IMF Executive Board Concludes 2020 Article IV Consultation with Israel

Washington, DC: On January 19, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Israel.

The COVID-19 pandemic has severely impacted Israel’s society and economy. While Israel’s strong growth and large pre-crisis buffers mean Israel entered the crisis with relatively low vulnerabilities, real GDP still contracted by 3 percent (yoy) in the first three quarters of 2020. The scale of the COVID-19 spread required strict containment and mitigation measures, including three nation-wide lockdowns. Nonetheless, the economic contraction was smaller than in other advanced economies in part due to the resilience of the Israeli economy, supported by its large high-tech sector.

The authorities introduced policies to curb the economic fallout of the pandemic. On the fiscal front, a fiscal package of 10¼ percent of GDP for 2020 was approved by parliament. The package included expanded health funding, benefits for unemployed and furloughed workers, grants for the self-employed, and grants and loan guarantees for small and medium enterprises. The central bank’s response included measures to ease financial conditions, provide liquidity, and ease access to financial services and credit, including for households and SMEs. Macroprudential and supervisory requirements were also eased, allowing banks to utilize their capital and liquidity buffers in support of the economy.

Executive Board Assessment [2]

Executive Directors commended the authorities for the appropriately rapid and large monetary and fiscal support in response to the COVID-19 pandemic, which has helped soften its impact on the country. They also welcomed the authorities’ efforts for early wide-spread vaccination, which could lead to a faster recovery. Going forward, as uncertainties remain high, Directors saw merit in continued supportive policies, as well as measures to strengthen social protection and reforms to enhance the resilience of the economy.

Directors concurred that fiscal policy should remain supportive and gradually become more targeted. Prompt adoption of the 2021 budget would help prioritize spending, position the economy for growth, and reduce economic uncertainty associated with the pandemic. Directors considered that, if further downside risks materialize, fiscal support should be maintained beyond mid-2021. They also noted that once the recovery is on firm ground, fiscal efforts will be needed to restore pre-crisis buffers and rebuild fiscal space.

Directors commended the Bank of Israel’s swift response to the crisis and concurred that monetary policy should remain accommodative. They agreed that, going forward, as inflation trends toward the target band, FX intervention should cease as a tool for managing inflation expectations and its use be limited to addressing disorderly market conditions.

Directors noted that Israel’s financial system is well prepared to face the impact of the pandemic. Banks’ capital remains strong, with substantial capacity to face large shocks. Nonetheless, Directors stressed that unless downside risks materialize, the minimum regulatory capital should not be lowered further, and structural buffers should eventually be restored. They also noted that efficient handling of a potential increase in nonperforming loans would help limit debt overhang and spur capital reallocation.

Directors emphasized that structural reforms should aim to tackle pre-COVID legacies, including low productivity and high inequality. Better funded labor activation policies, digitalization, and education reforms would help strengthen marketable skills of low-skilled workers, who were especially affected by the pandemic. Directors also encouraged completing governance reforms, particularly in procurement and AML/CFT.

Israel: Selected Economic Indicators, 2016-2022

2016

2017

2018

2019

2020

2021

2022

Projections

Real Economy (percent change)

Real GDP

3.8

3.6

3.5

3.4

-4.0

4.1

5.0

Domestic demand

6.7

3.9

3.4

3.5

-6.8

6.4

5.4

Private consumption

6.4

3.3

3.7

3.8

-10.0

7.3

6.7

Public consumption

4.2

3.5

3.9

2.8

2.3

5.0

3.0

Gross capital formation

10.4

6.0

2.5

3.5

-7.7

5.6

4.9

Gross fixed investment

12.7

4.6

5.1

2.5

-9.2

7.3

4.9

Foreign demand (contribution to growth)

-2.7

-0.4

0.0

0.0

2.8

-2.1

-0.4

Potential GDP

3.5

3.4

3.4

3.0

1.8

3.4

3.3

Output gap (percent of potential)

-0.2

0.0

0.1

0.6

-5.2

-4.6

-3.0

Unemployment rate (percent)

4.8

4.2

4.0

3.8

4.5

5.9

4.9

Overall CPI (percent change, end of period)

-0.2

0.4

0.8

0.6

-0.7

0.5

0.5

Overall CPI (percent change, average)

-0.5

0.2

0.8

0.8

-0.6

0.1

0.5

GDP Deflator (percent change, average)

1.0

0.2

1.3

2.2

-0.8

1.1

0.7

Saving and investment balance

Gross national saving (percent of GDP)

24.4

24.6

23.8

24.8

24.7

24.4

24.2

Foreign saving (percent of GDP)

-3.3

-3.1

-2.1

-3.4

-4.0

-3.7

-3.5

Gross capital formation (percent of GDP)

21.1

21.5

21.7

21.4

20.6

20.7

20.6

Public Finance (percent of GDP)

Central government

Revenues and grants

26.3

26.5

25.5

24.7

23.1

24.7

24.7

Total expenditure

28.4

28.4

28.4

28.4

36.5

34.0

31.7

Overall balance

-2.1

-2.0

-2.9

-3.7

-13.2

-9.0

-6.7

General Government

Overall balance

-1.4

-1.1

-3.6

-3.9

-13.3

-9.7

-6.8

Debt

62.1

60.6

60.9

60.0

73.0

79.1

81.6

Balance of Payments (percent of GDP)

Current account balance

3.3

3.1

2.1

3.4

4.0

3.7

3.5

Goods and services balance

1.4

1.1

0.7

1.9

4.2

3.1

2.9

Foreign reserves (eop, US$ billions)

98.4

113.0

115.3

126.0

161.3

165.6

169.5

Exchange Rate

NIS per U.S. dollar (period average)

3.84

3.60

3.56

3.45

Nominal effective exchange rate (2005=100)

111.3

118.7

123.2

125.5

Real effective exchange rate (2005=100)

103.3

108.1

108.6

109.1

Terms of trade (2010 = 100)

108.2

104.6

95.3

98.7

101.9

100.4

100.5

Sources: Bank of Israel; Central Bureau of Statistics; Haver Analytics; and IMF staff estimates and projections.


[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.

[2] 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: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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