In its announcement summarizing a visit to Israel of over a week, IMF economists said that Israel's economy was demonstrating strong growth, unemployment was at an all-time low and the rate of public debt had been significantly reduced. During their visit of more than a week to Israel under Article IV of the IMF Articles of Agreement, the IMF economists met with Minister of Finance Moshe Kahlon, Governor of the Bank of Israel Karnit Flug, and senior economists at the Ministry of Finance and the Bank of Israel.
At the press conference held yesterday, Kahlon took the IMF's praise of the government's policy on a number of economic issues in stride. He noted that IMF believed that the government's measures would lower housing prices in the short term, referring to the IMF's comment that the recent government measures were likely to moderate prices in the short term. The IMF went on to say, however, that more fundamental reforms were needed in order to increase the supply and make affordable housing available in the long term.
The IMF announcement also criticized Kahlon's buyer fixed price plan. IMF economist Craig Beaumont said that the plan would help people buy a home for the first time in their lives, but did not believe that it would change the housing market substantially. He added that the plan was costly, and that other measures might be more useful in the long term.
Beaumont did agree, however, with Ministry of Finance director general Shai Babad when he said that the buyer fixed price plan was designed to buy time until government measures aimed at increasing the supply of homes began to yield results. Beaumont also took issue with Kahlon's plan to continue cutting taxes. He regretted that the government had set a 2.9% budget deficit target for 2017. He said the target should be lowered to 2%, and that the best way of doing this was to use the surplus tax revenue, and to cut tax exemptions, which amount to a relatively high 5% of GDP.
In monetary policy, the IMF recommended that the Bank of Israel hold back on interest rate hikes until it is proven that inflation is returning to the 1-3% annual target. According to the IMF, shekel appreciation is the factor that has kept inflation in Israel negative.
The IMF praises the Bank of Israel's financial supervision of the banking system, taking particular note of the establishment of a new capital market, insurance, and savings authority, which it calls a forward looking measure worthy of note. The IMF said that it was also important to apply the Solvency II work framework in the insurance sector in order to ensure its resilience in the face of shocks, and to guarantee its ability to fulfill its obligations to clients. The IMF again recommended expediting the founding of a financial stability committee in order to improve coordination between the supervisory agencies, especially information sharing.
The IMF's chief recommendations to the government were to take advantage of the economy's solid state in order to promote structural reforms and changes, especially involving the inclusion of haredim (ultra-Orthodox Jews) and Arabs in the economy. The IMF said it was an especially propitious time for reforms that would help foster high and inclusive growth.
The IMF said that substantial progress had been achieved in reducing public debt - a trend that should be continued, while at the same time increasing potential growth by appropriate investments in education, health, and infrastructure, introducing deposit insurance, and adding tools for dealing with the banks. The IMF believes that Israel can substantially boost its productivity through properly planned reforms, including measures aimed at ensuring that regulation achieves the goals of public policy at lower cost. According to the IMF, progress in increasing the rate of participation in the labor force must continue, which requires redoubled efforts to narrow gaps in education and mobility, while increasing support for poor workers."
Published by Globes [online], Israel Business News - www.globes-online.com - on February 9, 2017
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