Israel was less affected than other developed countries by the coronavirus crisis, thanks in part to a vigorous response from the Bank of Israel and government policies that supported the healthcare system, households, and businesses, according to an optimistic review of the state of the Israeli economy published Thursday by the International Monetary Fund at the end of a visit to Israel.
The IMF initially expected a contraction of 5.9% for the Israeli economy in 2020, but according to the fund’s senior economist Iva Petrova, this forecast is currently being updated, and the contraction is expected to be significantly lower. At the same time, Petrova estimated that as part of the updated forecasts, Israel’s growth forecast for 2021 will also be reduced from the projected 4.9%.
The IMF is urging Israel to pass a 2021 state budget ASAP for its government to be able to prioritize spending, position the economy for growth and avoid the consequences of economic uncertainty characteristic of the coronavirus pandemic.
This was the fund’s semi-annual visit, during which its delegation of economists met with Finance Minister Israel Katz, Governor of the Bank of Israel Professor Amir Yaron, and senior economic officials.
The IMF praised Israel for its rapid response to the pandemic crisis while “timely and decisive measures introduced by the Bank of Israel at the outset of the pandemic have helped preserve market and financial stability and access to credit.”
Its report noted that government support to the healthcare system, households, and businesses helped soften the financial blow of the pandemic-related lockdowns. As a result, the Israeli economy contracted less than many advanced economies in 2020, and the IMF believes it will rebound in 2021 if the pandemic crisis continues to be contained.
“In this challenging environment, policies should continue to provide support to the economy, contain the risks associated with the pandemic, and promote recovery,” the IMF report advised. “Fiscal policy needs to become gradually more targeted to maximize the impact of the available fiscal space (and) monetary and financial policies need to remain accommodative.”
Regarding the labor market, the fund recommends a policy that will focus on professional training in supporting active businesses and on investing public funds in job-intensive projects. The fund notes that in the wake of the crisis, the government will have to act to reduce the debt ratio, among other things through a reform of the tax system, which will reduce distortions and tax exemptions. Also, the fund believes that income tax reform should ensure “more progressive” tax brackets to deal with what it termed the “relatively high inequality” in Israel.
In the area of structural reforms, the fund’s economists recommend measures to improve the skills and mobility of employees, expanding investments in the digitalization of government service, and increasing investment in subjects like math, science, and technology that will better prepare students for a digital world.
The fund recommends public investments in job-intensive projects in transportation, health, and digital infrastructure. The fund also believes that the Israeli government procurement procedures require reforms.