5.3.2006
 
The government debt in 2005
 
  The ratio of government debt to GDP declined in 2005, to 100 percent, compared to 103 percent at the end of 2004, but it is still high relative to the norm in the OECD––between 25 percent and 75 percent––and to the 60 percent requirement specified in the Maastricht Treaty.
  Interest payments on Israel's government debt reached 5.8 percent of GDP, which is also significantly higher than the 1.9 percent average in the OECD.
The Bank of Israel's Monetary Department advises that total government debt at the end of 2005 was NIS 552 billion, a nominal rise of 2.1 percent from the level at the end of 2004. The rise in the debt in 2005 was the lowest in the last ten years (except for the year 2000), and resulted from the government's low need for financing due to the sharp reduction in the budget deficit together with a marked increase in the proceeds from privatization.
The modest rise in the government debt combined with rapid GDP growth resulted in a relatively large reduction in the gross-debt/GDP ratio, from 103 percent at the end of 2004 to 100 percent at the end of 2005. The ratio of net government debt to GDP also went down, from 89 percent at the end of 2004 to 83 percent at the end of 2005. It should be noted that foreign and domestic investors consider the ratio of gross government debt to GDP to be an important index of an economy's stability, and it plays an important role in a country's rating by the international rating agencies. It is also one of the central conditions for joining the eurozone specified in the European Stability and Growth Pact (the Maastricht Treaty). According to the Treaty, government debt may not exceed 60 percent of GDP or must be on a clear downward path converging to that figure.
Despite the relatively large drop in the share of total debt in GDP, the debt ratio in Israel is still far from the level acceptable in the advanced economies. The norm for the debt/GDP ratio in the OECD is between 25 percent and 75 percent. It is worth mentioning that in Israel too the ratio has been lower in the past, and in 2000 reached as low as 88 percent, but in 2001 to 2003 it climbed again.
Israel's high government-debt/GDP ratio has ramifications for the burden of interest payments on the debt. Using the internationally accepted definition of the term, these amounted to 5.8 percent of GDP in 2005, considerably higher than that in the OECD, 1.9 percent, and that in the EU, 2.7 percent. Such a high interest burden ties up budget sources which must be used for interest payments, and impinges on the flexibility to direct budget sources to other economic needs. Moreover, a high debt ratio generally goes in hand-in-hand with a lower country rating, so that the interest rates the government and the business sector must pay in the capital markets abroad will be higher. Furthermore, when the debt/GDP ratio is low, the government can pursue a countercyclical policy, and at times of recession can increase the budget deficit to encourage demand and thus contribute to a faster recovery. When the debt/GDP ratio is too high, a countercyclical policy is dangerous because it is likely to lead to a financial crisis.
The government debt comprises internal debt, issued in Israel in NIS, and external debt, issued abroad in foreign currency. The rise in the balance of debt in 2005 reflects a 5.9 percent rise in the external debt, deriving mainly from the weakness of the NIS against the US$ during 2005, such that in dollar terms the external debt actually declined a little. On the other hand, the internal debt crept up by a moderate 0.8 percent, deriving from a revaluation of the debt and a rise in prices, while net domestic borrowing was negative, and amounted to a NIS 2 billion surplus of repayments over issues. (This contrasts with positive borrowing of NIS 12 billion in 2004, and of more than NIS 20 billion in each of the years 2002 and 2003.) The steep decline in government borrowing helped to lower yields to maturity during 2005, and released capital market funds, making them available to the business sector.
Internal debt constitutes about 74 percent of government debt, and external debt 26 percent. The composition of the internal debt changed in the last few years, reflecting changes in the policy of debt management and various capital market reforms, with the reform of pension savings in the vanguard. The main trend in debt management in recent years has been towards the focus on the issue of unindexed debt, in particular fixed-interest debt, and making it a key government instrument for raising funds, in line with normal bond-market practice world wide. At the same time the share of CPI-indexed debt––which was appropriate to investors' needs at times of high inflation––was reduced, and the use of complex debt instruments, such as those bearing floating interest or indexed to foreign currency, stopped.
It should be noted that unindexed fixed-interest (local-currency) debt is risk-free for the issuer, as the cash flow is constant and known in advance. Hence, the government should make every effort to increase its share in total debt. At the end of 2005 unindexed fixed-interest debt constituted only 16 percent of the government's debt balance, but it is showing a constant upward trend and is expected to rise even faster in the light of the pensions reform and the discontinuation of the issue of earmarked bonds. Furthermore, the issue of unindexed debt helps to reduce the extent of indexation in the economy, thereby contributing to the achievement of the price-stability target.
 
