The International Monetary Fund (IMF) on Wednesday flagged Israel's proposed judiciary reforms as a significant downside risk to the economy that could tighten financial conditions and hinder investment, consumption and long-term growth.
Israel needed to permanently reduce uncertainty around the reforms with a "politically sustainable solution that is clearly communicated and well understood both domestically and abroad," the IMF said in a statement issued at the end of an "Article IV" staff mission to Jerusalem.
Prime Minister Benjamin Netanyahu's hard-right coalition government has proposed sweeping changes that would limit the Supreme Court's power to rule against the legislature and the executive branch, while giving ministers more power in appointing judges.
The plan has sparked domestic protests and caused alarm among Israel's Western allies over its potential to weaken the rule of law.
Netanyahu says the reforms are seeking a better balance between the different branches of government, but has agreed to delay the overhaul to try to negotiate a middle ground.
"Absent the emergence of a durable and politically sustainable solution, continued uncertainty could significantly increase the price of risk in the economy, tightening financial conditions and hindering investment and consumption, with potential repercussions for growth, also in the longer term," the IMF said.
It added: "As in any country, maintaining strength of the rule of law would be important for economic success."
Protest organizers from the Israeli hi-tech sector responded to IMF's flagging, saying that "every day that goes by without the nixing of the judicial reform is another day in which the government is knowingly contributing to the collapse of the Israeli economy and hi-tech sector. Financial institutions around the world have lost their faith in Israel.
"The damage is long-term and every citizen will feel it in our defense, health and education budgets," the protesters argued.
Moody's Investors Service lowered its Israel's A1 sovereign credit rating outlook
The comments come after Moody's Investors Service last month lowered its Israel's A1 sovereign credit rating outlook to stable from positive, citing the reforms.
The IMF review gave Israel strong marks for its economic policies and management, saying that its GDP growth would slow to 2.5% in 2023 from "remarkable" 6.5% growth in 2022. It added that public debt-to-GDP levels had returned to pre-COVID levels, its international reserves were ample, and its banking sector had adequate capital and liquidity buffers.
The IMF added that Israel's monetary policy stance should remain tight given a tight labor market and headline inflation above the central bank's target range.