Despite the upheaval it suffered in the past year, on the eve of the war Israel's economy was in relatively good condition. In 2022, the debt-to-GDP ratio dropped by 7.1 percent and reached almost 60 percent, the level of before the Covid pandemic. The economy ended the year with an unemployment rate of about 4 percent and an impressive growth of 6.5 percent. The foreign exchange reserves of the Bank of Israel totaled over $200 billion last July.
Past experience has shown that since 2005, “ordinary” security events do not cause significant damage to the economy. According to Bank of Israel estimates, in the last 15 years, only Operation Defensive Shield in 2014, which lasted 50 days, caused a 0.3 percent drop in GDP. While the IMF and the rating companies regard security events as one of the significant risks to Israel's economy, it seems that the Israeli economy (including investors and the financial markets) have already internalized these risks and do not allow a local military operation to influence the long-term trends.
However, the current war will apparently have a significant long-term impact on the Israeli economy. Although the economy is in good shape, the economic trends this year are less encouraging. Largely because of the regime overhaul, we are witnessing an increase in the country's risk (according to the Israeli government's 10-year bond yield), a sharp decrease in foreign investment in the hi-tech sector, and a significant depreciation of the shekel. In addition, government spending increased and tax revenues were lower than forecast, which increased the government deficit above forecasts. The costs in product terms of prolonged fighting, which include the recruitment of over 300,000 civilians and the expected increase in the defense budget after the fighting, compound these trends.
Consequently, the government should act immediately to minimize the economic uncertainty. The first step is to offer another term to Prof. Amir Yaron, Governor of the Bank of Israel, who is internationally esteemed and has faced many challenges in a professional and independent manner. The renewal of Prof. Yaron's appointment will reduce the existing uncertainty and can prevent, for example, the rating companies from downgrading Israel's credit rating in their upcoming reports.
Despite the upheaval it suffered in the past year, on the eve of the war Israel's economy was in relatively good condition. In 2022, the debt-to-GDP ratio dropped by 7.1 percent and reached almost 60 percent, the level of before the Covid pandemic. The economy ended the year with an unemployment rate of about 4 percent and an impressive growth of 6.5 percent. The foreign exchange reserves of the Bank of Israel totaled over $200 billion last July.
Past experience has shown that since 2005, “ordinary” security events do not cause significant damage to the economy. According to Bank of Israel estimates, in the last 15 years, only Operation Defensive Shield in 2014, which lasted 50 days, caused a 0.3 percent drop in GDP. While the IMF and the rating companies regard security events as one of the significant risks to Israel's economy, it seems that the Israeli economy (including investors and the financial markets) have already internalized these risks and do not allow a local military operation to influence the long-term trends.
However, the current war will apparently have a significant long-term impact on the Israeli economy. Although the economy is in good shape, the economic trends this year are less encouraging. Largely because of the regime overhaul, we are witnessing an increase in the country's risk (according to the Israeli government's 10-year bond yield), a sharp decrease in foreign investment in the hi-tech sector, and a significant depreciation of the shekel. In addition, government spending increased and tax revenues were lower than forecast, which increased the government deficit above forecasts. The costs in product terms of prolonged fighting, which include the recruitment of over 300,000 civilians and the expected increase in the defense budget after the fighting, compound these trends.
Consequently, the government should act immediately to minimize the economic uncertainty. The first step is to offer another term to Prof. Amir Yaron, Governor of the Bank of Israel, who is internationally esteemed and has faced many challenges in a professional and independent manner. The renewal of Prof. Yaron's appointment will reduce the existing uncertainty and can prevent, for example, the rating companies from downgrading Israel's credit rating in their upcoming reports.