Shekel money bills.
(photo credit: REUTERS)
Israel's public debt burden will rise if it continues to defer plans to lower its budget deficit targets, the International Monetary Fund warned on Wednesday, while praising the Bank of Israel for its handling of monetary policy.
In a final report on Israel's economy, the Fund also said public finances leave "few buffers" to deal with shocks, such as a housing price correction, renewed military conflicts or a sharp recession.
"The fiscal deficit needs to be reduced to bring debt firmly on a downward path and build fiscal space," the report said.
"A stronger medium-term framework, with an explicit revenue and expenditure plan consistent with the deficit target, is critical."
Israel's debt-to-GDP ratio has stabilized after a period of decline, holding at around 67 percent. It is expected to rise to 69 percent by 2020 and could climb above 75 percent "under a growth-shock or sharp housing correction scenario," the IMF said.
The deficit is projected at 2.8 percent of GDP in 2015 while a target of 2.9 percent has been set for next year.
Those levels exceed the targets set out in a previous budget law, of 2.5 percent this year, 2 percent in 2016 and 1.5 percent in 2019, which the IMF said should be revived.
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"Achieving these targets would go a long way towards addressing the fiscal problem, with the debt ratio converging to 50 percent of GDP over the longer term. This will, however, require substantial efforts," it said, recommending budget cuts and an expenditure ceiling.
"This challenge should be addressed upfront, and not put off to the future," the Fund said, urging the 2016 deficit target be lowered by at least a half a percentage point.
The Knesset is expected to finally approve a 13-month budget, to run from December through 2016, in mid-November.
On interest rates, the IMF said "no monetary easing is needed at this point, as low inflation is largely imported and likely to be temporary."
The central bank has left its benchmark interest rate at 0.1 percent for six months, despite weak economic growth and a deflation trend for the past year. The annual inflation rate was -0.4 percent in August.
The IMF said Israel should boost the supply of housing to contain price increases and that concerted efforts among relevant ministries and local governments are needed. Housing prices have nearly doubled since 2007.
It noted that Israel's financial system appears sound but said risks emanating from exposure to real estate and construction should be carefully monitored.
The IMF forecasts economic growth of 3 percent in 2015 and 3-3.25 percent in the coming years, in line with potential growth.
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