Abstract
The Israeli economy has seen both rapid growth and price stability, and subsequently a very sharp deceleration. The design and execution of fiscal policy have improved markedly in recent years, but further progress is needed. It is also important to make further, steady progress with the structural and institutional reform agenda to create a more efficient and flexible economy and to enhance future growth prospects. Data provision is generally adequate for surveillance purposes, though the quality of some statistics could be enhanced.
1. This supplement contains information on recent economic developments in Israel that has become available since the circulation of the staff report for the Article IV consultation (SM/01/214, July 9, 2001). The information does not alter the general thrust of the staff appraisal.
2. The adverse environment, external and security-related, has seen little improvement. As a result, tourism is continuing to suffer—a decline of more than 50 percent in recent months (relative to the same period last year) in terms of the number of tourists from abroad—and the trade with the occupied territories and the utilization of Palestinian labor force remain seriously constrained. Industrial production shrank by 1.1 percent in May over April, bringing the cumulative decline in the first five months of this year to 1.7 percent.1 Both exports and imports have been weakening over the past months, with imports falling particularly sharply in June, resulting in some improvement in the trade deficit. Among generally weak economic indicators, retail sales are strong, growing by 3.2 percent in the second quarter after a moderate decline in the first quarter. Staffs growth forecast of 1.8 percent this year was based on the assumption that the security situation would begin to improve by mid-year. Unfortunately, this has not happened so far, and staff has revised the growth projection downward to ¾ percent.
3. The Consumer Price Index (CPI) rose by 0.3 percent in June over May (0.7 percent year-on-year), which has brought the cumulative CPI increase this year to 1.1 percent. Inflationary expectations have been broadly stable in recent months though some increase has been observed over the 1-2 year horizon, and their level in June was around 2 percent.2 The exchange rate vis-à-vis the basket has also been broadly stable, hovering 2-3 percent above the lower (most appreciated) boundary of the exchange rate band. There was no significant contagion to Israel during the recent emerging market turbulence.
4. Against the background of a moderate inflation environment, the Bank of Israel (Bol) continued with its gradual interest rate cuts in June and July. Following the 20 bps cut in mid-June after the conclusion of the labor dispute, the Bol reduced the policy rate by 30 bps in late-June. A further cut of 20 bps was announced on July 23, which has brought the nominal rate in August down to 6.3 percent.
5. A debate resurfaced over the Bol Law, following newspaper reports that Prime Minister Ariel Sharon, Foreign Minister Shimon Peres, and Finance Minister Silvan Shalom met in early July and discussed a plan to amend the Bol Law. According to the reports, the plan deviated from the Levin Committee recommendations in several respects. In particular, the plan required the Bol not only to seek price stability, but also to promote economic growth and employment.3 The plan was interpreted by market participants as an attempt to weaken the Bol. However, the debate subsided following a statement by the Prime Minister a few days later that he was initiating a move toward adopting the Levin Committee recommendations, he saw great importance in keeping the Bol’s independence, and there was no intention to harm this independence.
6. Staff received from the authorities revised GDP and fiscal figures, presented in the revised PIN table and Table 5, respectively, both of which are attached to this supplement. The growth rate in 2000 has been revised from 6.0 percent to 6.2 percent. The estimated fiscal deficit in 2000 has changed marginaly from 0.6 percent to 0.7 percent of GDP. The revised Table 5 shows that expenditures in 2000 were below the budgeted amount, but not well below the amount. These and other updated data shown in the attached tables do not alter the thrust of the staff appraisal.
Israel: State Budget, 1995–2001
(in percent of GDP)
The 2001 GDP estimate is based on a 1.8 percent incareasc in real GDP and a 2.5 percent increase in prices.
