The banker guiding Israel's economy through the coronavirus pandemic

Bank of Israel Governor Amir Yaron was just 14 months on the job when the corona pandemic began. He looks back at the management of the crisis, and projects optimism about Israel’s economy.

 BANK OF ISRAEL Governor Amir Yaron (photo credit: RONEN ZVULUN/REUTERS)
BANK OF ISRAEL Governor Amir Yaron
(photo credit: RONEN ZVULUN/REUTERS)

Amir Yaron was at work in February 2020 when he heard about a cruise ship – the Diamond Princess – sailing in the Western Pacific and carrying some of the first cases in the world of a new virus.

For Yaron, it was a pivotal moment. Appointed just 14 months earlier as governor of the Bank of Israel, the Israeli-born Wharton School economist felt that something was about to happen. One evening, he gathered the bank’s top staff around the conference table in his sleek and expansive office in Jerusalem to discuss what was happening thousands of miles away in Japan.

“We need to be prepared,” the governor told the group.

It was at that meeting that Yaron made a critical decision that would prove to be strategic in the 19 months since: he ordered the executives to create a new database that would give them the ability to see Israeli fiscal and economic data in real time.

It was a new way of thinking. Central banks usually think in three-month or six-month intervals, or in quarterlies: financial forecasts are not about what is going to happen next week, but what will happen in a few months. But when Yaron saw the events unfolding on board the Diamond Princess, he had an instinct that this was a new reality.

“It’s not like I knew exactly what was going to happen, but I knew this could be a major disruption,” he recalled in an interview with The Jerusalem Post. “I didn’t know this would be of that order; I didn’t know it would have such a long duration. But I could tell this [would be] a major disruption. We needed to think about it and make sure we refresh all of our emergency tools. And that’s what we did.”

The database would go on to serve Yaron, the bank and the government throughout the pandemic that continues to wreak havoc on economies and financial markets across the globe. It provided him with the ability to see how much money in Israel was being spent daily, how much was being charged to credit cards, and how much was moving through the banking system.

In a wide-ranging interview edited and condensed, Yaron talked about Israel’s fiscal stability, the future of its economy, potential plans to raise taxes, and how he, the bank, and the Israeli economy made it through three lockdowns.

How is our economy today? It seems we’ve recovered nicely, and there’s good projected growth for the upcoming year. On the other hand, we have a big deficit.

First of all, let me say the Israeli economy is vigorous. It showed its strength, its ability to come back from crisis, its agility, in terms of adapting to such a crisis. And recently, the numbers – basically the statistical agency even sort of went back and updated them. And we see even a stronger trend than we had before.

So Israel has a very strong potential, and we’ve seen it all throughout. And so in that sense, I’m very optimistic about the Israeli economy. So, that’s No. 1.

 THE BANK of Israel headquarters in Jerusalem.  (credit: MARC ISRAEL SELLEM) THE BANK of Israel headquarters in Jerusalem. (credit: MARC ISRAEL SELLEM)

No. 2, we know it’s not uniform. We know that the hi-tech has been almost our Iron Dome economically, and all the surrounding advanced technologies. We need to bring more segments in society, whether it’s Arab women, and advance them into the labor markets. More generally, in some of the more low-tech segments, be able to enhance them so they can basically be more productive in the next decade. But generally, we are seeing the economy doing well.

I think, obviously, we need to see what is happening with this fourth wave. And hopefully, we have to do everything in our power to avoid a complete lockdown. And I think, hopefully, with increased vaccination, we can indeed avoid that and see the numbers come down.

I like to use the Nike logo – the swoosh – as a metaphor. Is it smooth convergence toward where we would have been, or are we going to see continuous variants coming at us from different parts of the world every half a year, having to continuously deal with boosters?

That’s going to change the outlook somewhat, in terms of the medium-run recovery. But even in the second case, we can tell right now that these other segments of the economy basically have adapted well. We know more about how to coexist with the COVID pandemic around us. And that means that probably the contractions that we’ve seen in 2020 can be avoided and we can indeed be on a path to growth.

Until now, we were sort of in a maintenance regime. We wanted to bridge – whether it’s via credit, via economic support – and help bring households and businesses to the other side of this pandemic.

If on the other hand, we will be in these continuous waves for two, three or four years, at some point there’ll be segments – perhaps like airlines or tourism – that will have to be restructured. And that is what is in the balance, once we are able to see where we are, scope the land after this fourth wave, and assess things.

And that also brings me to the difference between the situation right now, where there is uncertainty, but not at the levels that we had in March 2020 or in June 2020, when the economic support was initiated. And I’m very proud of the bank and its workers and how much we were involved in terms of advancing the thought that this is not 2008. And here, as opposed to other crises, there should be fiscal support, and one should not wait until the end of the crisis.

