The International Monetary Fund (IMF) predicts that the Israeli economy will grow by only 2.5% in 2015, and hints that the budget deficit target is actually much higher than the official target in the Ministry of Finance's forecasts. The IMF's growth forecast is substantially lower than the Ministry of Finance's 3.1% growth forecast, but is consistent with the negligible growth shown by figures recently published by the Central Bureau of Statistics. Sources inform "Globes" that both the Ministry of Finance and the Bank of Israel are expected to revise their 2015 growth forecasts soon to a rate close to that of the IMF.
In its biennial report on the Israeli economy, published today, the IMF criticizes the Ministry of Finance, saying that the 2.9% budget deficit target set for the next two years is too high, "almost 4 percent of GDP based on international accounting standards." The IMF warns that for the first time since 2009, the ratio of debt to GDP is expected to rise. It recommends that the government make a sharp cut in spending in order to reduce the deficit target, and to continue lowering debt to GDP ratio. The IMF does not address the Minister of Finance's recent cut in VAT and corporate taxation, which was announced when the report was already in the advanced editing stages. At the same time, the IMF refrained from calling for higher taxes or eliminating tax exemptions, as recommended by Governor of the Bank of Israel Dr. Karnit Flug.
Together with praise for the Israeli economy's performance to date, the IMF recommends that the government finally appoint a Financial Stability Council, increase the supply of apartments in order to lower residential real estate prices, and act to boost productivity by enhancing competition and increasing investment in infrastructure and education. In the dispute between the Ministry of Finance and the Governor of the Bank of Israel over increasing competition in the banking system, the IMF adopts a position close to that of Flug, saying that measure to bolster competition in the sector "should remain mindful of financial stability concerns." The IMF also states that even though the banking sector in Israel features a high degree of concentration, the extent of competition between the banks is no less than in other advanced economies around the world.
The IMF report was compiled in consultation between Israel and the IMF executive board, which was completed in September. Just before the report was published, a team of IMF economists who visited Israel presented their recommendations to the IMF executive board. An Israeli source told "Globes" that in internal IMF discussions, it was decided to soften the recommendations on reducing the deficit.
"Israel’s economy has been doing well and near-term growth prospects are favorable," the report says, while highlighting the 3.5% annual growth in employment and the low level of unemployment. The IMF economists note that inflation in Israel is negative, but state that this phenomenon is "imported and temporary," and does not indicate weakness in the local economy. "Risks (in the economy, A.B.) are balanced, and the real exchange rate is broadly in line with fundamentals," the report states.
Together with praise for the economy's performance, the IMF economists, like Flug, argue that the ratio of debt to GDP is expected to rise for the first time since 2009 as a result of raising the budget deficit targets for 2015 and 2016. The IMF adds that the increase in productivity is small, and "income inequality is among the highest in advanced countries."
The IMF executive board noted that the main challenges facing the Israeli government's economic policy were alleviating the risks in the real estate market, strengthening fiscal stability coefficients (for example, by lowering the deficit targets, A.B.), bolstering labor productivity, and reducing income inequality.
Published by Globes [online], Israel business news - www.globes-online.com - on September 16, 2015
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