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The IMF Published its Annual Report on Israel's Economy


The IMF 2012 Article IV on Israel's economy in 2011 was released on April 2, following the IMF consultation mission to Israel in February

Following the IMF consultation mission to Israel, which submitted its preliminary concluding statement on February 13, the IMF executive board concluded the 2012 Article IV Consultation with Israel on March 27. The IMF Article IV Consultation with Israel was released yesterday, April 2.

The examination carried out in November 2011 encompassed all the bodies involved in the supervision and regulation of Israel's financial system, including the Bank of Israel, and in particular the Banking Supervision, the Financial Stability area, and the Payment and Settlement systems; the Ministry of Finance, focusing on the Capital Market, Insurance and Savings Division; the Securities Authority; and the Tel Aviv Stock Exchange.

The examination was carried out on the basis of international standards and specific core principles regarding the activity of the various bodies, and involved the use of up-to-date tools that have been developed around the world as part of the lessons learned from the most recent financial crisis.

Main notes in the IMF Annual Report

According to the IMF, Israel’s economy remains strong with GDP growing 4.7 percent in 2011, led by robust private consumption and buoyant investment. However, the IMF states that global downturn is slowing Israeli growth, with 2012 GDP growth expected at 2.8 percent.

Nevertheless, the IMF mentions that Israel’s fundamentals are strong: inflation and inflation expectations are squarely within the 1–3 percent target range, unemployment is at historic lows, the net international investment position is a surplus, and public debt has fallen steadily to below 75 percent of GDP. According to the IMF, these strengths are also underpinned by Israel’s sound institutional frameworks, including fiscal rules and a new central bank law. Furthermore, the IMF states that following recent discoveries of natural gas fields, Israel may become a net energy exporter in coming years.

According to the IMF, Poverty remains among the highest in OECD countries, despite strong growth. This primary reflects low labor force participation rates among the Arab-Israeli and Haredi minority populations.

Executive Board Assessments

Executive Directors commended the authorities for sound macroeconomic management and policy frameworks that have underpinned Israel’s strong economic performance in recent years. Directors noted, however, that global uncertainties and elevated regional strains pose risks to the outlook, and that longer-term domestic challenges underscore the need to push ahead with the reform agenda.

Directors considered that near-term economic prospects remain favorable. In the face of a weak external environment, reductions in the policy interest rate and the free play of the automatic stabilizers in the context of the two-year budget have appropriately supported activity, although the 2012 deficit target will be overshot.

Directors stressed that fiscal policy should remain focused on reducing the debt-to-GDP ratio over the medium term. Accordingly, the total spending limits in this year’s budget and the ceilings under the expenditure rule for the 2013 and 2014 budgets should be respected, and a sizeable consolidation should be secured in 2013–14. In that context, further revenue mobilization would be appropriate.

Considering further reforms to the fiscal frameworks, Directors recommended that the deficit targets should be adjusted to take account of cyclical factors. Most Directors supported establishing an autonomous Fiscal Council to reinforce the momentum toward medium-term sustainability. In addition, Directors commended the authorities’ plan to place natural resource revenues in a sovereign wealth fund.

Directors noted that the FSSA Update confirmed the soundness of Israel’s financial institutions. However, given global risks, high concentration in the financial sector, and elevated house prices, they welcomed continued proactive supervision and plans to raise bank capital ratios. Directors also encouraged a review of the financial crisis management framework, as well as the establishment of a Financial Stability Committee to improve the coordination of supervisory agencies.

Directors noted that fiscal tightening would create space for further monetary easing. However, such easing would have to be evaluated against wage trends and second round effects of rising oil prices, with house price concerns addressed via macroprudential tools. Directors encouraged further strengthening of the monetary framework, including enhancement of central bank autonomy over remuneration of its staff and lengthening the horizon of published forecasts. They also agreed that, with the exchange rate broadly at its equilibrium level, a de facto free floating exchange rate regime should be maintained, although the option to intervene to sustain orderly conditions continues to be viable.

Directors emphasized macro-social concerns, notably that labor participation among the Arab-Israeli and Haredi populations is low, with adverse effects on growth prospects, poverty reduction, and fiscal sustainability. They welcomed recent reforms to address these concerns, while emphasizing that more is needed.

Financial System Stability Assessment

This year, in addition to its usual report, it also published the results of a comprehensive study it carried out of Israel's financial system, in the framework of its Financial Sector Assessment Program (FSAP).

The FSAP is a process involving a comprehensive investigation of the stability of financial systems and the quality of the supervision and regulation of its activities. The previous study of Israel's financial system took place in 2001. Since then there have been many changes in the financial system and the international standards, which prompted the latest assessment.

IMF Annual report files

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