Government debt fell to the equivalent of 100% of gross domestic product in 2005 from 103% the year before, as the economy's quick growth rate outpaced a moderate rise in debt, the Bank of Israel said Sunday.
"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 central bank said.
OECD (Organization for economic cooperation and development) member nations generally maintain a ratio of between 25% and 75% while the EU's Maastricht Treaty restricts membership in the euro bloc to countries with a debt-to-GDP ratio of less than 60%, or that can show a clear trend in that direction.
Israel's debt-to-GDP ratio had fallen to 88% in 2000, before rising to 93% in 2001 and to 104% in 2003, the Bank of Israel noted.
The current ratio places Israel between Greece, whose government debt equaled 108% of GDP in 2005, and Belgium (98%), and ahead of Italy (125%) and Japan (159%).
"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," the central bank commented.
Israel's debt rose by 2.1% to NIS 552 billion, it's lowest rate of growth since 2000, due to the government's lower financing needs resulting from the steep drop in the deficit and marked increase in proceeds from privatizations, the Bank of Israel said.
The debt's growth reflected a 5.9% rise in the external debt, due mainly to the weakness of the shekel against the dollar in 2005, which actually slightly reduced the external debt in dollar terms. Internal debt, issued in New Israeli Shekels, constitutes about 74% of government debt, and external debt, issued in foreign currency, 26%.
Internal debt rose a moderate 0.8%, due to a revaluation of the debt, a rise in prices and negative net domestic borrowing.
The central bank also stressed that Israel's high debt-to-GDP ratio led to a heavy burden of interest payments on the debt, which equalled 5.8% of GDP in 2005, "considerably higher" than the OECD average of 1.9% the EU's 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," the central bank said.
"Moreover, a high debt ratio generally goes in hand-in-hand with a lower country rating," which in turn forces the government and business sector to pay higher interest rates in capital markets abroad, the Bank of Israel added.