Full report
Bank of Israel Governor Dr. Karnit Flug: “I thank the members of the IMF delegation for their professional and thorough work. It is worth noting the delegation’s recommendation to urgently approve the establishment of the financial stability committee, in view of the changes expected in the financial system. The delegation listed a number of recommendations, the implementation of which is a necessary condition for continued strong growth in the long term, with an emphasis on the need to improve skills by improving the level of education and other tools to increase productivity, and the continued integration of Arabs and the ultra-Orthodox in the labor market. It is important that the government adopt these recommendations and act consistently to implement them.”
The International Monetary Fund submitted the main points of its annual report on the state of the Israeli economy to the Governor of the Bank of Israel and the Director General of the Ministry of Finance, favorably noting the strong growth of the economy and good state of the labor market. Strong economic growth is expected to continue, and inflation is expected to increase in 2018–2019, although there is uncertainty regarding the pace of the increase in inflation. The IMF emphasized that despite good macroeconomic performance, the inflation environment in Israel has been below the target range for a long time, due among other things to government efforts to increase competition and lower the cost of living.
With that, the Israeli economy grew by 3.4 percent in 2017, led by growth in domestic demand and the improvement in global growth. The unemployment rate has been declining steadily in recent years, falling to below 4 percent at the beginning of 2018, and supported broad wage increases in the economy that averaged 3.3 percent in 2017.
The IMF emphasizes that in the coming years, the budgetary deficit must be reduced moderately in order to maintain the downward trend of debt. The economic boom period is creating a good opportunity to implement particularly significant structural reforms in the areas of education and training, the goods market, and the business environment. A main challenge for the Israeli economy is the level of skills and the low labor force participation rate among minority groups in the population, particularly the ultra-Orthodox and Israeli Arabs. While the IMF notes positively the progress achieved by the government in recent years in dealing with the challenge of raising the participation rate among these minority groups, the demographic forecasts for growth in the proportion of these groups in the population in the coming decades make further improvement necessary.
Despite the increase in the education budget in recent years, the IMF emphasizes that there is still room for improvement, and highlights the need for streamlining in the system. The IMF notes positively the work currently being done in planning and implementing reforms in professional training, and emphasizes the need to connect these changes to the needs of the labor market.
The report also took positive note of the government’s work in infrastructure investments, and emphasized the need for improvement mainly in the area of transport infrastructure. A government committee is currently doing staff work on developing a long-term national infrastructure strategy for the period until 2030, and is also emphasizing projects that require a response in the next five years. In view of the long duration of transport infrastructure projects, the IMF emphasizes the need to also deal with the demand for infrastructure in the short term, and took positive note of initiatives such as the “Going Green” pilot.