Against the backdrop of the judicial reform, the International Monetary Fund (IMF) sliced Israel's forecast from 2.9% to 2.5% on Thursday and recommended reaching a compromise as soon as possible.
The IMF published an interim report and proposed to quickly reach an agreement on the controversy surrounding the judicial overhaul. "In order to reduce uncertainty, a significant political solution is required, achieved through clear and well-understood communication both internally and externally. Prolonged uncertainty regarding legal reform poses a negative risk to growth," the report stated.
IMF economists who visited Israel last week and held a series of meetings with key economic figures concluded that "the risk balance is leaning downwards and reflects, among other things, external risks and the ongoing uncertainty surrounding the proposed legal reform."
The economists have further solidified their economic forecast for Israel, stating that "following a notable recovery from the foundations of the Israeli economy shaken by the rooted pandemic, it is expected that growth will slow down broadly according to its potential, with inflation dropping within the designated range (1% to 3% per year) until the end of 2024."
The authors of the report praised Israel's economic condition in the past year under the previous government, stating: "Israel's economic performance in 2022 was commendable. The growth reached a high rate of 6.5%, led by the excellent performance of the high-tech sector, with record-low unemployment rates."
Economists also noted that "the public debt compared to gross domestic product has significantly decreased to pre-pandemic levels. The external position was strong, and the banking sector had substantial capital and liquidity reserves."
Furthermore, it was mentioned that "economic activity is expected to temporarily slow down before reaching its full potential," and that "risks to growth are downward, while risks of inflation are upward."
It should be noted that "Mamon," a financial publication, reported that economists from the IMF are particularly concerned about inflation and less concerned about judicial reform, which they consider an internal matter for Israel.
The team at the IMF has suggested additional investments in infrastructure and education to promote growth in the gross national product and reduce inequality.
Praise to the Bank of Israel
Bank of Israel receives praise in the report, and economists note that the central bank has acted properly in the monetary policy it has implemented, "and should continue in this position while the underlying pressures remain strong."
The IMF evaluates Israel's budgetary position properly due to a strong fiscal situation compared to the estimate in 2022, which ended with a budget surplus. This allows for faster fiscal stimuli than anticipated. However, they expect the general government deficit in 2023 to be around 1% of the gross domestic product.
The Finance Ministry stated Wednesday that this is a positive report on the Israeli economy. Finance Minister Betzalel Smotrich said, "The announcement indicates economic stability and resilience, alongside the need to take policy measures to deal with domestic challenges. It commends the conservative and responsible budget that preserves fiscal space and highlights the resilience of the Israeli economy." The Economists for Israeli Democracy forum stated, "The International Monetary Fund understands well that the risk of a political upheaval in Israel harms the economy."