The head of Israel's central bank presented the Bank of Israel's annual report for 2023 on Sunday, in which he also detailed the impact of the Israel-Hamas war on the final quarter of the year.
“The negative impact of the war on the economy was visible on many levels,” Professor Amir Yaron, governor of the Bank of Israel, said in a letter to the government and Knesset finance committees accompanying the report.
“GDP contracted, private consumption and especially investment fell sharply, and exports fell at a more moderate pace,” Yaron said, addressing the negative impact on the employment of Israeli workers, which he expects to recover by the end of 2023 started .
The impact has been particularly severe in the construction and agricultural sectors, where there is a severe shortage of foreign workers, impacted by a ban on the employment of Palestinian workers, the report said.
Lawmakers in March approved a revised state budget for 2024 that added tens of billions of shekels to fund Israel's war against Hamas in Gaza as the conflict nears six months. Governor of the Bank of Israel, Prof. Amir Yaron. Complete trust in the financial and monetary systems. (Source: FLASH90, image editing)
Yaron called for the formation of a committee that would determine the level of the defense budget “in an informed manner.”
“It should outline Israel’s defense needs in the coming years and formulate a corresponding multi-year budget program that takes into account all impacts on the economy.”
Yaron also said that additional increases in the defense budget would need to be accompanied by fiscal adjustments to “at least prevent a permanent increase in public debt to GDP.”
Israel aims to increase defense spending by around 20 billion shekels ($5.4 billion) annually.Advertising
The amended budget calls for a deficit of 6.6% of gross domestic product (GDP) in 2024, revised from a prewar level of 2.25%. In February, the deficit rose to 5.6% over the past 12 months from 4.8% in January.
The national debt-to-GDP ratio rose from 60.5% to 61.9% this year.
The Bank's Monetary Committee focused on stabilizing markets after the outbreak of war and implemented a number of tools, including the sale of $30 billion in foreign currency.
Israel's economy is being affected by existential events
The report also addressed the impact of judicial reform on the Israeli economy, saying that it was one of the two “significant domestic political events” that impacted the Israeli economy in 2023, along with the war.
The reform led to a number of “hot spots” that were accompanied by reactions in financial markets, the report said.
Medium and long-term risks may arise from structural changes that are perceived to affect the quality or independence of institutions or their trust in the rule of law, the report says, explaining that such changes affect investors (both domestic and foreign) deterring debt could make debt more expensive. Anticipating these long-term risks may increase short-term risk and impact short-term indicators.
“The program of legislative changes and the resulting atmosphere in Israel were reflected in the financial markets during the reporting period. Given the milestones in this process, the shekel depreciated significantly over the year, and the Israeli capital market and Israeli companies trading abroad performed worse than other countries,” the report said.
The report said: “In addition, investment data from venture funds showed underperformance in raising capital for start-ups.” It added that financial shocks were less severe if the reform did not move forward.
GDP growth in the first three quarters of 2023 was slower than in previous years, and for the full year GDP grew by only 2%, meaning GDP per capita did not grow at all in 2023.
Inflation peaked at 5.4% in early 2023 and gradually declined throughout the year. Its annual value is 3%, which is the upper limit of the target rate.
“Tight monetary policy, the global decline in inflation and Israel's acyclical fiscal policy during this period contributed to the decline in inflation leading up to the war. In contrast, the devaluation of the shekel delayed inflation from approaching its target,” the report said.
Yaron said the Israeli economy faces major challenges, particularly low labor productivity and a lack of standard skills that prevent ultra-Orthodox Jewish men and Arab women from integrating into the labor market.
“Looking forward, the economy faces significant challenges arising from the war, in addition to the structural challenges related to its fundamental problems that have existed for some time,” he said.
“The Israeli economy has managed to recover from more than just a few difficult times in the past and quickly return to prosperity,” Yaron concluded. “It is based on robust and solid economic foundations built over years, providing strength and stability,” and responsible economic policies will contribute to sustainable growth, he concluded.
Reuters contributed to this report.
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