Israel: State Budget, 1995–2001
(in percent of GDP)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Budget | Estimate | Budget Proposal 1/ | ||||||||||
| Revenue | 40.5 | 41.3 | 40.9 | 39.9 | 38.9 | 40.0 | 40.2 | 40.3 | ||||
| Domestic | 37.7 | 36.3 | 36.6 | 35.4 | 35.0 | 35.7 | … | 37.6 | ||||
| Tax | 31.2 | 30.6 | 31.0 | 30.2 | 30.2 | 30.7 | 32.0 | 32.2 | ||||
| Of which: On income and profits | 16.9 | 16.2 | 16.8 | 16.5 | 16.5 | 16.6 | 18.6 | 18.1 | ||||
| On domestic goods and services | 13.9 | 14.1 | 13.9 | 13.3 | 13.4 | 13.8 | 13.4 | 13.8 | ||||
| Nontax domestic | 6.5 | 5.7 | 5.6 | 5.2 | 4.8 | 5.0 | … | 5.4 | ||||
| Of which: Loans from the National Insurance Institute | 1.8 | 1.7 | 1.6 | 1.4 | 1.4 | 1.2 | … | 1.4 | ||||
| Foreign | 2.8 | 5.0 | 4.3 | 4.6 | 3.8 | 4.3 | … | 2.7 | ||||
| Of which: Grants | 1.9 | 4.1 | 3.2 | 3.2 | 2.6 | 2.8 | 2.5 | 2.4 | ||||
| Expenditure | 44.6 | 45.1 | 43.6 | 42.2 | 41.4 | 42.5 | 40.9 | 42.0 | ||||
| Domestic | 40.9 | 40.8 | 39.6 | 38.2 | 37.9 | 38.6 | 37.8 | 38.1 | ||||
| Current domestic | 37.2 | 37.0 | 36.7 | 35.5 | 35.3 | 35.2 | … | 35.0 | ||||
| Of which: Wages | 9.4 | 9.4 | 9.2 | 8.5 | 5.9 | 8.6 | … | 8.2 | ||||
| Interest | 4.7 | 4.7 | 4.8 | 4.8 | 4.5 | 4.5 | 4.7 | 4.5 | ||||
| Subsidies and transfers | 14.9 | 15.8 | 15.1 | 14.9 | 15.3 | 14.9 | … | 14.7 | ||||
| Repayment | 8.6 | 10.3 | 9.5 | 9.9 | 9.0 | 9.3 | … | 10.7 | ||||
| Capital | 3.6 | 3.S | 3.0 | 2.7 | 2.6 | 34.4 | … | 3.1 | ||||
| Foreign | 3.7 | 4.3 | 4.0 | 4.0 | 3.5 | 3.9 | 3.0 | 3.9 | ||||
| Of which: Interest | 1.8 | 1.9 | 1.6 | 1.5 | 1.4 | 1.5 | 1.4 | 1.5 | ||||
| Budget balance | -4.0 | -3.8 | -2.7 | -2.3 | -2.5 | -2.5 | -0.7 | -1.8 | ||||
| Domestic | -3.2 | -4.5 | -3.1 | -2.9 | -2.9 | -2.9 | … | -0.5 | ||||
| Foreign | -0.9 | 0.7 | 0.4 | 0.6 | 0.4 | 0.4 | … | -1.2 | ||||
| Financing | 4.0 | 3.8 | 2.7 | 2.3 | 2.5 | 2.5 | 0.7 | 1.8 | ||||
| Domestic | 2.6 | 2.7 | 3.1 | 2.7 | 2.5 | 2.1 | 0.8 | 1.8 | ||||
| Bank of Israel (net) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | -0.1 | 0.0 | ||||
| Nonbank (net) | 2.4 | 2.5 | 0.2 | 1.0 | 1.8 | 1.2 | -0.1 | 0.7 | ||||
| Sale of assets | 0.7 | 0.1 | 2.4 | 1.3 | 0.5 | 0.8 | 0.6 | 0.6 | ||||
| Other (net) | -0.5 | 0.0 | 0.5 | 0.3 | 0.3 | 0.1 | 0.5 | 0.4 | ||||
| Foreign (net) | 1.4 | 1.1 | -0.4 | -0.4 | -0.1 | 0.4 | -0.1 | 0.0 | ||||
| Memorandum items: | ||||||||||||
| Defense expenditure | 9.9 | 9.6 | 9.7 | 9.9 | 9.3 | 8.8 | … | 8.9 | ||||
| Primary balance | 2.4 | 2.8 | 3.7 | 4.1 | 3.4 | 3.5 | 5.4 | 4.2 | ||||
The 2001 GDP estimate is based on a 1.8 percent incareasc in real GDP and a 2.5 percent increase in prices.
