Dei'ah veDibur - Information & Insight

A Window into the Chareidi World

23 Iyar 5761 - May 16, 2001 | Mordecai Plaut, director Published Weekly








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IMF Report Says Long Term Growth Prospects Are Good
by Mordecai Plaut

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.


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