​Summary:

  • The current account was in a surplus equal to 4.9 percent of GDP in 2006 which is an exceptionally high level, both from the historical and international perspectives.  
  • The high current account surplus was primarily the result of the tax reform on investment abroad and the expansion of investment by institutional investors abroad, larger-than-expected public savings and a domestic interest rate at a similar level to that in the US, which created pressure for both a nominal and a real depreciation.  
  • In addition to these forces, there are others acting to reduce investment and increase the share of savings in GDP, which would mean a rise in the current account surplus. These forces include the decline in the number of immigrants arriving in Israel, which exerts downward pressure on investments; the structural change in the economy, that serves to reduce the physical investment and to increase the investment in human capital--which theoretically are likely to offset each other, but in the light of individuals' liquidity constraint and their uncertainty regarding the return to education, the reduction in physical investment is the stronger effect; and the shrinking of the social security net, which raises the level of individual's uncertainty about their future situation and tends to increase private savings.  
  • The rapid growth in the last three years, accompanied by an increase in the current account surplus, in contrast to the previous period of growth in which the deficit in the current account expanded, emphasizes the intensity of the forces acting to create the surplus. These include exports, which are a leading factor in the growth process, and short-term factors that support real depreciation. Together these factors have led to a current account surplus alongside rapid growth.  
  • In 2006, the upward trend in the net export of investment continued, alongside an increase to record levels of investment flows into and out of the economy. This trend, which began in 2002, is a manifestation of Israel's integration within the global economy and is a result of both global and domestic factors.  
  • The global processes that have influenced the financial account this year are primarily cyclical and include the continuing global trend of mergers and acquisitions ,which has worked to increase the volume of direct investment by nonresidents in Israel. The sharp decline in share indices in the emerging markets in May-June worked to reduce the volume of financial investment by both nonresidents in Israel and local residents abroad. The domestic influences that brought about the increase in capital flows are primarily structural and are the result of reforms in the financial markets.  
  • A long-term comparison to countries similar to Israel shows that Israel, like other developing countries, is a net importer of direct investment, though on a relatively small scale. In recent years, there has been a noticeable upward trend in the volume of incoming and outgoing investment in terms of percentage of GDP.  
  • The proportion of direct investment that contributes directly to capital accumulation within total direct investment has risen since the beginning of the decade but has fallen during the last two years as a result of the privatization process. 


The Balance of Payments - Full File