IMF says Israel managed pandemic ‘exceptionally well,’ warns of ‘significant’ risks

In report, financial institution notes rapid vaccination campaign, quick measures taken by government and central bank, but says challenges persist

Ricky Ben-David is a Times of Israel editor and reporter

People walk by graffiti art of the late David Ben Gurion, Israel's first prime minister, on a street in Tel Aviv's  Neve Tzedek neighborhood. January 22, 2022. (Nati Shohat/Flash90)
People walk by graffiti art of the late David Ben Gurion, Israel's first prime minister, on a street in Tel Aviv's Neve Tzedek neighborhood. January 22, 2022. (Nati Shohat/Flash90)

The International Monetary Fund (IMF) said Israel has weathered the COVID-19 pandemic “exceptionally well” with a swift, efficient vaccination campaign and a rapidly recovering economy, but still faced “significant” risks to its 2022 outlook such as soaring housing prices and affordability.

In a report published Sunday, the 190-country lending agency said Israel’s “world-leading vaccination campaign boosted confidence and helped mitigate the impact of the pandemic in the face of new, virulent variants,” while the government embarked on “prompt and ample” support for households and businesses and the Bank of Israel’s “monetary and prudential measures provided liquidity, kept credit flowing, and prevented undue tightening of financial conditions.”

The IMF reported that after a relatively mild downturn in 2020, Israel’s economy recovered strongly in 2021 with real GDP exceeding its pre-pandemic level and with growth at around 6.5 percent last year. “The rebound was stronger than in other advanced economies,” the financial institution reported, echoing separate reports in December 2021 by the OECD and by multinational business information company Dun & Bradstreet that showed Israel’s economic recovery beat the global average.

The IMF, too, found that Israel’s thriving tech industry “led the recovery” as private consumption “gained speed.”

Inflation, meanwhile, “surged due to global factors and a rebound in domestic demand” though it remained within the Bank of Israel’s target range. The central bank said last month that inflation was forecast at 2.4% in 2021 and expectations for 2022 in the medium and long terms were within an annual target of 1%-3%.

“The 2021 fiscal deficit was significantly smaller than expected due to buoyant tax revenues on the back of fast-growing domestic and global equity markets and gradual tapering of COVID-related support,” the IMF said in its report. Unemployment has also declined steadily, it noted.

A healthcare worker takes swab samples from an Israeli child at a COVID-19 drive-through testing site in Modi’in, February 1, 2022. (Yossi Aloni/Flash90)

In a briefing with Israeli journalists Sunday, IMF’s Mission Chief for Israel Iva Krasteva Petrova said the IMF expected “the recovery to firm up and continue in 2022” and that the organization sees “no long-term scarring effect from the pandemic.”

The Israeli government’s support and the Bank of Israel’s policies were “timely, ample, and well-executed,” she said.

The IMF report said Israel’s economic recovery was “projected to solidify in 2022” with growth “supported by strong private consumption, investment, and net exports,” and inflation set to ease in the medium term.

At the same time, Israel will need 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).

The IMF said skills and knowledge gaps in the Israeli economy “could make labor reallocation across sectors challenging and costly and could affect unevenly the employment and wages of different demographic groups.” Policies should focus on “facilitating job creation and reallocation, removing product market barriers, and improving infrastructure.”

Housing prices and affordability are also a significant concern in Israel, the report said. “The rapid rise in housing prices rekindled concerns of price misalignment, stressing the need to advance structural measures to ease housing supply,” it read.

Krasteva Petrova said Israel has “exceptionally tight housing constraints” at a “high level that suggests misalignment.” She said addressing this issue should be a priority.

Israel could undertake “tax reforms to support incentives for municipalities to increase housing provisions,” she indicated.

A construction site of a new residential neighborhood in Herzliya, on March 27, 2020. (Gili Yaari / Flash90)

The IMF report also said Israel’s efforts to reduce trade barriers would be “key to promote efficient allocation of resources, investment, and innovation,” and help boost competition and reduce costs.

The country’s infrastructure also featured among the concerns and potential hindrances to growth.

“Infrastructure spending needs to accelerate further if Israel is to close the infrastructure stock gap relative to other OECD countries. Infrastructure improvements are particularly pressing in transportation to ease traffic congestion and improve job accessibility,” the IMF said.

Traffic jams on the Ayalon highway in Tel Aviv, on December 2, 2021. (Tomer Neuberg/Flash90)

The IMF welcomed Israel’s strengthened commitments to address climate change and the “significant progress” it has made “in developing policies to achieve their targets, including a gradual phase-in of excises on coal and other fuels between 2023–28 and a phase-out of coal energy production by 2025.”

Krasteva Petrova said, Israel’s “climate mitigation policies are welcome” and its “goals are ambitious.”

“Further efforts will be needed,” the IMF said. “Options include larger increases in carbon prices and providing greater regulatory and fiscal support for Israel’s innovative green technologies.”

Israel’s management of some risks and longstanding challenges “would help secure the recovery,” the financial institution said. These risks include new variants that could present a threat to economic growth, existing geopolitical issues that “might potentially cause socioeconomic and political disruption,” and a tightening of global financial conditions that “could lead to a stock market fall, lower government revenues, and a rise in the cost of capital.”

In the coming year, according to the report, pandemic-related support “should target the most affected sectors and vulnerable population groups,” after which medium-term fiscal policy should refocus “on reducing public debt and rebuilding pre-pandemic buffers.”

People shop at Hadar mall in Jerusalem, on December 16, 2021. (Yonatan Sindel/Flash90)

Israel’s tax system could also be made more progressive and the tax base could be broadened, including by reducing pension tax exemptions and personal and corporate tax incentives for selected groups, the report read.

Israel’s policies “should remain agile in the face of high growth and still significant uncertainty,” the IMF offered.

Finance Minister Avigdor Liberman said in a statement that the IMF report was a show of appreciation toward “the management of prudent and responsible fiscal policy based solely on economic and professional considerations, and indicates the resilience and dynamism of the Israeli economy compared to other developed countries.”

Bank of Israel Governor Professor Amir Yaron thanked the IMF for the “thorough and professional work in recent weeks.” He added that the central bank will study the final report in-depth.

Last month, the IMF said it was downgrading its forecast for the world economy in 2022, citing the spread of COVID-19’s Omicron variant, higher energy prices, an uptick in inflation and a deteriorating outlook for the world’s two biggest economies — the United States and China.

The financial institution now forecasts the global economy will expand 4.4% in 2022. That’s down from an estimated 5.9% last year and from the 4.9% the IMF was forecasting for 2022 back in October.

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