Which is what happened in 2008?

Which is kind of what happened in 2008. And I think this was a very important backwind that we got the government and the Ministry of Finance, in terms of this thought process [to understand], that we can’t be in the same box that we were before, because the situation is very different, and support is needed.

 AMIR YARON walks to a cabinet meeting in Jerusalem during the COVID-19 pandemic. (credit: EMIL SALMAN/REUTERS) AMIR YARON walks to a cabinet meeting in Jerusalem during the COVID-19 pandemic. (credit: EMIL SALMAN/REUTERS)

And while there were items in the support programs that I, in real time, criticized, when you zoom out, fundamentally, there was a need to support, to provide some certainty and some support to businesses and households. Whereas now, I think we can afford to at least see where we are in this fourth wave and then assess. I’m contrasting the situation now to where we’ve been before.

So given that we need financial support – and I think it’s unquestionable – all the international agencies and the rating agencies all understood that this is the time where government needs to step in. And in that sense, I’m confident that we did the right thing. Regarding the deficit, yes, it did increase the deficit. But to give you perspective, in comparison to a cross-section of countries, you’ll see we’re not an outlier, by any means.

Everyone had to spend money.

Everybody had to spend money, and we are right in the middle of things. And yet we’ve contracted, and that of course hurts. But in the scope of 2020, where some countries contracted immensely, our contraction has been relatively small. We spent a quantity that does not seem to be out of the ordinary. In fact, you will see it’s in the middle of the distribution.

Where things were slightly different was that when we entered the crisis, the Israeli economy was at good levels on pretty much all parameters – very tight labor market, low unemployment, growth that approximately over the last couple of years was above 3%.

And importantly, over time, we’ve seen the debt-to-GDP converge to just around 60%. This was, by the way, a strategic asset, and we’ve utilized this strategic asset in increasing the deficit right now.

[On the other hand,] we entered with a relatively large structural deficit of approximately 4%. So in that same graph, you’ll see the increase in the deficit in 2020, and the overall deficit. And most of the overall deficit is high, because we entered with a high structural deficit.

The Bank of Israel and I spoke a lot about the need to cut that structural deficit prior to the COVID crisis, but upon entering the COVID crisis, we were the first one to say, ‘leave that aside right now, focus on the support now.’


What do you want the structural deficit to be?

What we ultimately want is to see the inefficient components that are contributing to the structural deficit to be taken out, and instead, we want investments that will support increased productivity. And those include infrastructure and education. We are seeing a need, first of all, to cut the structural deficit by 1%-1.5% of GDP. And we’re talking about investments that are on the order of 3% of GDP over time.

That’s the NIS 45 billion that will be raised to be invested back into the economy in 2024?

It’s about two-thirds for infrastructure and about one-third for health and education. What we recommended was to lower that structural deficit by about 1%-1.5% and to basically initiate these investments. Most of these investments wouldn’t require immediate spending – most of the spending would anyway come beyond 2023. But in order to control the debt-to-GDP so that it’s on a responsible path and not a divergent path, we basically said, ‘You’re going to have to basically put some fiscal restraint on this structural deficit by increasing income or taxes.’

Starting 2023?

Starting 2023.

Israelis aren’t going to be happy about that.

Well, these investments are going to have a high return on them. If you look at Israel and you look at the expenditures that are non-military to GPD as a percent of GDP, we are pretty much on the lower end of the OECD. And if you look at the tax burden in Israel, surprisingly, we are slightly below the median. So, we have to do it. We have to do these fiscal adjustments. If we want to spend on things like the metro, ultimately, it costs what it will cost.

Sure. We all sit in traffic jams.

We all sit in traffic jams. This lowers productivity, workers coming to work tired.

You can just go back to that simple maxim: If you want to make money, you got to spend money. Right?

You’ve got to do it responsibly. And I think given the situation that the budget is just starting right now, and most of the actual expenditures will be in 2024 and beyond, it allows you, for 2021 and 2022, to not do any fiscal restraint. But the idea is not to create an additional burden by increasing the structural deficit. So that’s why we said don’t lower taxes or create extra debt, which will be long-lived, and on the other hand, don’t raise taxes now.

And yet in 2023, when these will start appearing in some form of expenses, you’re going to have to lower, somewhat, the inefficient part of the structural deficit and at the same time, raise some taxes, in order to still allow debt-to-GDP. Perhaps it’ll grow a little bit, but it won’t diverge.

You recently decided to leave the interest rate unchanged, right at a historic low of 0.1%. Can you explain why you made that decision to keep the rate so low? And when you have your next policy meeting in October, is it going to change?

The second half of the question, obviously, I’ll refrain from answering. But first of all, one has to understand that the interest rate is a broad range economic tool. And we are still not out of it – even though Israel looks like it’s recovering well – in the sense that we still have large unemployment, relative to what we had before.

We are in the fourth wave now, with huge uncertainty. In terms of inflation, Israel has an inflation right now of 1.9%. It is definitely a higher inflation environment than it used to be a year ago, but this is still, if you look at the OECD, on the low side of the inflation metric.

We are importing some inflation from aboard, but as I said, it’s still relatively low. We’re not seeing an outbreak of inflation here, and that allows us to be patient and to let the economy continue to recover.

Moreover – and this is a debate that’s gone on in all central banks – how much of the inflation, even in the US that is about 5%, is real, or driven by pure transitory components, which are perhaps some supply chain disruptions on the one hand and pent-up demand of people coming out of COVID and spending money on the other. And once both of these sort of settle down, inflation will come down. And so, given the slow inflation history that we’ve seen in Israel, and given that still most of the analysis seems to point to a lot of transitory components, I think that allows us to have an accommodative monetary policy and to be patient with it.


When corona broke out last year, Yaron convened the heads of Israel’s banks. As governor of the Bank of Israel, his job is not just to set monetary policy, but also to advise the government on economic affairs and ensure the continued operations of the country’s banking system. At that meeting, Yaron convinced the executives to issue billions of shekels of credit, to offer credit lines, and to give people the option to defer loan payments.

“Look, you can tighten the belts, and after this look like you were smart, or you can give responsible but more lenient loans that will help everybody,” he told the banking heads. Needless to say, they listened.

As this was happening, the markets started to panic. Institutional investors started to post margin calls abroad, due to losses, and sold government bonds. Yaron took two steps, leading BoI to purchase government bonds for the first time since 2009 and FX.

He also spoke publicly to calm peoples’ nerves. One particular day was March 14, when people swarmed to ATM machines to withdraw cash in a scene right out of It’s A Wonderful Life. Yaron knew that, like the movie, if cash ran out, the situation could spiral out of control, making the toilet paper panic purchasing in the US look small compared with Israel. Brinks trucks loaded full of cash left the bank to fill up the ATM machines across the country. Yaron also went on TV to reassure the public and helped avert an even greater crisis.

So you incentivized the banks to be nice.

Incentivized. We did another [step], too. We went to the corporate bond market, and we bought a very broad measure of the corporate bond market to make that a more liquid and accessible bond. We didn’t purchase as much as we initially stated that we would, but it created, again, certainty. And it basically allowed the banks to have those cheap loans, without needing to utilize that market. So all of these tools jointly provided a very accommodative monetary policy, all aimed to get the Israeli economy to a situation where it is able to withstand the crisis and then continue to grow out of the crisis.

You also bought $25 billion of foreign exchange, right? Out of a planned $30 billion, and that’s aimed at containing the shekel and keeping it strong. I remember the days when the dollar was five shekels. Now it’s barely three.

That $30 billion was another part of the accommodative monetary policy tools. But this was a very unique tool and special, in a very uncertain time, to basically demonstrate our commitment. At that point, there was a huge appreciation of the shekel. We’re talking December and January when we still didn’t know what the vaccines would do. There was huge uncertainty, double-digit unemployment, and we wanted to provide support to the economy when there is a situation in the background where you’re seeing another spike in morbidity.

If I sort of zoom out over the years, the Bank of Israel, through its interventions, has not tried to change things, but has wanted to allow the economy to transition from a manufacturing to a service economy, and still be in a relatively full employment situation. And we’ve been able to do that. And that’s why I mentioned that at the point where we came to use this very special tool, we had huge unemployment and it was not clear where economic activity was going.

Going back to COVID in early 2020: you saw the Diamond Princess, but in your life, you’ve never experienced a plague. How did you understand something unique was happening?

No, but one of the things that we do in the bank, we often think of tail risk and stress test, and in fact, a couple of years ago we had a stress test on some kind of pandemic. It’s not like I knew exactly what was going to happen, but I knew this could be a major disruption. I didn’t know this would be of that order, and I didn’t know it would have such a long duration, but I could tell this was a major disruption, and that we needed to think about it and make sure we refresh all of our emergency tools. And that’s what we did.

You were outspoken and voiced concerns about what lockdowns would do. Obviously, what started was a health pandemic, but it moved into an economic pandemic. In hindsight, did we fully balance that in the right way?

I think, first of all, one has to realize decisions have to be done in real time, with the information that is available at that time. Just to give you an example, even the way we’re treating people who are severely ill. In the beginning, the constraint was the ventilator. We bought a lot of ventilators. Then things sort of changed. So, I think to do a complete analysis, one has to go through what information was available at any point in time. I would say the one thing that we probably could have done better is the enforcement side. If we had gone into some kind of an equilibrium where enforcement is done in a better way, perhaps some of the lockdowns could have been somewhat less harsh, and maybe we could have avoided the degree of some of the second and third waves. But even that, one would need to very carefully analyze.

That leads to another question: the role politics played in everything. You were in a lot of those late-night government meetings, and there’s no question politics played a role. How troubling was that for you, in the moment?

I’m not in the business of giving grades, but I’ll say the following. I think in real-time I was pretty outspoken. I said what I had to say about the ‘check to every citizen,’ which I didn’t think was targeted enough. But this is also part of a structural problem that we have in Israel, in the sense that the data is just not coordinated. And so even when you have the brightest idea of how to target it, when it comes to implementation, you don’t have the luxury to say, ‘I’ll just sit down, it’ll take more time, I’ll refine it.’ Here, the dimension of time is pertinent. And so you have some trade-offs between being very efficient at being targeted, and time to market.

Let’s talk about the transition from academia to BoI governor. In the academic world, you’re looking at the situation through a scientific lens – you’re studying the data and making your conclusions. Here you’re dealing with politics. How do you make that shift?

I never dreamed or worked toward this job. But when you get a phone call, this is an opportunity to bring your know-how. And I have been involved in more practical ways beyond academia, to really help and improve the economy. And so, that’s first. And second, yes, central banks are definitely something you want to ensure have independence. And we have independence. But in that special role that I mentioned, as the ‘economic adviser to the government,’ that obviously brings you very, very close to fiscal issues. And there, naturally, some of the political issues you mentioned, you face them. It comes with the territory. And as they say, if you can’t handle the heat –

Get out.

Well, you need to know that the kitchen has some heat in it.

I want to talk about two sectors in Israeli society you mentioned that are not fully working: haredim and Israeli Arab women. Let’s start with the haredim. What do you make of the draft law that was just passed, and the lowering of the IDF exemption age? Will they work? And if they don’t work, are we really in that much trouble?

Fundamentally, we understand the haredim, in terms of percentage of society, are projected to be a higher percentage. And we want them to have broad and good employment with the ability to contribute to society and to themselves. And that’s an interest of everyone. And in that sense, it’s very important.

On the other hand, the equality of serving in the military is another yardstick, and I think that goes beyond pure economic issues. And this is something the lawmakers and politicians have to analyze and put together. Specifically, the research department in the bank has done research with the National Council of Economics, and they found that in the past, when the age of the draft was lowered, there was a moderate increase in employment. And so I think from that perspective, it’s good to give it a chance.

But if they don’t work, do you agree with the doomsday projections of what’s going to happen to the State of Israel? Are we at a point in time that we have to deal with this now?

In a world where you are heading toward technology being so important, you don’t want technology to substitute humans. You want educated people complementing technology. And in order to do that, you need not just haredim, but definitely also haredim down the road, purely because they’re going to be a larger segment of society. If these segments grow [and they don’t work], the average growth will come down and ultimately this will affect the whole society.

It is pertinent that we find a way, on the one hand, to accommodate culture and the haredim, and on the other hand, really figure out a way for them to want to be able to acquire the skills that we need, in order to allow them to be useful in the labor market.

Is enough being done to integrate Israeli Arab women? I’ve been to some of the special employment centers in Arab towns, and the numbers are still low regarding how many are working.

This is another area where we have specific recommendations. Some of them are about transportation, and some of them talk about education. We know that Hebrew, for example, not just for females, but for the general Arab sector, is a key element to being successful in the labor market. So we need to do all these things.

First of all, we want everyone to be able to do well. Again, this is a growing, large segment of society. And one of the things that we’ve seen in COVID is that although our contraction, overall, was relatively small compared with other countries, we see that the weak segments have gotten weaker, and the stronger ones have gotten stronger. So in that sense, inequality has increased.

Even before COVID, when you look at the gaps between the first, second, third, and fourth decile, in terms of skills, reading comprehension, math, etc… the gaps to those same deciles are very, very large. So we have very high-end skills on one side, but on the low end, we have a lot of catching up to do. And that’s why we think that investments in education are very, very important. As you know in Israel, it’s not just money, it’s not just budget. And that’s why I think we need to bring everybody together – the Ministry of Education and the Teachers Union – because you really need to entice qualified teachers, and you need to enhance the structure of wages there.

We know that there are a lot of gaps in the periphery. We can utilize what I call the lemonade out of the lemon of COVID, which is that we all know how to use Teams or Zoom. We can bring some of the best teachers through technology like Zoom. But it cannot just be a guest lecture. It has to be part of a package of reform of education. And that requires attention, and it needs a joint force to do all of that.