Table 1: Gross Government Debt and Government Borrowing.
  2000 2001 2002 2003 2004 2005
A. Balance of debt at end-period (NIS billion, current prices)
1. Internal debt 305 326 372 390 403 407
2. External debt 111 121 132 133 138 146
3. Total debt 417 447 504 523 541 552
B. Share of government debt in GDP (percent)1
1. Internal debt 65 68 75 78 77 73
2. External debt 24 25 27 26 26 26
3. Total debt 88 93 102 104 103 100
C. Composition of debt by indexation
1. CPI-indexed 58 54 53 51 49 47
of which NonTradable 34 33 32 31 29 28
2. Unindexed (fixed interest) 7 9 10 13 14 16
3. Dollar-indexed 4 4 3 1 0 0
4. In foreign currency 27 27 26 26 25 26
5. At floating interest 5 7 8 9 11 11
6. Total 100 100 100 100 100 100
D. Share of interest payments on government debt in GDP (percent)
1. Internal debt 3.8 3.7 3.6 4.4 4.2 4
2. External debt 1.2 1.2 1.2 1.2 1.2 1.1
3. Total debt 5 5 4.8 5.6 5.3 5.1
4. Total debt according to Maastricht2 5.1 5.7 7.8 4.9 5.8 5.8
E. Composition of government borrowing by type of debt (percent, during period)
1. Domestic 79 84 83 70 65 72
a. Tradable 53 63 65 54 59 64
of which CPI-indexed 6 12 25 21 18 22
Unindexed (fixed interest) 27 31 24 23 26 37
Dollar-indexed 1 0 0 0 0 0
At floating interest 19 20 16 10 15 6
b. Nontradable (all CPI-indexed) 27 21 18 16 6 8
2. Abroad 21 16 17 30 35 28
3. Total 100 100 100 100 100 100
F. Composition of government borrowing by indexation (percent, during period)
1. CPI-indexed (including nontradable) 33 33 43 37 25 29
2. Unindexed (fixed interest) 27 31 24 23 26 37
3. Dollar-indexed and in foreign currency 21 16 17 30 35 28
4. At floating interest 19 20 16 10 15 6
5. Total 100 100 100 100 100 100
G. Composition of domestic tradable borrowing (percent, during period)
1. CPI-indexed 11 19 39 39 31 33
2. Unindexed (fixed interest) 51 49 37 42 44 58
3. Dollar-indexed 1 0 0 0 0 0
4. At floating interest 37 31 24 19 25 9
Total 100 100 100 100 100 100
 
1Balance of debt at end of period divided by GDP during period (the method used in the eurozone).
2Nominal interest plus indexation differentials.
 
Table 2: Interest Payments on Israel's Government Debt, According to the Universally Accepted Definition
  Interest payments on Interest payments on Interest payments on total debt in budget
Total debt Internal debt External debt Total debt Internal debt External debt
NIS billion, at current prices Percent of GDP Percent
2000 24.0 18.3 5.6 5.1 3.9 1.2 13.7
2001 27.5 21.5 6.0 5.7 4.5 1.2 14.6
2002 38.6 32.8 5.7 7.8 6.6 1.2 19.5
2003 24.6 18.4 6.2 4.9 3.7 1.2 12.4
2004 30.5 24.4 6.1 5.8 4.7 1.2 15.3
2005 32.4 26.0 6.4 5.8 4.7 1.1 15.8
 
Table 3: Interest Payments on Israel's Government Debt, According to the Definition Used in Israel1
  Interest payments on Interest payments on Interest payments on total debt in budget
Total debt Internal debt External debt Total debt Internal debt External debt
NIS billion, at current prices Percent of GDP Percent
2000 23.4 17.7 5.6 5.0 3.8 1.2 13.3
2001 23.8 17.8 6.0 5.0 3.7 1.2 12.6
2002 23.6 17.9 5.7 4.8 3.6 1.2 11.9
2003 28.2 22.0 6.2 5.6 4.4 1.2 14.1
2004 27.9 21.8 6.1 5.3 4.2 1.2 14.0
2005 28.2 21.9 6.4 5.1 4.0 1.1 13.8
 
1 Data on interest payments on Israel's government internal debt issued before 2001 are not calculated according to the international definitions, i.e., indexation differentials on the indexed debt and the rate of actual inflation in the case of the unindexed debt are deducted, and these are recorded as part of the balance of the principal and not as a budget expenditure, the universally accepted method. For debt issued after 2001 these are calculated as nominal payments, in line with the internationally accepted rules, and are recorded as a budget expenditure, as in other countries. As a result, these data on interest payments, according to the definition used in Israel, are generally biased downwards relative to the method used abroad.
 
Table 4: Average Term to Maturity on the Government Debt (Years)
  2000 2001 2002 2003 2004 2005
Total debt 6.5 6.6 6.6 6.9 6.8 6.7
Total internal debt 6.2 6.5 6.6 6.6 6.2 6.1
Tradable 4.5 5.1 5.4 5.5 5.3 5.4
Unindexed 4.4 5.6 5.6 4.7 4.1 3.7
At fixed interest 2.5 4.0 4.1 3.9 3.6 3.6
At floating interest 7.0 7.6 7.5 5.9 4.7 3.9
CPI-indexed 4.9 5.3 5.8 6.5 6.8 7.8
At fixed interest 5.3 5.8 6.0 6.6 6.8 7.8
At floating interest 1.7 1.1 0.7 0.1    
Dollar-indexed 2.5 1.8 1.0 0.6 5.1 4.1
Nontradable 8.6 8.5 8.3 8.2 7.7 7.3
External debt 7.1 6.8 6.5 8.0 8.6 8.4