for 2009 as of September.
5/ Data for 2009 as of October.
6/ National definition, cash basis.
7/ International definition, accrual basis. On the difference between central and general government deficits during 2003–06: much of it is accounted for by the difference between accrual and cash bases accounting. On the latter, the key factor is the CPI indexation component that is paid on all NIS debt when it matures and is recorded below the line in the central government balance, but above the line in the general government balance when it accrues.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100