Abstract
The Israeli economy is performing exceptionally well, but still high public indebtedness calls for the continuation of strong economic policies. Monetary policy has successfully stabilized inflation expectations, but policy and communication challenges remain. The recent positive fiscal performance needs to be carried forward to improve international credibility. The government’s intention to stick with a rules-based approach to fiscal policy, solidly anchored in longer-term objectives, is commended. Enhanced fiscal transparency and governance are essential to improve the quality of policymaking.
Appendix I. Israel: Fund Relations
(As of November 30, 2007)
I. Membership Status: Israel became a member of the Fund on July 12, 1954, and accepted the obligations of Article VIII, Sections 2, 3, and 4 on September 21, 1993, and, other than solely for national and international security reasons, maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions. Israel subscribes to the SDDS and is in full observance of the SDDS’s prescriptions for data coverage, periodicity and timeliness, and for the dissemination of advance release calendars.1
II. General Resources Account:
| SDR Millions | % Quota | |
|---|---|---|
| Quota | 928.20 | 100.00 |
| Fund holdings of currency | 867.56 | 93.47 |
| Reserve position in Fund | 60.65 | 6.43 |
| SDR Millions | % Quota | |
|---|---|---|
| Quota | 928.20 | 100.00 |
| Fund holdings of currency | 867.56 | 93.47 |
| Reserve position in Fund | 60.65 | 6.43 |
III. SDR Department:
| SDR Millions | % Allocation | |
|---|---|---|
| Net cumulative allocation | 106.36 | 100.00 |
| Holdings | 10.55 | 9.91 |
| SDR Millions | % Allocation | |
|---|---|---|
| Net cumulative allocation | 106.36 | 100.00 |
| Holdings | 10.55 | 9.91 |
IV. Outstanding Purchases and Loans: None
V. Financial Arrangements: None
VI. Projected Payments to Fund:
| Forthcoming | |||||
|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | 2010 | 2011 | |
| Principal | |||||
| Charges/Interest | 3.41 | 3.40 | 3.40 | 3.40 | |
| Total | 3.41 | 3.40 | 3.40 | 3.40 | |
| Forthcoming | |||||
|---|---|---|---|---|---|
| 2007 | 2008 | 2009 | 2010 | 2011 | |
| Principal | |||||
| Charges/Interest | 3.41 | 3.40 | 3.40 | 3.40 | |
| Total | 3.41 | 3.40 | 3.40 | 3.40 | |
VII. Implementation of HIPC Initiative: Not applicable
VIII. Safeguards Assessments: Not applicable
IX. Exchange Rate Arrangement:
As of June 9, 2005 Israel’s exchange rate regime is officially classified as floating. This step by the Government of Israel was taken to remove the last vestige of a policy in which the exchange rate of the NIS fluctuated within the limits of a crawling band. In practice, however, the NIS has been floating since 1997, when the Bank of Israel stopped intervening to protect the band.
X. Article IV consultation:
The last Article IV consultation was concluded on January 19, 2007. Israel is on the standard 12-month consultation cycle.
XI. ROSCs:
Financial System Stability Assessment was conducted in 2000, issued in August 2001.
Fiscal Transparency ROSC was conducted in 2003, issued in March 2004.
AML/CFT ROSC was conducted in 2003, issued in June 2005.
Data Module ROSC was conducted in 2005, and issued as IMF Country Report No. 06/125 in March 2006.
XII. Technical Assistance:
The Fund has been providing policy advice and technical assistance to the Palestinian Authority since the 1993 Oslo Accords, and presently has a senior resident representative based in Jerusalem. The Fund’s work in the West Bank and Gaza (WBG) has recently intensified, with a focus on the macroeconomic, fiscal, and financial areas. Staff missions to the WBG took place during May-August and November 2007 to assist the authorities in developing their medium-term macroeconomic and fiscal framework. That framework underpinned the Palestinian Reform and Development Plan (PRDP) presented at the Paris international donors’ conference in December 2007. Looking forward, the Fund will be regularly reporting to donors on the macroeconomic and fiscal situation, and on the implementation of public finance reforms. Technical assistance will be stepped up in the areas of public expenditure management, banking supervision and regulation, and macroeconomic statistics.
XIII. Resident Representative:
A resident representative has been in the WBG since early 1996.
Appendix II. Israel: Staff Research, 2006–08
Monetary Policy
“Endogenous Monetary Policy Credibility in a Small Macro Model of Israel,” (Eyal Argov, Natan Epstein, Philippe Karam, Douglas Laxton, and David Rose. 2007, Working Paper).
Extends a small linear model of the Israeli economy to allow for nonlinearities in the inflation-output process that arise from convexity in the Phillips curve and endogenous monetary policy credibility. Finds that the dynamic responses to shocks in the extended model more closely resemble features in the data from the recession period of 2001–03. In particular, the extended model does a much better job in accounting for the deterioration in monetary policy credibility and the output costs of regaining monetary policy credibility once it has been lost.
“A Simple Forecasting and Policy Analysis System for Israel: Structure and Applications,” (Natan Epstein, Philippe Karam, Douglas Laxton, and David Rose. 2006, Selected Issues).
Develops a simple forecasting and policy analysis system (FPAS) model to prepare baseline forecasts and risk assessments for monetary policy and the Israeli economy. The model is designed to support policy analysis for an inflation-targeting regime and captures the essential small, open, flexible-exchange-rate economy linkages between the policy rate and output, inflation and the exchange rate. Conducts risk assessments on three key sources of uncertainty underlying the baseline forecast—exchange rate, output gap, and oil prices—and reviews model properties and performance.