Israel: State Budget, 1995–2001
(in percent of GDP)
| 1995 | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Budget | Estimate | Budget Proposal 1/ | ||||||||||
| Revenue | 40.5 | 41.3 | 40.9 | 39.9 | 38.9 | 40.0 | 40.2 | 40.3 | ||||
| Domestic | 37.7 | 36.3 | 36.6 | 35.4 | 35.0 | 35.7 | … | 37.6 | ||||
| Tax | 31.2 | 30.6 | 31.0 | 30.2 | 30.2 | 30.7 | 32.0 | 32.2 | ||||
| Of which: On income and profits | 16.9 | 16.2 | 16.8 | 16.5 | 16.5 | 16.6 | 18.6 | 18.1 | ||||
| On domestic goods and services | 13.9 | 14.1 | 13.9 | 13.3 | 13.4 | 13.8 | 13.4 | 13.8 | ||||
| Nontax domestic | 6.5 | 5.7 | 5.6 | 5.2 | 4.8 | 5.0 | … | 5.4 | ||||
| Of which: Loans from the National Insurance Institute | 1.8 | 1.7 | 1.6 | 1.4 | 1.4 | 1.2 | … | 1.4 | ||||
| Foreign | 2.8 | 5.0 | 4.3 | 4.6 | 3.8 | 4.3 | … | 2.7 | ||||
| Of which: Grants | 1.9 | 4.1 | 3.2 | 3.2 | 2.6 | 2.8 | 2.5 | 2.4 | ||||
| Expenditure | 44.6 | 45.1 | 43.6 | 42.2 | 41.4 | 42.5 | 40.9 | 42.0 | ||||
| Domestic | 40.9 | 40.8 | 39.6 | 38.2 | 37.9 | 38.6 | 37.8 | 38.1 | ||||
| Current domestic | 37.2 | 37.0 | 36.7 | 35.5 | 35.3 | 35.2 | … | 35.0 | ||||
| Of which: Wages | 9.4 | 9.4 | 9.2 | 8.5 | 5.9 | 8.6 | … | 8.2 | ||||
| Interest | 4.7 | 4.7 | 4.8 | 4.8 | 4.5 | 4.5 | 4.7 | 4.5 | ||||
| Subsidies and transfers | 14.9 | 15.8 | 15.1 | 14.9 | 15.3 | 14.9 | … | 14.7 | ||||
| Repayment | 8.6 | 10.3 | 9.5 | 9.9 | 9.0 | 9.3 | … | 10.7 | ||||
| Capital | 3.6 | 3.S | 3.0 | 2.7 | 2.6 | 34.4 | … | 3.1 | ||||
| Foreign | 3.7 | 4.3 | 4.0 | 4.0 | 3.5 | 3.9 | 3.0 | 3.9 | ||||
| Of which: Interest | 1.8 | 1.9 | 1.6 | 1.5 | 1.4 | 1.5 | 1.4 | 1.5 | ||||
| Budget balance | -4.0 | -3.8 | -2.7 | -2.3 | -2.5 | -2.5 | -0.7 | -1.8 | ||||
| Domestic | -3.2 | -4.5 | -3.1 | -2.9 | -2.9 | -2.9 | … | -0.5 | ||||
| Foreign | -0.9 | 0.7 | 0.4 | 0.6 | 0.4 | 0.4 | … | -1.2 | ||||
| Financing | 4.0 | 3.8 | 2.7 | 2.3 | 2.5 | 2.5 | 0.7 | 1.8 | ||||
| Domestic | 2.6 | 2.7 | 3.1 | 2.7 | 2.5 | 2.1 | 0.8 | 1.8 | ||||
| Bank of Israel (net) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | -0.1 | 0.0 | ||||
| Nonbank (net) | 2.4 | 2.5 | 0.2 | 1.0 | 1.8 | 1.2 | -0.1 | 0.7 | ||||
| Sale of assets | 0.7 | 0.1 | 2.4 | 1.3 | 0.5 | 0.8 | 0.6 | 0.6 | ||||
| Other (net) | -0.5 | 0.0 | 0.5 | 0.3 | 0.3 | 0.1 | 0.5 | 0.4 | ||||
| Foreign (net) | 1.4 | 1.1 | -0.4 | -0.4 | -0.1 | 0.4 | -0.1 | 0.0 | ||||
| Memorandum items: | ||||||||||||
| Defense expenditure | 9.9 | 9.6 | 9.7 | 9.9 | 9.3 | 8.8 | … | 8.9 | ||||
| Primary balance | 2.4 | 2.8 | 3.7 | 4.1 | 3.4 | 3.5 | 5.4 | 4.2 | ||||
The 2001 GDP estimate is based on a 1.8 percent incareasc in real GDP and a 2.5 percent increase in prices.
