To the presentation (Hebrew)​

To the lecture on YouTube 

Bank of Israel Governor Prof. Amir Yaron spoke at the College of Management on, “The COVID Crisis—The Economic Situation and a Look Forward”.  The following are the main points of his remarks.


The Governor began with a survey of the state of the Israeli economy in view of the crisis, and noted that it is important to remember that the ramifications of the crisis on the various industries are not uniform.  Thus, the adverse impact is mainly concentrated in the industries that are directly affected by the restrictions on activity and by social distancing requirements, particularly restaurants, tourism, culture, leisure, and so forth.  Businesses’ abilities to survive the crisis over the long term also vary according to their size.  These characteristics of the crisis emphasize the important function of fiscal policy, particularly the importance of taking policy steps that will enable as many people as possible to return to their jobs.  The Governor also emphasized that despite the good news on progress in developing a vaccine, when making policy decisions, we must take into account that it will take time until the vaccines reach the entire population.  We must therefore continue taking policy steps to manage morbidity while supporting continued economic activity and helping impacted households and merchants to get through the interim period.


The Governor then reviewed the Bank of Israel’s steps thus far during the crisis.  He noted that a large number of monetary steps have been taken, some of which had never been taken before by the central bank.  The Governor also emphasized that the synergy between the monetary measures and measures vis-à-vis the banking system enabled the Bank of Israel to make sure that the supply of credit for getting through the crisis and bridging over liquidity and cash flow difficulties was spread throughout the economy at a reasonable price level, while interest rates remained stable and even declined despite the increase in the risk environment.  The Governor added that the Bank of Israel is constantly monitoring the various markets and has even developed designated tools for this during the crisis, and that the Bank can take additional policy measures as necessary.  The Governor also discussed the Bank of Israel’s activity as Economic Advisor to the Government, which has included assistance in formulating the economic programs for dealing with the crisis, and formulating policy measures to minimize the economic damage, publication of more frequent macroeconomic forecasts than usual, performing economic analyses and assessments, and more.


The Governor related for the first time to the confirmation of Israel’s sovereign debt rating (AA-) and its stable ratings outlook by Standard and Poor’s last weekend.  He noted that the announcement attests to the strength of the Israeli economy, although it also signals measures that are necessary in order to maintain the rating, mainly on the fiscal side, such that the current situation should not be taken for granted.  For instance, the report noted the debt to GDP ratio as an important parameter in maintaining the current rating level, meaning that it should be kept below the 80 percent level.  The economic significance of maintaining the ratings level is that the State of Israel can raise debt at lower prices, and the government’s interest expenses are lower, so that more resources can be freed up for growth engines and assisting citizens.  In addition, the Governor noted that the report also mentions the Bank of Israel’s actions and contributions to the strength of the Israeli economy and financial system, and to minimizing the economic damage of the crisis, thanks to the effectiveness and flexibility of the Bank’s independent monetary measures.


The Governor for the first time presented the Research Department’s forecast of the multiyear path of the debt to GDP ratio in accordance with the various scenarios included in the Bank’s recent staff forecast, while relating to possible policy paths.  The tremendous uncertainty regarding the development of morbidity in the coming year and its impact on the economic situation has had a marked impact on the expected debt ratio in the coming years, and on the optimal fiscal policy.  While the rapid reduction of the structural deficit by reining in expenditures and raising tax rates can accelerate the reduction of the debt to GDP ratio, it also may harm the recovery from the crisis in a period when the unemployment rate remains high, particularly if morbidity declines slowly.  The Governor therefore recommended a more flexible fiscal path for the coming year, which is based on the rapid approval of the 2021 budget, and to wait to make comprehensive decisions regarding the budgets for the following years until the health situation becomes clearer, while building a fiscal policy that can adapt to developments.  The Governor also noted that despite the marked increase since the start of the crisis, by international comparison, the expected debt and deficit in Israel are near or below the average of the advanced economies.


The Governor emphasized that it is important to rapidly approve the 2021 budget.  Such a budget will enable the government ministries and those working with them to better plan their activities for the coming year, will include the necessary changes to the composition of the budget (which is currently based on the 2019 budget that was approved at the beginning of 2018), and prevent the risk of unplanned fiscal restraint derived from activity through a interim budget.  Alongside this, the Governor recommended maintaining the separation between direct expenses to deal with the COVID crisis that have already been approved, mainly the safety net for businesses and employees, and the normal budget that will be increased in accordance with the legally mandated expenditure ceiling.


