Abstract
This 2006 Article IV Consultation highlights that strong macroeconomic conditions and sound domestic policies have significantly improved Israel’s growth performance and prospects, notwithstanding political uncertainties and the hostilities in the north during the summer of 2006. Inflation pressures are subdued, and monetary policy has been easing as of late. Financial soundness indicators have been recovering although some weaknesses on bank balance sheets that relate mainly to previous boom–bust cycles remain. For 2007, real GDP growth is forecast about 4½ percent.
This statement 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/06/397, 12/14/06). The information does not alter the thrust of the staff appraisal.
1. Preliminary national accounts data suggest that real GDP grew by 5.0 percent in 2006. The upswing is broad based, with investment growing particularly strongly.
| Real Growth Rates | 2006 | |
|---|---|---|
| Staff Report | CBS Estimate | |
| GDP | 4.8 | 5.0 |
| Private consumption | 4.7 | 4.6 |
| Public consumption | 4.0 | 3.2 |
| Fixed capital formation | 4.8 | 6.1 |
| Imports of G&S | 3.0 | 2.0 |
| Exports of G&S | 5.5 | 5.1 |
| Real Growth Rates | 2006 | |
|---|---|---|
| Staff Report | CBS Estimate | |
| GDP | 4.8 | 5.0 |
| Private consumption | 4.7 | 4.6 |
| Public consumption | 4.0 | 3.2 |
| Fixed capital formation | 4.8 | 6.1 |
| Imports of G&S | 3.0 | 2.0 |
| Exports of G&S | 5.5 | 5.1 |
2. On December 25, the Bank of Israel lowered its policy rate by 50 bps to 4.5 percent for the month of January. This followed a significant appreciation of the sheqel during the first half of December. The decision somewhat surprised markets, which were expecting a 25bp drop in the policy rate, but stemmed the appreciation of the exchange rate. Nonetheless, the sheqel remains appreciated against the U.S. dollar relative to staff’s end-November baseline. The rate cut is consistent with the staff report’s central scenario and risk assessment (Box 2). In December, the CPI came in at 0.1 percent below last year’s level.
Israel: NIS per US$
Citation: IMF Staff Country Reports 2007, 024; 10.5089/9781451819625.002.A002
Israel: NIS per US$
Citation: IMF Staff Country Reports 2007, 024; 10.5089/9781451819625.002.A002
Israel: NIS per US$
Citation: IMF Staff Country Reports 2007, 024; 10.5089/9781451819625.002.A002
3. The 2006 central government budget deficit turned out lower than widely estimated, reaching 0.9 percent of GDP. Indications are that revenues were significantly higher than earlier projected. On January 3, the Knesset passed the proposed 2007 budget, which targets a deficit of no more than 2.9 percent of GDP. Since the release of the staff report, the government approved an increase of about 0.3 percent of GDP in defense spending, which is to be offset by cuts across various ministries. The overperformance in 2006 lends further support to staff advice to hold the 2007 budget deficit considerably below the 2.9 percent budget ceiling.
