Economic crisis should be a time for reform

Businesses, economists decry ‘lack of leadership’ as pandemic batters economy

Ad hoc addenda, poor implementation and too little, too late — a chorus of criticism for the government’s aid measures comes from firms big and small, along with the self-employed

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Prime Minister Benjamin Netanyahu (R) and Finance Minister Moshe Kahlon in Jerusalem on March 11, 2019. (Aharon Krohn/Flash90)
Prime Minister Benjamin Netanyahu (R) and Finance Minister Moshe Kahlon in Jerusalem on March 11, 2019. (Aharon Krohn/Flash90)

Businesses along with economists have been decrying what they say is a lack of economic leadership as Israel copes with the fallout of the coronavirus pandemic.

The economic package that the country has provided is too little, too late, they say. Unemployment has reached record highs and businesses big and small warn they may permanently shut down in the wake of restrictions imposed to stave off the viral infection that has killed hundreds of thousands of people around the world.

Small business owners and self-employed workers have taken to the streets, clamoring for more government help. Large retail chains refused to open when the government finally eased some restrictions this week, demanding compensation for their losses amid concerns of lower consumer spending and continued social distancing measures.

Information regarding what state aid is being given and who can benefit has been confusing, critics say, with ministry officials adding sums and earmarking money ad hoc rather than setting out a clear and well-defined strategy. And even when money is made available, it is not reaching the businesses that need it fast enough, they say.

Self-employed workers participate in a rally calling for financial support from the government outside the Knesset in Jerusalem, on April 19, 2020. (Yonatan Sindel/Flash90)

“The performance of the Finance Ministry and the state relative to the whole economic crisis is beneath all criticism,” said Yaron Zelekha, Israel’s former accountant general and today the director of accountancy studies at the Ono Academic College, in a phone interview. “They don’t understand the depth of the crisis.”

Yaniv Pagot, an economist and head of strategy for the Ayalon Group. (Courtesy)

Prime Minister Benjamin Netanyahu, busy with coalition building and the health crisis caused by the pandemic, has not been seen as taking charge of the economic crisis.

Finance Minister Moshe Kahlon, who has served in the post since 2015, is a lame duck after saying in September that he’d be leaving politics after March’s elections.

“What we are seeing is a lack of economic leadership; no one is taking ownership of the economic crisis,” said Yaniv Pagot, an economist and strategic adviser to institutional investors. “There is no political leadership that is focusing on the economic aspects of the crisis. No one is stepping up to the challenge.”

Israel had 15,870 confirmed cases of COVID-19 and 219 deaths from the illness as of April 30. With the economy at a near-halt, jobless figures spiked to 1,093,000 by mid-April, bringing the unemployment rate to an unprecedented 26%, from below 4% pre-coronavirus.

For the first time since 2002, growth this year is expected to be negative, at minus 5.4 percent, according to a Finance Ministry report. This compares with a growth of 3% forecast by the ministry, pre-coronavirus, and a 3.3% growth in 2019.

The recession could be even deeper if there is a second wave of the virus and further lockdowns, the ministry warned. Unemployment this year could reach an average of 13%-14%, the report said, as a drop in local and global consumer demand will deter employers from re-employing workers they have put on unpaid leave.

The budget deficit for the year is expected to surge to 10.29% of GDP, as tax revenues are expected to plunge and expenses to rise amid the crisis, making Israel’s deficit the third-highest among OECD nations below just the US and Canada, according to the Treasury report based on data compiled by the International Monetary Fund.

Israel’s debt-to-GDP ratio is expected to rise to some 76.2%, from some 61.2% in 2019. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts.

In a bid to get the economic engine going again, the government has gradually started easing restrictions on a range of measures it imposed to contain the spread of the virus. These measures included travel restrictions, social distancing, and the closure of nonessential businesses.

The government also approved, in March, an economic rescue package worth NIS 80 billion (approximately $22.9 billion), the largest in Israeli history, to prop up its economy. The package includes a NIS 8 billion fund for small businesses, backed by government guarantees; loan guarantees for larger businesses; property tax relief for businesses; payment deferrals for VAT, municipal taxes, utilities and income tax; accelerated tax refunds and business grants.

The package is very conservative compared to those of other countries, the critics say. And implementation is experiencing hiccups, with businesses accusing the banks of dragging their feet in vetting, and then turning down, their applications for the government-backed loans because they are deemed too risky.

The loan guarantees provided by the government — up to 15% for small businesses — are much smaller that those provided by other governments: Germany provides 90% government, Switzerland 85%, Spain 80%, data compiled by the Bank of Israel shows.

The NIS 80 billion package is just some 5% of Israel’s GDP, compared with an aid package equal to 15% of GDP provided by the US and one equal to 17% of GDP provided by the UK and Germany, according to data compiled by the Israel Federation of Small Business Organizations. The federation has organized demonstrations to amplify the demands of small business owners, such as falafel vendors, who were dealt a critical blow by the pandemic regulations.