Based on the forecast that was presented, it is clear that maintaining the budgetary expenditure restrictions—with the possibility of exchanging some of the major restrictions with an increase on the revenue side—alongside control of morbidity can stability the debt to GDP ratio and even lead to a downward path in a few years.  Maintaining the structural deficit at its pre-crisis level could lead to the opposite result, in which the debt to GDP ratio stabilizes at high levels or continues to increase.


The Governor emphasized that history shows that the years following an economic crisis feature high growth.  This is therefore the opportunity to make significant structural changes in the economy.  Moreover, the extent of our success in maximizing the recovery years is largely derived from proper planning that makes it possible to initiate processes that accelerate growth and productivity following the crisis, while adapting to the insights, opportunities, and changes resulting from the crisis.  Later on, based on the Productivity Report that the Bank of Israel published last year and thinking processes at the Bank in view of the insights from the crisis thus far, the Governor noted a number of examples of such processes such as investment in transport infrastructure, investment in communications infrastructure, and a number of measures to ease the regulatory burden and adopt digital processes in government services to the business sector.


Investment in transport infrastructure:


The special nature of the crisis has made it possible to accelerate work on important infrastructure projects during the crisis throughout the country.  It is therefore recommended to continue increasing the volume of investment in public transport infrastructure.  The rapid increase in population in Israel makes it necessary to maintain a higher rate of investment in infrastructure over time than in other countries, in order to attain and maintain quality infrastructure that is comparable to other advanced countries.  It is recommended that preference be given to investment in the use of underground public transit in the downtown Tel Aviv metropolitan area, and in public transit with dedicated rights-of-way in less-congested areas.  In addition, in order to streamline the use of existing transport infrastructure, it is advisable to impose a congestion tax in parallel with the rapid expansion of availability of public transit and joint transit options.


Investment in communications infrastructure:


The use of communications infrastructure has increased during the crisis, and this has become especially important to the functioning of the labor market and other fields such as education, government services, and so forth.  The crisis has emphasized the advantage of accelerating and expanding investment in communications infrastructure, and the government has taken initial steps in advancing such investments.  It is recommended that the removal of regulatory obstacles to deploying such infrastructure continue, and that a response be given regarding access to places where it is not commercially feasible, using public resources.  It is recommended that a regulatory mechanism be put in place to enable the sharing of vertical communications infrastructure to save costs, and to increase access of Bezeq’s physical infrastructure to all operators in order to deploy parallel infrastructure more easily.  The pace and service level of data transfer are essential not only for improving quality of life, but also for employee output and the ability to deploy new technology that can contribute to labor productivity.


Regulation and the business environment:


The public sector has adapted itself during the crisis to a different work format than it was used to prior to the crisis.  The computerization of government services began even before the crisis, but it accelerated during the crisis, in parallel with the deployment of the government workforce, including remote working.  As a result, an opportunity for change was created in the public sector in terms of labor flexibility and deployment throughout the country.  There will apparently be adjustments to wage agreements and how the public sector is managed in the post-crisis era.  It is therefore recommended that targets be set in the wage agreements for the adoption of digital processes in government services to the business sector, such as digital signatures that will obviate the need to physically go to government offices.  In addition, legislation must be amended to allow for the shortening of the process of establishing, expanding, and developing a business, and regulatory processes must be streamlined, for instance by requiring a declaration as an alternative to supervision while ensuring that the mechanisms controlling these processes are budgeted at a level that will enable effective enforcement and proper service.  Finally, the process whereby any new regulation must be examined in terms of its implications and economic cost should be expanded.  Accelerating the process of adopting regulations from other advanced economies unless there are material reasons not to do so in individual cases will help both in easing the regulatory burden and in increasing competition in the economy through increased exposure to products from abroad.  It is reasonable to assume that most of the measures in the field of regulation and bureaucracy can be implemented with a change in managing work and labor relations in the government ministries, without any significant budgetary cost.


In conclusion, the Governor emphasized that the best way to advance these issues is through a clear budgetary framework and rapid accompanying legislation.  However, due to the great uncertainty, it is correct at this stage to focus the 2021 budget on dealing with the crisis and advancing the multi-year outline to lower the debt ratio in the 2022 budget that will be discussed in the summer of 2021.  Alongside this, it is important to advance the necessary measures to accelerate growth and productivity.  In addition, the Governor emphasized that all of the necessary adjustments and changes to the budgets for the coming years must be done through clear definitions of the goals for convergence of the fiscal aggregates accompanied by policy measures that will lead to their achievement, with a long-term view that includes fiscal commitment and a return to the downward path of the debt to GDP ratio within a few years.  Fiscal credibility was a strategic asset for the Israeli economy before the crisis, and it is important to maintain it.​