In an interview with "Bloomberg", Ministry of Finance director general Yarom Ariav said, "Israel’s budget deficit may reach 6% of GDP in 2009 year, forcing the country to raise money abroad for the first time since 2006. He added that the deficit would be widest since at least 1995, and will remain high at 5-5.5% of GDP in 2010 as the slumping economy reduces tax revenue.
"Bloomberg" notes that this forecast will require the government to increase borrowing to about NIS 40 billion shekels ($9.4 billion) this year from NIS 9.1 billion in 2008. Israel will have to raise money abroad to avoid pushing up domestic interest rates. It further noted that the Bank of Israel has cut the benchmark rate to 0.75 percent to bolster economic growth and begun buying government bonds to lower long-term rates.
Ariav said, “We know we are going to raise money in the international markets - in the States, maybe Europe, maybe the Far East - but we haven’t decided the exact mix. We face a big challenge financing this deficit."
Ariav added, “Tax collections won’t recover substantially in 2010. From what we see right now the global crisis will continue to 2010, and there is also a time lag between the recovery of the economy and the recovery of tax collections."
"Bloomberg" said that some of the foreign borrowing would be done with $3.8 billion remaining from $9 billion in guarantees the US gave Israel in 2003.
Ariav added that Israel’s ability to finance stimulus projects was limited because government debt is already equivalent to about 80% of GDP, while the impact of increased spending is constrained by the fact Israel has an open economy where stimulus money may go to imports.
“Because of that, we have to be more creative and more focused,” he said. “The effectiveness of traditional Keynesian economics in this kind of economy is quite limited.”
Published by Globes [online], Israel business news - www.globes-online.com - on March 11, 2009
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