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Stable government, budget needed for Israel to exit crisis – central bank chief

Bank of Israel governor Amir Yaron says taxes will need to be raised to curb debt, but not this year; monetary policy to stay expansionary

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

Governor of the Bank of Israel Amir Yaron, left, presents the central bank's annual report to President Reuven Rivlin, April 6, 2021 (Mark Neyman, GPO)
Governor of the Bank of Israel Amir Yaron, left, presents the central bank's annual report to President Reuven Rivlin, April 6, 2021 (Mark Neyman, GPO)

Israel needs a stable government and a budget as soon as possible to help it get out of the economic crisis wrought by the coronavirus pandemic, Bank of Israel Governor Amir Yaron said on Tuesday at a press conference in which the central bank presented its annual report.

“It is clear that we need a government and some sort of stability,” said Yaron in answer to a question about the political deadlock that has gripped the nation, after a fourth election in two years yielded no clear winner. “Without a government we cannot advance the programs and structural changes that the economy needs.”

To ensure sustainable growth, and investments and the establishment of priorities, a stable government is needed, he said. “This cannot be done in a haphazard way.”

Because of the political upheaval, Israel has been without an annual budget since 2018. On Tuesday, President Reuven Rivlin reluctantly tapped incumbent Prime Minister Benjamin Netanyahu to form the next government, noting that he was doing so reluctantly, both because no party leader appeared to have enough support to succeed at cobbling together a ruling coalition and because he had “moral and ethical” reservations given that Netanyahu is on trial for corruption.

Israelis enjoy sitting at restaurants in Tel Aviv, on April 04, 2021. (Miriam Alster/FLASH90)

Israel’s gross domestic product contracted by 2.5% in 2020 due to the pandemic, with enforced social distancing shuttering businesses and economic activities. Unemployment shot up to its highest level in at least 50 years, to an average of 15.7% for the year, compared to a record low level of 3.8% in 2019. Private consumption dropped by 9.5%, and GDP per capita by 11%. The government deficit ballooned to 11.6% from 3.7% in 2019, and the debt to GDP ratio surged to 72.6% from 60% in 2019.

The economy is now exiting the crisis, as restrictions have been widely lifted amid a world-beating vaccination drive that is lowering the rate of infections. There are now 4.86 million people in Israel who have been vaccinated with a second dose, out of a population of about 9 million.

Yaron said that the Bank of Israel forecasts that only in 2040 will the nation bring its debt to GDP ratio back to a pre-pandemic level of 60%. Taxes, he said, will have to be raised to lower national debt, though it is still unclear when.

“It won’t happen in 2021,” Yaron said. “It will happen when the economy will reach a high activity level… When this will happen, we don’t have the ability to say, because we are just exiting the crisis. Will it be somewhere within 2022, or will slide to 2023? This is one of the issues we are still studying.”

VAT charges could be temporarily eased, Yaron said, if consumer demand doesn’t  bounce back to pre-pandemic levels, but it is too soon to know, and that step is “not necessary” at the moment.

The economic crisis triggered by the coronavirus pandemic was one of the worst ever registered by Israel but its impact was attenuated by the fact that exports grew, even during the crisis, as the high-tech sector continued to thrive. The economic aid packages and plans rolled out by the government and the Bank of Israel to boost the economy also helped. Without the aid, the economy could have contracted by as much as 5% this year, Yaron said.

The government should halt in June, as planned, unemployment benefits it has extended to workers who have been furloughed, to make sure they are incentivized to return to work, Yaron said.

Dealing with unemployment, investing in infrastructure and curbing regulation, training workers who are out of jobs and increasing digitalization are among the key steps that need to be taken to get the economy out of the crisis, he said.

Regarding interest rates, Yaron reiterated that the monetary policy will continue to be “expansionary,” and that rates will likely to continue to be “low for longer.”
The central bank’s key lending rate is at a record low level of 0.1%.

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