IMF says Israel has handled pandemic ‘exceptionally well’, warns of ‘significant’ risks

The International Monetary Fund (IMF) said Israel had weathered the COVID-19 pandemic “exceptionally well” thanks to a rapid and effective vaccination campaign and a rapidly recovering economy, but still faced challenges. “significant” risks to its outlook for 2022, such as soaring house prices and affordability.

In a report released on Sunday, the 190-nation lending agency said “Israel’s world-class vaccination campaign has boosted confidence and helped mitigate the impact of the pandemic in the face of new virulent variants,” while the government embarked on “a rapid and extensive vaccination campaign”. support for households and businesses and the “monetary and prudential measures of the Bank of Israel have provided liquidity, maintained credit and prevented an undue tightening of financial conditions”.

The IMF reported that after a relatively mild slowdown in 2020, the Israeli economy recovered strongly in 2021, with real GDP exceeding its pre-pandemic level and growth of around 6.5% the last year. “The rebound has been stronger than in other advanced economies,” the financial institution reported, echoing separate December 2021 reports from the OECD and multinational business news firm Dun & Bradstreet that showed that Israel’s economic recovery was above the world average.

The IMF also found that Israel’s thriving tech industry “led the recovery” as private consumption “picked up speed.”

Inflation, meanwhile, “jumped due to global factors and a rebound in domestic demand”, although it remained within the Bank of Israel’s target range. The central bank said last month that inflation was forecast at 2.4% in 2021 and expectations for 2022 over the medium to long term were within an annual target of 1% to 3%.

“The 2021 fiscal deficit was significantly lower than expected due to buoyant tax revenues thanks to rapidly growing domestic and global equity markets and the gradual reduction in COVID-related support,” the IMF said in its report. Unemployment has also fallen steadily, he noted.

In a briefing with Israeli journalists on Sunday, the IMF’s mission chief for Israel, Iva Krasteva Petrova, said the IMF expected “the recovery to firm up and continue into 2022” and that the organization sees “no long-term scarring effects of the pandemic”.

Support from the Israeli government and the policies of the Bank of Israel have been “timely, sufficient and well executed”, she said.

The IMF report says Israel’s economic recovery is expected to “solidify in 2022” with growth “supported by strong private consumption, investment and net exports”, and inflation is expected to decline over the medium term.

At the same time, Israel will have to address long-standing challenges like overall participation in the labor market, where some communities do not participate or do so in small numbers; low productivity (estimated by the OECD at 35% lower than the organization’s best performance) driven by the disparity between the technology sector and more traditional sectors; and a shortage of human capital (particularly in the technology sector).

The IMF said skills and knowledge gaps in Israel’s economy “could make the reallocation of labor between sectors difficult and costly and could unevenly affect the employment and wages of workers.” different demographic groups”. Policies should focus on “facilitating job creation and reallocation, removing product market barriers and improving infrastructure”.

Housing prices and affordability are also a significant concern in Israel, according to the report. “Rapidly rising property prices have rekindled concerns about price misalignment, underscoring the need to advance structural measures to facilitate housing supply,” it read.

Krasteva Petrova said Israel had “unusually tight housing constraints” at a “high level that suggests misalignment.” She said solving this problem should be a priority.

Israel could undertake “tax reforms to support incentives for municipalities to increase housing supply”, she said.

A construction site for a new residential area in Herzliya on March 27, 2020. (Gili Yaari/Flash90)

The IMF report also said that Israel’s efforts to reduce trade barriers would be “essential to promote efficient allocation of resources, investment and innovation”, and would help boost competition and reduce costs.

The country’s infrastructure was also among the concerns and potential impediments to growth.

“Infrastructure spending needs to accelerate further if Israel is to close the infrastructure stock gap with other OECD countries. Improving infrastructure is particularly urgent in transport to reduce traffic congestion and improve accessibility to employment,” the IMF said.

Traffic jams on the Ayalon highway in Tel Aviv, December 2, 2021. (Tomer Neuberg/Flash90)

The IMF hailed Israel’s strengthened commitments to combat climate change and the “significant progress” it has made “in developing policies to achieve their goals, including a gradual introduction of excise taxes on coal and other fuels between 2023 and 28 and an elimination of coal-fired power generation by 2025.”

Krasteva Petrova said that “Israel’s climate mitigation policies are welcome” and that its “targets are ambitious”.

“Further efforts will be needed,” the IMF said. “Options include bigger increases in carbon prices and greater regulatory and fiscal support for Israel’s innovative green technologies.”

Israel’s management of some long-standing risks and challenges “would help ensure recovery”, the financial institution said. These risks include new variants that could pose a threat to economic growth, existing geopolitical issues that “could potentially cause socio-economic and political disruptions” and tighter global financial conditions that “could cause equity markets to fall, lower government revenues and higher cost of capital.

Over the coming year, according to the report, pandemic-related support “should target the most affected sectors and vulnerable population groups”, after which medium-term fiscal policy should refocus “on reducing public debt and replenishment of pre-pandemic buffers”.

People shop at the Hadar mall in Jerusalem on December 16, 2021. (Yonatan Sindel/Flash90)

Israel’s tax system could also be made more progressive and the tax base could be broadened, including by reducing pension tax exemptions and personal and corporate tax incentives for certain groups, the report said.

Israel’s policies “should remain nimble in the face of high growth and still significant uncertainty,” the IMF suggested.

Finance Minister Avigdor Liberman said in a statement that the IMF report was a show of appreciation for “the management of a prudent and responsible fiscal policy based solely on economic and professional considerations, and indicates the resilience and dynamism of the Israeli economy compared to other developed countries”. .”

The Governor of the Bank of Israel, Professor Amir Yaron, thanked the IMF for the “thorough and professional work of the past few weeks”. He added that the central bank will study the final report thoroughly.

Last month, the IMF said it was lowering its forecast for the global economy in 2022, citing the spread of the Omicron variant of COVID-19, rising energy prices, rising inflation and a deterioration in the outlook for the world’s two largest economies – the United States and China.

The financial institution now forecasts that the global economy will grow by 4.4% in 2022. This is down from the 5.9% estimated last year and the 4.9% that the IMF forecast for 2022 in October.