IMF Executive Board Concludes 2023 Article IV Consultation with Israel
June 15, 2023
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Israel.
Israel’s impressive economic performance continued in 2022. GDP increased 6.5 percent in 2022, led by domestic demand, with an increase in investment and consumption and with a minimal contribution from the government, as fiscal consolidation gained pace. Supported by strong economic growth and prudent fiscal policies, debt-to-GDP ratios fell to about 61 percent in 2022, down from about 71 percent during the Pandemic. Inflation remained high, at about 5 percent by end 2022, with the Central Bank of Israel following a tightening monetary policy to bring inflation rates on check. External demand was negative on net, as imports outgrew exports.
Economic activity is expected to decelerate in 2023, and thereafter converge towards its potential. Staff projects economic growth to slow to about 2.5 percent in 2023, as households purchasing power moderates and firms rein in investment. The labor market is expected to remain tight and the unemployment rate is expected to marginally increase. Fiscal buffers are expected to be maintained as public debt to GDP is projected to decrease further and stay below 60 percent. The external sector is projected to remain robust. As domestic demand starts recovering from 2024, the growth rate is anticipated to converge towards its potential rate, estimated at about 3.8 percent; thus, closing the output gap in the medium term.
Executive Board Assessment[2]
Executive Directors commended Israel’s remarkable economic performance and strong external position, noting that economic growth would slow down this year as it returns to potential over the medium term. Given downside risks to the outlook, Directors recommended that policies be geared toward protecting fiscal buffers, reducing inflation, maintaining macro-financial resilience, and enhancing potential growth. They also cautioned that the uncertainty created by the proposed judicial reform could have a negative impact on the economy and called for a politically sustainable solution. Also, as in any country, maintaining the strength of the rule of law would be important for economic success.
They generally agreed that the fiscal stance is appropriate. Given the need to protect fiscal buffers, they considered that raising growth-enhancing spending in education and infrastructure will require additional revenue measures. Directors also encouraged the authorities to strengthen the fiscal framework, including by improving budgetary planning and considering the establishment of a fiscal council.
They commended the Bank of Israel’s tight monetary policy stance given elevated inflation and a tight labor market. They stressed that monetary policy should remain tight until there are clearer signs that aggregate demand is cooling and welcomed the central bank’s readiness to tighten policy further if needed. They emphasized that market forces should be allowed to continue to set the price of the shekel, with foreign exchange interventions limited to addressing disorderly market conditions.
They welcomed that the banking system remains broadly robust, while calling for close monitoring of risks, particularly those related to real estate lending. They also welcomed the tightening of macroprudential policies and encouraged efforts to raise the supply of housing. Further measures to improve the supervisory and AML/CFT frameworks would also be important.
They underscored the importance of enhancing potential growth and addressing inequality through reforms to close skill gaps, improve infrastructure, and increase competition. They emphasized that education reforms and active labor market policies are particularly important for better integrating minorities in the economy. Directors also stressed the importance of reducing barriers to product market competition to address rising cost of living concerns. Regarding the climate agenda, they encouraged the authorities to press ahead with their commitments to reduce greenhouse gas emissions and adapt to climate change impacts.
[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: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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Israel: Selected Economic Indicators, 2018–2028 |
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