Israel: Selected Economic Indicators
(Percentage change, unless indicated otherwise)
Operational concept, excludes the inflation component of interest payments on domestic government debt.
Staff preliminary estimates for 2000.
Israel: Selected Economic Indicators
(Percentage change, unless indicated otherwise)
| 1996 | 1997 | 1998 | 1999 | 2000 | ||
|---|---|---|---|---|---|---|
| National accounts (constant prices) | ||||||
| Real GDP | 4.5 | 3.3 | 2.7 | 2.6 | 6.2 | |
| Private consumption | 5.2 | 3.9 | 4.3 | 3.2 | 6.6 | |
| Private consumption | 5.2 | 3.9 | 4.3 | 3.2 | 6.6 | |
| Public consumption | 5.3 | 1.8 | 2.4 | 3.1 | 1.1 | |
| Gross capital formation | 7.1 | -2.1 | -7.1 | 9.5 | -4.1 | |
| Exports of goods and services | 4.9 | 8.0 | 6.6 | 11.6 | 23.9 | |
| Imports of goods and services | 7.7 | 3.3 | 1.7 | 14.8 | 12.2 | |
| Labor market indicators | ||||||
| Israeli civilian labor force | 2.2 | 2.5 | 2.6 | 3.5 | 3.8 | |
| Overall employment | 2.4 | 1.4 | 1.5 | 3.1 | 4.0 | |
| Unemployment rate (in percent) | 6.6 | 7.5 | 8.6 | 8.9 | 8.8 | |
| Prices (end-period) | ||||||
| Overall CPI | 10.6 | 7.0 | 8.6 | 1.3 | 0.0 | |
| Underlying CPI (excluding housing, fruits and vegetables) | 10.1 | 6.7 | 8.5 | 1.7 | 0.9 | |
| Money and credit (period average) | ||||||
| Narrow money (M1) | 9.4 | 13.2 | 12.0 | 9.6 | 11.0 | |
| Broad money (M3) | 27.3 | 25.3 | 22.2 | 21.8 | 19.7 | |
| Net domestic credit | 24.6 | 19.1 | 16.1 | 16.7 | 13.1 | |
| Interest rates (average, in percent) | ||||||
| Discount rate | 15.2 | 13.8 | 11.8 | 12.1 | 9.3 | |
| Nondirected credit in new sheqalim | 20.7 | 18.7 | 16.2 | 16.3 | 12.8 | |
| Public finance (percent of GDP) | ||||||
| Central government balance 1/ | -3.8 | -2.7 | -2.3 | -2.5 | 0.0 | |
| General government balance 1/ | -6.0 | -4.5 | -3.8 | -4.7 | -2.2 | |
| Public debt | 107.9 | 105.0 | 108.1 | 101.9 | 92.8 | |
| Balance of payments | ||||||
| Trade balance (percent of GDP) 2/ | -7.3 | -5.1 | -3.2 | -4.4 | -3.0 | |
| Current account (percent of GDP) 2/ | -5.7 | -3.9 | -1.4 | -2.9 | -1.2 | |
| Foreign reserves (end-of-period, in U3$ billions) | 11.6 | 20.3 | 22.7 | 22.5 | 23.2 | |
| Exchange rate and terms of trade indices | ||||||
| Nominal effective exchange rate (1990=100) | -2.7 | 0.2 | -6.4 | -7.7 | 9.1 | |
| Real effective exchange rate (1990=100) | 5.9 | 7.0 | -3.0 | -3.8 | 8.0 | |
| Terms of trade (1995=100; index level) | 102.9 | 106.8 | 108.5 | 108.9 | 108.0 | |
Israel: Selected Economic Indicators
(Percentage change, unless indicated otherwise)
| 1996 | 1997 | 1998 | 1999 | 2000 | ||
|---|---|---|---|---|---|---|
| National accounts (constant prices) | ||||||
| Real GDP | 4.5 | 3.3 | 2.7 | 2.6 | 6.2 | |
| Private consumption | 5.2 | 3.9 | 4.3 | 3.2 | 6.6 | |
