Israel's economy will only grow 1.5-2.0 percent in 2001 while inflation will remain below the government's target of 2.5-3.5 percent, the International Monetary Fund said in preliminary report on Monday, May 14.
The IMF noted that while the Bank of Israel has cut interest rates in small steps since 1999, "due to a sharp fall in inflation expectations that took place over the same time, the decline in real interest rates has been rather modest".
As a result, "real rates are still high, at around six percent", said the IMF mission, which has been visiting Israel. "The mission supports the easing of monetary policy consistent with inflation targeting," the report said.
The Israeli government's current forecast for 2001 growth is 2.0-3.0 percent. Gross domestic product expanded 5.9 percent last year.
Jonathan Katz, macro strategist at Israel's Ofek Securities, said the IMF's forecast was in line with private sector predictions. Katz estimated GDP will grow 1.0-1.5 percent in 2001 while GDP excluding the start-up sector will rise 2.5-3.0 percent.
In its report on the Israeli economy, the IMF said the deceleration in growth that began in the fourth quarter of 2000 was due mainly to the global turnaround in the high-tech boom as well as Israel's security problem.
The Palestinian uprising against Israeli occupation that began at the end of September has particularly hurt Israel's tourism, construction and agricultural sectors.
"The critical task confronting policy makers is to formulate economic policies so as to weather these shocks, maintaining stability and minimizing economic costs borne by the population, until global economic conditions rebound and the security situation improves," the report said.
Long-term growth prospects for the Israeli economy remain bright, however, particularly once a lasting solution to the security problem is reached, the IMF said. The mission praised Israeli authorities for establishing credibility on both the fiscal and monetary policy fronts.
It called on the government to support its commitment to meeting an original budget deficit target of 1.75 percent of GDP by refraining from introducing measures that would pressure spending. It said additional defense spending arising from the security situation should be offset by cuts elsewhere in the budget.
But the IMF also said that if government revenues fall short because of the growth slowdown, a deviation from the budget deficit target should be tolerated so as not to deepen the downturn.
Katz said this was in line with government and central bank thinking. "It's expected when you enter an economic downturn you may see slightly higher fiscal deficits and that is acceptable," he said.
Finance Minister Silvan Shalom expressed satisfaction with the report, saying in a statement that the IMF had praised the government's "responsible" economic policy. The Bank of Israel declined to comment on the report.
The IMF also urged that a process be put in place to eliminate the Israeli shekel's trading band, a measure also sought by the central bank but opposed by the government. "At a minimum, the band should be modified so that the lower boundary will not constrain the Bank of Israel's pursuit of price stability," the report said. ― (Reuters, Tel Aviv)
By Tova Cohen
© Reuters 2001
© 2001 Mena Report (www.menareport.com)