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Bank of Israel predicts economy can keep expanding despite political upheaval

Amir Yaron, bank’s governor, says Israeli system has ‘an impressive ability to grow’ even amid uncertainty, vows to further rein in inflation

Luke Tress is an editor and a reporter in New York for The Times of Israel.

Bank of Israel Governor Amir Yaron speaks during a press conference in Jerusalem, on April 11, 2022. (Flash90)
Bank of Israel Governor Amir Yaron speaks during a press conference in Jerusalem, on April 11, 2022. (Flash90)

The head of the Bank of Israel, Amir Yaron, said Tuesday that Israel’s economy can continue to grow amid the political upheaval wrought by the government’s collapse.

“Israel fortunately has an institutional system that, as we have seen, has made it possible for the economy to function properly during election campaigns,” Yaron said at the Eli Hurvitz Conference in Jerusalem.

“The Israeli economy has proven to have an impressive ability to grow and prosper even under conditions of uncertainty, political and otherwise,” Yaron said.

He added that he hopes the national budget will not be delayed long due to the expected elections in the fall, which will be Israel’s fifth in under four years.

“This is the economic task of the highest order for any government, and it is vital for the continued advancement of economic reforms that are essential in accelerating growth and raising the standard of living,” Yaron said of the budget.

The Knesset began the process of dissolving itself on Wednesday, after months of tumult that saw the coalition end up unable to pass even routine legislation.

Prime Minister Naftali Bennett’s governing coalition took power last year after a series of inconclusive elections, and passed a state budget for the first time in years last fall.

The coalition’s collapse has thrown Israel back into political uncertainty, with polls predicting deadlock after elections, barring any major changes in political alliances. Until the elections, the government will remain in place, but will largely cease legislating.

The political instability between 2019-2021 incurred heavy costs on Israeli society, including due to the lack of an up-to-date budget.

The Israel Democracy Institute estimated on Wednesday that the cost to the economy of the expected election will be up to nearly NIS 3 billion ($873 million).

From right to left: Israeli prime minister Naftali Bennett, Minister of Foreign Affairs Yair Lapid and Minister of Defense Benny Gantz seen in the Knesset on June 20, 2022. (Yonatan Sindel/Flash90)

Israel’s economy has weathered years of political instability, and the pandemic, relatively well, though.

In 2021, Israel’s economy grew by 8.1%, surpassing all forecasts. It contracted slightly in the first quarter of this year, but earlier this month, the OECD predicted it will grow by 4.8% in 2022.

Inflation for the past 12 months was about 4%, higher than the Bank of Israel’s target range of 1-3%, but lower than the global average.

Yaron said the Bank of Israel’s Monetary Committee will implement policy that will further rein in inflation to the target range.

“High inflation impairs economic certainty and activity, and is more damaging to the weaker parts of the population,” he said.

“Some of that process is due to supply factors and the continued supply chain interruptions, while some is due to domestic inflationary processes, in respect of which monetary policy is more effective,” Yaron said.

Israel’s budget deficit is essentially zero for the first time since 2008, and unemployment is a low 3.4%.

The tech ecosystem, an economic powerhouse, is going strong and has held its top international ranking, even as the global downturn has made funding more scarce. The value of Tel Aviv’s startup ecosystem is an estimated $120 billion.

The main economic concern for the Israeli public is housing prices, which are up 15% in the past year and were already sky-high. Demonstrators set up a camp in Tel Aviv this week to protest housing costs, hearkening back to the massive social justice movement of 2011.

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