Yuval Carmi, a falafel store owner in Ashdod who has been hit hard by the pandemic, April 19, 2020. (screen capture: Channel 13)

“The Finance Ministry’s method is not wise. They want to first see what the damage is and then pay,” said Roee Cohen, the president of the Israel Federation of Small Business Organizations, by phone. “But it will be too late, there will be nothing left.”

Cohen said the federation will be holding the “mother of all demonstrations” on Thursday in Tel Aviv to demand solutions for small businesses at high risk and unemployment benefits for the self-employed. Protesters will light the “torch of independents,” he said, referring to the citizens honored with torch-lighting on Tuesday evening, the eve of Independence Day. “We are continuing our fight.”

Meanwhile, larger businesses are also clamoring for help. Some 200 chains, including leading stores in clothing, optics, home decor, camping and sports gear, as well as cafes and restaurants, chose not to open their doors as many pandemic restrictions were lifted at midnight Saturday.

The Association of Fashion and Commerce Chains said in a statement that opening stores in a limited capacity now without a government-provided security net would only deepen their losses.

“There was a month and a half in which we were forced to close because of the emergency measures imposed by the government,” said Avi Shomer, the CEO of the Tzomet Sfarim bookstores, which employ 700 workers in 100 stores across the country, in a phone interview.

Avi Shomer, the CEO of the Tzomet Sfarim bookstores (Courtesy)

“We don’t know what the situation will be in the future,” he said, because many limitations still remain in place, such as limiting the number of customers allowed into stores at a time. “People have less money and fewer will come out to buy.”

Sales will not go back to their pre-coronavirus level, he said. Thus, stores cannot open up without a safety net. “If we open, it could be our situation could be much worse, so it is preferable not to open.”

In response to the protests, on Friday the government approved an NIS 8 billion plan to increase support for self-employed Israelis and small business owners, and on Sunday night it said it would allocate an additional NIS 6 billion, not included in the original $80 billion package, to help businesses return employees to the workforce. In response, the chains recommended reopening the stores, even as the criteria for who would be eligible for the funds were yet to be announced.

“The Finance Ministry is enacting a policy that is very conservative based on concerns that people will take advantage of the system and cheat,” Pagot said. “We are already two months into the crisis and there is no orderly plan.”

Israeli economist Yaron Zelekha, January 15, 2013. (Yossi Zeliger/FLASH90)

The Finance Ministry declined to comment. It should be noted, however, that its officials, could be said to have been responding to an unprecedented economic crisis without a fully functioning minister, under a transitional government, and with no approved budget to work with.

Moreover, the 2019 budget deficit ballooned to 4% of GDP, well above the government target of 2.9%, as expenditure surged and government revenues were impacted by weak growth in indirect taxes and “fewer one-off revenue windfalls” relative to recent years, according to Moody’s, which on Friday lowered its outlook for the nation to stable from positive.

All of this, it could be said, has made it harder for the ministry to open up its purse strings, especially in light of the fact that there could be a second wave of the virus, or another kind of war, around the corner.

If not now, when?

“It could be the ministry believes it needs to hold on to funds in case there is a second outbreak,” said Pagot, the economist. But the higher budget deficit is not an excuse behind which it should hide, he said.

“Of course, if we’d had a lower deficit, we would have been in a better position,” Pagot added. “But in a once-in-a-100-year crisis, like we have now, an extra 1% or 2% in deficit as a result of this crisis is not something that will dramatically change the picture.”

Former Bank of Israel governor Karnit Flug said earlier this month that increased spending at this time was justified to ward off even more devastating consequences.

“At the moment, it is very important to actually take all the measures in order to reduce the long-term damage to the economy as a result of this lockdown,” she said. “Yes, it means higher deficit and higher debt, and yes, it means we will have to finance it over time, over the years. But if we don’t take this measure, the effect on the economy will be even more devastating. And I think the cost of that will be huge.”

The government will pay a heavy price for its “stingy” policies, warned the economist Zelekha. Each business that goes under because it did not get a government-backed loan “will stop paying taxes forever and its workers will be made unemployed and they will need unemployment payments,” he said.

In the case of providing loans to businesses, he said, “it is better to be roughly right than precisely wrong,” he said, quoting the British economist John Maynard Keynes.

Economic crises — with all parties feeling a sense of urgency and responsibility to save the economy — are good starting points for carrying out reforms of sectors such as ports, electricity and taxation, to benefit the economy once the bad times are over, economists say. Without a strong economic leadership at its helm, though, Israel could be squandering this opportunity.

“This is a perfect time to undertake a reform of the public sector and cut back on inefficiencies there,” said Pagot.

Most Popular
read more: