Fischer ups '06 growth forcast

Bank of Israel governor calls for next government to cut debt ratio.

stanley fischer 88 (photo credit: )
stanley fischer 88
(photo credit: )
Bank of Israel Governor Stanley Fischer raised the bank's economic growth forecast for 2006, while calling on the next government to take advantage of the good years to reduce government debt and create conditions for sustained growth to tackle poverty. "Against the background of fairly rapid economic growth, and assuming that the next government will follow the same macro-economic policy, the Bank of Israel's forecasts for 2006 are of a 4.3% increase in GDP (gross domestic product), and a 5.4% increase in business-sector product," Fischer said Tuesday at the sixth Herzliya Conference on the Balance of Israel's National Security. In December, Fischer had estimated the economy would grow by 4% and business product by more than 5%. Although prospects for continued economic growth are favorable, Fischer warned that the Israeli economy might be affected by the risks to global growth: "The possibility that energy prices, particularly oil prices, will continue to rise, the effects of the rise in interest rates world wide, and the possibility that the US economy will grow more slowly than originally estimated." In his speech, Fischer underlined the importance for the next government to work towards reducing the debt burden as a proportion of GDP at a time when the Israeli economy was still experiencing some of the best years it has known. Despite, a reduction achieved in 2005, the ratio of government debt to GDP was still extremely high compared to that in other OECD countries, according to Fischer. "If the debt/GDP ratio were to fall by half to about 50%, a reasonable ratio by international standards, interest payments would fall to less than 3% of GDP and less than 8% of the budget, because the interest rates would fall, and about NIS 17 billion a year would be available for other economic uses," Fischer said. At the same time, Fischer explained that as the debt/GDP ratio - an indicator of economic strength - in Israel was so high, the budget and the economy were very sensitive to interest-rate changes around the world. This, in turn, affects Israel's credit rating and the interest rates that the government and the business sector have to pay in the capital markets to finance their activities. Further, the governor called for advancing "real" competition in the financial markets and the banking sector - a process started by the Bachar reform - but he said more steps were needed to build the legal framework. "The government should give maximum impetus to the promotion of the legislation dealing with Repo-type financial transactions, the issue of netting, and to mortgage and loan securitization. Such legislation is one of the most important means for removing barriers to the development of the capital markets," he said. Competition between the banks, he said, was still hindered by the dominance of Israel's two largest banks and he called for the merger of smaller banks or the entry of foreign banks into retail banking. In another presentation, Dr. Karnit Flug, Director of the Bank of Israel Research Department said the challenge currently confronting economic policy was to absorb those joining the labor force into employment. At the same time, she said, there was a need to raise the return to labor for those with low levels of education, to guarantee a reasonable standard of living. Flug also said the earned income-tax credit (EIC) was an effective means of reducing poverty, in particular for the working poor. His 3 step program * Budget policy: Further reduction of government debt as a proportion of GDP. *Financial markets policy: Increased competition in the capital markets and the banking sector by implementing a legal infrastructure. *Social policy: Sustained economic growth to tackle social problems and the fight against poverty, together with better accessibility to education and health services.