| Private consumption | 5.2 | 3.9 | 4.3 | 3.2 | 6.6 | |
| Public consumption | 5.3 | 1.8 | 2.4 | 3.1 | 1.1 | |
| Gross capital formation | 7.1 | -2.1 | -7.1 | 9.5 | -4.1 | |
| Exports of goods and services | 4.9 | 8.0 | 6.6 | 11.6 | 23.9 | |
| Imports of goods and services | 7.7 | 3.3 | 1.7 | 14.8 | 12.2 | |
| Labor market indicators | ||||||
| Israeli civilian labor force | 2.2 | 2.5 | 2.6 | 3.5 | 3.8 | |
| Overall employment | 2.4 | 1.4 | 1.5 | 3.1 | 4.0 | |
| Unemployment rate (in percent) | 6.6 | 7.5 | 8.6 | 8.9 | 8.8 | |
| Prices (end-period) | ||||||
| Overall CPI | 10.6 | 7.0 | 8.6 | 1.3 | 0.0 | |
| Underlying CPI (excluding housing, fruits and vegetables) | 10.1 | 6.7 | 8.5 | 1.7 | 0.9 | |
| Money and credit (period average) | ||||||
| Narrow money (M1) | 9.4 | 13.2 | 12.0 | 9.6 | 11.0 | |
| Broad money (M3) | 27.3 | 25.3 | 22.2 | 21.8 | 19.7 | |
| Net domestic credit | 24.6 | 19.1 | 16.1 | 16.7 | 13.1 | |
| Interest rates (average, in percent) | ||||||
| Discount rate | 15.2 | 13.8 | 11.8 | 12.1 | 9.3 | |
| Nondirected credit in new sheqalim | 20.7 | 18.7 | 16.2 | 16.3 | 12.8 | |
| Public finance (percent of GDP) | ||||||
| Central government balance 1/ | -3.8 | -2.7 | -2.3 | -2.5 | 0.0 | |
| General government balance 1/ | -6.0 | -4.5 | -3.8 | -4.7 | -2.2 | |
| Public debt | 107.9 | 105.0 | 108.1 | 101.9 | 92.8 | |
| Balance of payments | ||||||
| Trade balance (percent of GDP) 2/ | -7.3 | -5.1 | -3.2 | -4.4 | -3.0 | |
| Current account (percent of GDP) 2/ | -5.7 | -3.9 | -1.4 | -2.9 | -1.2 | |
| Foreign reserves (end-of-period, in U3$ billions) | 11.6 | 20.3 | 22.7 | 22.5 | 23.2 | |
| Exchange rate and terms of trade indices | ||||||
| Nominal effective exchange rate (1990=100) | -2.7 | 0.2 | -6.4 | -7.7 | 9.1 | |
| Real effective exchange rate (1990=100) | 5.9 | 7.0 | -3.0 | -3.8 | 8.0 | |
| Terms of trade (1995=100; index level) | 102.9 | 106.8 | 108.5 | 108.9 | 108.0 | |
This and other figures cited in this paragraph are all changes in seasonally adjusted data (except when year-on-year changes are mentioned).
Based on market-based inflationary expectations calculated and published by the Bank of Israel. A set of three expectations is published, i.e. one year, two years, and “three years and beyond” that covers up to seven years.
In the Levin Report, the Bol’s main goal is price stability, and to the extent that this main goal is achieved, the Bol is to support the government’s other economic goals, including growth and employment. Another deviation in the plan, as reported by media, is the way the members of the policy board are chosen; the Levin Report recommends that this be made by the government in consultation with the Bol Governor, whereas the plan excludes the Governor’s involvement.