An International Monetary Fund (IMF) that spent the past two
weeks in Israel studying the situation said in its report
presented on Monday to Bank of Israel Governor David Klein
and Finance Minister Silvan Shalom that long-term growth
prospects for the Israeli economy remain bright,
particularly once a lasting solution to the security problem
is reached. The mission also praised Israeli authorities for
establishing credibility on both the fiscal and monetary
policy fronts.
The mission noted that in the first three quarters of 2000
the Israeli economy grew at the astounding yearly rate of
seven percent. In the fourth quarter there was a sharp
deceleration in growth due mainly to the global turnaround
in the high-tech boom as well as Israel's security problem.
The overall growth for the year was a quite respectable 5.9
percent.
Now, says the IMF, "The critical task confronting policy
makers is to formulate economic policies so as to weather
these shocks, maintaining stability and minimizing economic
costs borne by the population, until global economic
conditions rebound and the security situation improves."
Observers have not been able to determine the exact impact
of the various factors on the Israeli economy. Either the hi-
tech bust or the security situation could have had a severe
impact on the situation in Israel. In fact, even the
combined impact has been pretty moderate so far.
For this year, IMF economists forecast that Israel's gross
domestic product (GDP) will grow by only 1.5-2 percent and
this could even prove optimistic, given the global downturn
of hi-tech and the local security situation. The report says
that the uncertainty in their prediction is greater than
usual. The current Israeli government forecast is for 2-3
percent growth in 2001.
The main recommendations of the report were that Israel
continue to reduce interest rates, that the government keep
a rein on fiscal spending, and that the foreign exchange
trading band be abolished.
The delegation said that unemployment remains high and may
go higher. The government officially says it could go as
high as 9.3 percent, but has informally said that it could
go even higher, perhaps as much as 10 percent. A record
180,500 jobless have registered with the Employment Services
so far this year. The IMF did not expect much inflation,
noting that the official forecast of 2.5-3.5 percent
inflation may prove high.
The result is that the central bank has room to continue
lowering interest rates. The cut in short-term interest
rates since the beginning of October has been 1.7 percent in
nominal terms but only 0.7 percent in real terms because of
the inflation factor. "As a result, current real rates are
still high, at around 6 percent," the IMF said. This means
that the difference between the expected inflation and the
interest rate is about six percent, which is historically
very high -- more than double the normal rate in a stable
economy.
Some observers believe that the high real interest rate is
an unnecessary burden on the economy, but Bank of Israel
governor David Klein maintains that the stability provided
by conservative management of the money supply is more
important than low interest rates.
The IMF called on economic and political decision makers to
abide by the original budgetary deficit target of 1.75
percent of GDP. The IMF called for budget cuts to balance
the added military allocations. However if tax revenues fall
short of their expected target, the IMF said a slight
deviation will be tolerated. The Treasury has already
projected a NIS 3-5 billion shortfall in tax revenues this
year, placing further pressure on the NIS 245.8b. state
budget.
The IMF also recommended that the shekel's trading band be
eliminated, a measure also sought by the central bank but
opposed by the government. It said that this restriction is
outdated now that inflation in Israel is comparable to that
in the rest of the West.
The IMF report was compiled by four economists from the
European department of the fund who spent the last two weeks
in Israel. The report will be submitted to the IMF in
Washington and will come up for discussion in the
institutions of the fund. It will then be included in the
annual report of the IMF that comprises reviews on the close
to 200 member-states of the fund.
Stanley Fisher, the outgoing deputy director of the IMF, was
guest of honor yesterday when the IMF delegation presented
its report. Fisher earlier met Prime Minister Ariel
Sharon.
Fisher, who is Jewish, was involved in the recovery and
stabilization plan for the Israeli economy in 1985. A year
ago his name was mentioned as a possible candidate for
governor of the Bank of Israel. A native of Zimbabwe, he was
also Africa's candidate for the presidency of the IMF.
Fisher said that he told the prime minister that Israel's
achievements regarding inflation and the budget had made the
country attractive to foreign investments -- successes
reflected in Israel's high financial ranking. Fisher also
said that the government, despite all the problems it faces,
must preserve the framework of the 2001 state budget.
In other news, the British government has officially
declared Israel the 14th nation targeted for increased
economic cooperation. According to the Federation of Israeli
Chambers of Commerce, the new status will mean allocation of
some £1 million for trade promotion between the countries.
The announcement was made by Ambassador Francis Cornish at a
meeting of the Israel Britain Business Council in Jerusalem
on Monday.
