Following the shock of war, the Israeli economy found itself at a crossroads, as it witnessed a clear slowdown in commercial, investment, and service activity.
These challenges did not only impact the economic situation, but posed social and political challenges that obstructed the path of continuous growth that had lasted for almost two years.
A report issued by Moody’s rating agency said that the ongoing war costs Israel $269 million daily. The report was based on a preliminary study that took into account the estimates of the Israeli Ministry of Finance. This means that the war has cost Israel $61.9 billion since its eruption around 230 days ago.
According to data from the Israeli Ministry of Finance, the fiscal deficit rose to 7 percent of GDP in 4 months of the current year, reaching $35.7 billion since April 2023, which is higher than the government’s estimate of 6.6 percent for the entire year of 2024.
It is also an unprecedented number since the global financial crisis in 2008, according to the Ministry of Finance, which indicated that the fiscal deficit in April amounted to $3.16 billion.
The war forced the government to increase defense spending significantly, which accounted for about two-thirds of total spending in four months. In contrast, revenues declined by 2.2 percent, due to a decrease in tax payments.
The government plans to raise about $60 billion in debt this year and increase taxes to meet its financial needs. The average monthly bond sales tripled after the outbreak of the war, according to Bloomberg estimates, which indicated that the government had collected about $55.4 billion since October, from domestic and foreign markets.
In light of the growing financial burdens resulting from the war, Israel was receiving blow after blow from international rating agencies, which of course affected its attempts to raise external financing. After Moody’s lowered its sovereign rating for Israel by one notch to A2, Standard & Poor’s joined in in April and lowered the rating from AA- to A+.
In light of the uncertainty about the extent of the impact of the ongoing war with Hamas, it is widely expected that the Bank of Israel will leave short-term interest rates unchanged during its meeting on Monday, for the third time in a row.
In January, the Monetary Policy Committee reduced the key interest rate by 25 basis points, which followed 10 consecutive increases in interest rates, in a strong tightening cycle from the lowest level ever at 0.1 percent in April 2022, before a temporary pause in July.
According to a Reuters poll, further cuts in interest rates during the rest of 2024 are at risk due to inflation pressures.
The annual inflation rate continued to rise in April to 2.8 percent, after falling to 2.5 percent in February.
In light of talk about a possible Israeli military rule in Gaza, Yedioth Ahronoth newspaper reported, citing an official document, that such strategy in Gaza would cost Tel Aviv no less than 20 billion shekels ($5.4 billion) annually. The newspaper reported that the Israeli security establishment prepared an analytical document to study the financial consequences of establishing a military government in the Gaza Strip.
The fate of the Israeli economy in the war period and beyond depends largely on several factors, including political and security stability, transformations in various economic sectors, and developments in regional conflicts. Despite the existing challenges, some expectations indicate that the Israeli economy will recover at a moderate pace, but this does not replace the need to better promote growth and stability, especially in light of the turbulent geopolitical conditions that the region is witnessing.
In an interview with the Jerusalem Post newspaper, the former governor of the Bank of Israel, Karnit Flug, said that the government response to the economic challenges resulting from the conflict between Israel and Hamas were not commensurate with the situation.
She explained the proposed measures (some of which were approved in the Knesset, while others were postponed or planned to be implemented in the future) are not sufficient to address the current challenges.
