Bank of Israel head issues new warning on overhaul, says bodies’ independence vital

In letter to cabinet alongside central bank’s annual report for 2022, Amir Yaron writes that major changes must be done with broad agreement, preserve institutions’ professionality

Bank of Israel Governor Amir Yaron arrives at a cabinet meeting on the state budget at the Prime Minister's Office in Jerusalem, February 23, 2023. (Alex Kolomoisky/Pool)
Bank of Israel Governor Amir Yaron arrives at a cabinet meeting on the state budget at the Prime Minister's Office in Jerusalem, February 23, 2023. (Alex Kolomoisky/Pool)

Bank of Israel Governor Amir Yaron again cautioned Tuesday against the potential economic danger posed by the government’s push to curb the justice system, stressing that any legislation must preserve the independence of the state’s institutions.

The warning came after Prime Minister Benjamin Netanyahu announced Monday night that he was pausing the highly contentious judicial overhaul until the end of April to launch negotiations with the opposition for a more broadly agreed-upon reform.

In a letter sent to the government alongside the Bank of Israel’s annual report for 2022, Yaron didn’t explicitly refer to the overhaul’s delay.

“The existence of strong and independent bodies is vital for the stability and prosperity of the economy over time,” Yaron wrote, according to the Kan public broadcaster.

“A number of developments in the financial markets and comments by international financial bodies on the legislative procedures currently being discussed in Israel underline the need to guarantee the independence and professionality of the institutions in Israel, as well as the need for significant changes to be done with broad agreement,” he added.

The report itself described 2022 as a year of recovery from the coronavirus crisis, with a growth of 6.4 percent, more than expected, despite the global crisis triggered by Russia’s ongoing invasion of Ukraine. However, global conditions and tensions in Israel have contributed to a high-than-expected inflation rate of 5.3%, as well as a 4% devaluation of the shekel.

Yaron cautioned in an interview with CNN earlier this month that the government’s sweeping overhaul was “hasty,” and said one of the reasons an orderly and broadly agreed-upon process was important was to stop companies from directing investments away from the Israeli market, which several major firms have already announced they will do.

Senior Finance Ministry officials warned Finance Minister Bezalel Smotrich last week that the overhaul could stunt the country’s growth, resulting in annual losses of NIS 50-100 billion ($14-27 billion) to the GDP, and do “very significant harm” to the economy with potential downside risk to Israel’s sovereign credit rating and related costs and lack of economic growth.

Earlier this month, Fitch Ratings affirmed Israel’s A+ credit rating with a stable outlook, citing the country’s “diversified, resilient” economy, but warned that the planned judicial changes could have a “negative impact” on its credit profile. The rating agency also noted that some countries that passed major reforms reducing institutional checks and balances have seen a significant weakening of World Bank governance indicators, which constitute an “influential” part of the agency’s sovereign credit model.

Before that, Moody’s rating agency warned that the overhaul could weaken the country’s institutional strength and if fully implemented could be “credit negative,” posing a threat to the economy and in particular to capital inflows into the tech sector.

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