Bank of Israel governor meets with new head of IMF mission ahead of annual report

Bank of Israel governor Prof. Amir Yaron on Tuesday met with the new Israel mission head of the International Monetary Fund Miguel Segoviano ahead of the institution’s annual discussions on Israel’s economy which will start in May.

Yaron together with Bank of Israel staff held a meeting with Segoviano and three additional IMF members. The IMF delegation arrived for a short introductory visit in Israel, which was planned in advance, the Bank of Israel said in a statement.

The delegation is also expected to meet with Finance Minister Bezalel Smotrich and other senior officials from government and private sector in Israel to receive an overview of the local economy.

The IMF delegation is expected to arrive in Israel again in May, for the ongoing annual meeting, as in every year. With the end of the visit in May, they are expected to publish initial remarks, followed later by a concluding report on the Israeli economy.

In the past, investors have been closely watching the IMF’s economic reports as well as reports by credit rating agencies. The meetings come as former Bank of Israel governors Karnit Flug and Jacob Frenkel as well as leading economists have in recent weeks been warning Prime Minister Benjamin Netanyahu and his government that the proposed changes to overhaul the judiciary system could scare away investors and negatively impact the country’s credit rating. Yaron himself is said to have warned Netanyahu that the judicial shakeup will hurt the economy.

The Netanyahu coalition’s proposals, as presented by Justice Minister Yariv Levin, would severely restrict the High Court’s capacity to strike down laws and government decisions, with an “override clause” enabling the Knesset to re-legislate struck-down laws with a bare majority of 61; give the government complete control over the selection of judges; prevent the court from using a test of “reasonableness” to judge legislation and government decisions; and allow ministers to appoint their own legal advisers, instead of getting counsel from advisers operating under the aegis of the Justice Ministry.

IMF delegation led by Miguel Segoviano, the new mission chief to Israel, meet with Bank of Israel governor Amir Yaron and senior staff, February 7, 2023. (Bank of Israel spokesperson)

Speaking at a Knesset Finance Committee meeting on Monday, Yaron emphasized the importance of safeguarding institutional independence for Israel’s sovereign credit rating.

“As an economist, I will say in this context that many studies have shown that strong and independent institutions are a vital component for the existence of a developed and thriving economy,” Yaron said. “Accordingly, the credit rating companies also examine these areas.”

“For this reason, it is important to ensure that these characteristics are preserved in any process that is advanced,” Yaron cautioned.

As the economic adviser to the government, Yaron has also warned the Netanyahu government about the potential risk of exuberant budget demands made by its coalition partners. The deals signed with far-right and Haredi partners are slated to increase welfare payouts for the ultra-Orthodox, whose employment rate is low.

“Israel is a state with a debt-to-GDP ratio that has dropped, and has already returned to its pre-COVID-19 level,” Yaron said at the finance committee meeting. “I have defined this as a strategic asset, and I still treat it as one.”

In its Israel annual report last year, the IMF praised the government’s management of the COVID-19 pandemic and its aim of lowering Israel’s debt burden over the medium term. The IMF, too, found that Israel’s thriving tech industry “led the recovery” as private consumption “gained speed.”

The IMF had called on Israel to address long-standing challenges like overall labor force participation, where certain communities do not participate or do so in low numbers; low productivity (estimated by the OECD at 35% lower than the organization’s best performers) driven by the disparity between the tech sector and more traditional sectors; and a human capital shortage (specifically in the tech sector).

Israel posted a budget surplus of NIS 9.8 billion ($2.85 billion) in 2022, or 0.6% of gross domestic product, fueled by a 14% rise in tax revenue. In 2022, the government’s revenues rose 4.8% to NIS 468.5 billion ($135 billion) and exceeded total expenditure of NIS 458.8 billion ($132 billion, creating a surplus for the first time since 1987, the ministry said. The Finance Ministry had set a budget deficit target of 3.9% for 2022.

In 2023, the Bank of Israel expects the budget deficit to be at least 1.8% of GDP, rising to 2.1% of GDP in 2024.