Israel Economy In Worst Recession Ever

by Emad Mekay

Military operations in the Palestinian territories, a possible U.S. attack against Iraq and the sluggish world economy combined with a lack of fiscal discipline meant that "macroeconomic conditions deteriorated with external demand stagnant," said the IMF in a statement after consultations with the Israeli government.

The fund, a dominant voice in the global economy, said that Israel's gross domestic product (GDP) was expected to be about minus 1 percent in 2002, which would give the country its second successive year of negative growth since the Palestinians started their second uprising in 2000.

The global economic slowdown that led to sluggish demand for technology-based products took its toll on exports, such as computer software, chemicals and even agricultural products.

Tourism and regional trade, both dependent on an environment of security, declined as well, added the IMF in its annual statement on the Israeli economy.

The report comes only days after Israel sought $14 billion in loan guarantees and new military assistance from the United States.

The IMF did not assess the impact of the expected loans on the future performance of the Israeli economy, but based on Washington's record of forgiving Israeli debt, the new loans would not burden the Israeli economy.

Contrary to its position on loans to developing countries and highly indebted nations in Africa, Asia and Latin America, Washington has traditionally written off its loans to Israel, a country with an average annual per capita income of $17,600 -- dozens of times higher than many countries in Africa, some of whose citizens live on as little as $600 a year.

Billions of dollars initially given to Israel as loans have later been converted into grants by Washington.

Israeli newspapers have reportedly said that the requested loans might be used to suppress the Palestinian uprising and offset any effects of a possible U.S.-led military action against Iraq -- both points ignored in the IMF report.

But the IMF does not blame the security situation alone -- which has taken an even higher toll on the Palestinian economy -- for Israel's economic woes. The fund's economists say that Israeli economic policy is to blame for investors' temporary loss of confidence in the country's macroeconomic policies.

Officials recently cut interest rates by 2 percentage points, a clear departure from previous gradualism that, according to the fund, caused a major disruption in financial and foreign exchange markets in the first half of 2002.

The subsequent failure to reduce the fiscal deficit as planned, led to a sharp depreciation of the Israeli sheqel, a surge in inflation, and a threat to financial stability.

The fund said the Jewish state needs macroeconomic policies that are "consistent, transparent, credible, and geared toward maintaining stability."

"This is all the more important in light of the continuing uncertainties regarding the regional security situation and the global economy," it added.

The IMF urged fiscal discipline -- a broad set of policies that include various spending and interest rate cuts.

"The basic requirement of stability-oriented fiscal policy is to convince the market that the government is able and willing to move the debt and deficit back to a declining path over the medium term," said the fund.

The economists did not touch on Israel's whopping military expenditure -- now around 11 percent of GDP or three times the level in the United States, itself one of the world's highest military spenders.

The fund also advised Israel, a country of 5.8 million, to trim the number of "foreign workers," that is, Palestinians under Israeli occupation.

Although the number of Palestinians working in Israel is at an all-time low, advocating such a policy could help the Israeli economy, but it is certain to harm the Palestinians since they depend on work in Israel.

According to the World Bank, in June 2000, three months before the current intifada began, 21 percent of all Palestinians with jobs worked in Israel, mainly in low-skilled positions in construction.

Net income from outside the Palestinian territories reached more than 22 percent of Palestinian GDP, making it one of the world's economies most dependent on remittances, the bank says.

The fund said the Israeli government should facilitate the return of unemployed Israeli workers and welfare recipients to the labor force, "including a decisive reduction in the number of foreign workers."

"In order to reduce foreign workers, it is essential to introduce measures that would bring the cost for employers of hiring foreign workers closer to that of hiring Israelis," it added.

The government has already endorsed a labor program in the 2003 budget that attempts to drastically cut the number of Palestinian workers.

"This is a step in the right direction, but it should be accompanied by various measures that facilitate the job-search activity of the unemployed and income support recipients, such as an increase in, and improvement of, vocational training and employment services," said the fund.

It supported the austerity budget submitted by the government of Israeli Prime Minister Ariel Sharon and pointed out opportunities to improve Israeli market conditions.

These include approving the 2003 budget "without compromise," a stable and fiscally prudent government after the January 2003 elections and "the hopefully peaceful resolution of the Iraqi situation."