In its latest report on the state of the Israeli economy, the International Monetary Fund (IMF) welcomes Minister of Finance Moshe Kahlon's intention of boosting competition, particularly in banking, but warns that the stability of the banking system needs to be ensured.
The IMF finds two main points for which to praise Israel, namely the economy's good performance in terms of GDP growth, and the rise in the rate of participation in the workforce from 59% in 2007 to 68% today. Alongside this, however, the IMF finds some "challenges" for Israeli policy makers: "The fiscal deficit remains stubbornly high, leaving limited buffers to respond to shocks. Inflation is negative well below the Bank of Israel’s targetbut housing prices continue to rise. Labor productivity is low and the gap with the United States is widening. And income inequality is among the highest in advanced countries," the report states.
In effect, the IMF criticizes fiscal policy in Israel as something of a bluff. "If we use international accounting standards and include the inflation compensation of indexed bonds above instead of below the line as is currently done, the deficit is almost 1 percent higher than the 2½-3 percent reported in Israel… In theory, Israel has an expenditure rule and a deficit rule underpinned by a debt target, but they have been revised so often that in practice there is no effective fiscal anchor," the report says. The IMF characterizes Israel's fiscal deficit as "high, structural, and persistent," and calls for reduction of at least 0.5% in relation to 2015 in the 2016 budget.
The Bank of Israel also called for government spending cuts in order to reduce the fiscal deficit yesterday. In its regular report "Recent Economic Developments", the central bank estimates the deficit at 3.3% of GDP in 2016, and 3.5% of GDP in 2017-2020, "significantly above the deficit target." The Bank of Israel estimates that government spending will exceed the expenditure ceiling by NIS 10 billion in 2016, and by NIS 14 billion in 2020.
The IMF also has some cautionary words about Israel's financial system. "Banking sector credit to the housing/real estate/construction sector accounts for around 44 percent of loans," it notes. As for reforms in the sector, the IMF says, "Increasing competition could lead to reduced fees, improved services, and increased access to credit, but it could also raise risks to financial stabilityparticularly if it would lead to weak new banks or rapid credit growth and an erosion of credit standards. It will thus be important to keep prudential policies strong."
The IMF identifies low productivity as a key weakness in the Israeli economy. Israel's GDP growth in the past couple of decades has largely come from population growth, it says, and it warns that without a rise in labor productivity, GDP growth is likely to slow. "Raising productivity should become a priority," the report states, adding, "Israel has too much regulation and restriction, and not enough competition."
Published by Globes [online], Israel business news - www.globes-online.com - on June 25, 2015