Fiscal Policy
“Toward a New Fiscal Rule: What Might Work Well for Israel,” (Xavier Debrun and Natan Epstein. 2008, Selected Issues).
Assess Israel’s fiscal performance against its fiscal rules over the past two decades; reviews the international experience with fiscal rules; and proposes a new rule for Israel. In particular, recommends anchoring a new fiscal rule on the objective of lowering the public debt to 60 percent of GDP by 2015.
“The Political Economy and Fiscal Institutions in Israel,” (Mario Catalan. 2007, Selected Issues).
Analyze the political economy factors that have affected fiscal policy and performance in Israel. Finds that fragmented parliaments and short average government duration have boosted public debt and deficits. Argues that strengthening fiscal governance mechanisms can counter political economy biases to fiscal policy, notably through enhanced budgetary transparency and analysis and independent fiscal policy assessment.
“Fiscal Consolidation in Israel: A Global Fiscal Model Perspective,” (Selim Elekdag, Natan Epstein, and Marialuz Moreno-Badía. 2006, Working Paper).
Employs the IMF’s Global Fiscal Model to quantify the costs of delaying fiscal consolidation in Israel. Finds that early consolidation through expenditure cuts would result in a substantial increase in Israel’s long-term output growth relative to the case with delayed fiscal adjustment. Using an alternative fiscal instrument, it also finds that delaying tax cuts would result in long-run cumulative real GDP that is five times larger than when the tax cuts are immediately implemented.
Financial Sector
“Financial Sector Stability Analysis for Israel,” (Martin Čihák. 2008, Selected Issues).
Examines financial sector stability in Israel, focusing on market-based indicators and stress tests. Compared with the accounting ratios, market-based indicators paint a more mixed picture of recent financial stability developments in Israel, reflecting markets’ assessment of challenges and risks associated with the recent financial sector reforms. The note also presents preliminary results of stress tests for banks, based on publicly available data. It finds that the banks have become more resilient to shocks over time, and that credit risk remains the key source of risk.
“Financial Sector Developments,” (Ian Tower, Michael Moore and John Palmer, 2008, Selected Issues).
Describes and analyses recent changes in the financial sector and financial regulation as they emerge from a period of major reform. Performance of the banks has been improving. Although one bank has incurred significant losses on assets related to the US mortgage market, the scope for further losses appears limited, provided that AAA mortgage-backed securities other than sub-prime are not significantly impaired. A key development in insurance has been the greater diversification of insurance groups. Overall the reforms have led to more diverse financial markets and appear to be generating benefits for the economy. It is also appropriate for the authorities to take stock of the results so far. Regulation of banking and insurance has been strengthened but further development is required, especially to build expertise for a more complex regulatory system and to consider the appropriate balance between a principles-based and a rules-based approach.
“Financial Sector Supervision Structures: Assessing the Alternatives for Israel,” (Natan Epstein and Richard Pratt. 2007, Selected Issues).
Reviews the international experience with various financial supervision structures. Examine the key advantages of the different models and provide a neutral assessment of the existing options. Highlights that any restructuring must provide for more independent supervision, supported by a strong governance structure; adequate resources for supervision; a strong regulatory capacity; and a level playing field across financial service industries.
“Corporate Balance Sheets and Investment: Empirical Estimates for Israel,” (Marialuz Moreno. 2006, Selected Issues).
Analyzes the empirical relationship between corporate leverage—and other indicators of financial health—and investment in Israel, using dynamic panel data techniques. Finds that weak balance sheets may well have contributed to the investment decline of recent years. Leverage, measured as the debt-to-assets ratio, is found to have a large negative effect on investment.
“The Reform of the Capital Markets in Israel,” (Richard Pratt. 2006, Selected Issues).
Reviews and analyzes the capital market reforms in Israel. Highlights that, together with the forced divestiture of banks’ holdings of mutual and provident funds, actions that the authorities have taken to remove the legal, tax, and regulatory barriers to the further development of capital markets, are leading to growth and innovation in the creation of new instruments for investment and risk management. Maintains that the rapid development of the capital markets have created new supervisory and regulatory challenges.
“Banking Sector Developments and Issues,” (Jonathan L. Fiechter, Michael Moore, John Palmer, and William Ryback. 2006, Selected Issues).
Reviews developments and issues affecting the banking system in Israel and examines the supervision function by the Bank of Israel. Argues that while the banking system has grown stronger in recent years following the 2001–02 recession, the level of problem loans remained stubbornly high, contributing to a low level of profitability. Finds that the caliber of the BoI supervisors is strong and supervisors are highly qualified, but highlights the need to increase efficiency in the operations of the supervisory function.
External Issues
“Israel’s External Competitiveness: Assessing the Real Exchange Rate,” (Natan Epstein. 2008, Selected Issues).
Finds that Israel’s real exchange rate is moderately undervalued, while gains in external competitiveness appears to have been eroded somewhat in recent years. Various estimations suggest that the real exchange rate may be undervalued by about 5–10 percent. However, for various reasons the undervaluation may well be lower.
For purposes of Fund relations, the West Bank and Gaza (WBG) fall under Israeli jurisdiction in accordance with Article XXXI, Section 2(g) of the Articles of Agreement.