IMF warns about deficit, home prices

“The pace of house-price inflation cannot continue without risk of broader instability," IMF report on Israel says.

November 29, 2010 23:19
2 minute read.
Housing in the Galilee.

galilee housing 248. (photo credit: Courtesy)

The International Monetary Fund on Monday called upon the Israel to reduce the fiscal deficit faster than planned and implement steps to cool the housing market.

“Israel passed through the global recession swiftly – the fruit of decisive policies – and strengthened macrofinancial policy frameworks,” the IMF said in its preliminary report on Israel’s economy in 2010. “The challenge now is to sustain growth and low inflation while boosting medium-term prospects – in the context of continued global uncertainty, capital outflows from advanced countries, shekel appreciation and a housing market that is overheating.”

On Monday, the members of the IMF mission, headed by Peter Doyle, submitted their report to Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fischer. The IMF is expected to submit its full 2010 report on Israel’s economy in January.

“The members of the mission are expert and experienced economists, and we derive much benefit from their reports,” Fischer said. “IMF economists generally express support for economic policy implemented in Israel. Nevertheless, in some areas they also voice criticism and make proposals which we take very seriously.”

The IMF praised the Israeli economy and the firm policy response for succeeding in bringing back strong growth and lowering unemployment to about 6 percent, close to its historic low. But the organization also pointed to several challenges.

“This performance has, however, come at a cost,” the report said. “Buoyed by global capital movements, the shekel appreciated by some 15% in real terms relative to precrisis levels, and is still rising. Competitiveness has been adversely affected, and this may already be reflected in loss of export market share in 2010, falling FDI inflows, and in recent months, outright falls in exports and flat employment.”

At the same time, the strong shekel has helped to contain inflation, which recently returned into its 1%-3% target range after a lengthy period just above it, the report said.

“Alongside, and in an echo of advanced countries in the early 2000s, nominal house prices took off in 2008 after years of stagnation, rising over 40% in just two years,” the report said.

“The pace of house-price inflation cannot continue without risk of broader instability – notably in the banking sector,” the report said. “Given uncertainty about when stabilization will occur, prompt measures to check the momentum of prices should focus on actions needed anyway to establish a healthy housing sector for the long run.”

The IMF welcomed the government’s establishment of the Sheshinski Committee to review taxes on natural gas and the arrangements for spending of the proceeds.

“General intention to raise the ‘tax take’ from these activities to advanced country norms is fully appropriate,” the report said. “We encourage other reforms to adopt international best practice in this area, including appropriate pricing arrangements in the tax and to secure appropriate intergenerational distribution of the proceeds.”

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