Israeli Economy Faces Slowdown Due to Ongoing Conflict, Central Bank Warns
Bank of Israel Warns of Economic Impact
The Bank of Israel issued a warning today about the potential economic impact of the ongoing war with Hamas. The conflict is expected to cause a significant slowdown in Israel’s economic growth and inflate the budget deficit due to increased military expenditure, civilian aid measures, and business support initiatives. The bank projected that if the conflict remains localized to Israel’s southern front, annual economic growth will decrease to 2.3% this year and 2.8% in 2024, down from the initially projected 3%.
Economic Activities Continue Amid Conflict
Despite the conflict, most of Israel’s economic activities are continuing as normal, with financial markets remaining operational. However, the shekel has experienced further depreciation since the start of the conflict. In response, the central bank has earmarked $30 billion from its foreign exchange reserves to bolster the currency.
Optimism Amid Uncertainty
Bank Governor Amir Yaron admitted that factors such as war duration and potential expansion introduce economic uncertainty. Nevertheless, he remains optimistic about recovery due to Israel’s robust economy marked by low debt levels, a current account surplus, and substantial foreign exchange reserves prior to the conflict.
Central Bank’s Decision
Yet, concerns had already begun regarding high-interest rates, inflation, and an anticipated global economic slowdown. The central bank was faced with a choice between reducing interest rates to boost the wartime economy or maintaining them to support the depreciating shekel. It ultimately chose the latter in an effort to stabilize markets and reduce uncertainty.
Stability of Israel’s Banking System
Credit rating agencies have issued warnings about potential downgrades to Israel’s debt based on the severity and duration of the conflict. Despite these warnings, the central bank maintains that Israel’s banking system remains stable.
Rise in Debt Ratio and Financial Support
The bank also expects a significant rise in Israel’s debt ratio due to increased defense spending and financial support for the war effort, coupled with a decrease in tax revenues as economic activity slows and citizens are drafted into military service. To counter these challenges, the government has committed to implementing various financial aids and initiatives, including repayment deferrals, grants, loans, and funds for fixed expenses, aimed at supporting those affected by the conflict.
This article provides an overview of the current economic situation in Israel amid the ongoing conflict with Hamas. It highlights the potential economic impact of the war, including a slowdown in economic growth and an increase in the budget deficit. Despite these challenges, the article emphasizes that most economic activities in Israel are continuing as usual, with financial markets remaining operational. The central bank is taking measures to support the currency and stabilize the markets. While there is uncertainty about the duration and expansion of the conflict, the bank remains optimistic about Israel’s recovery due to its strong economy. The article also discusses the central bank’s decision to maintain interest rates and the stability of Israel’s banking system. Finally, it mentions the expected rise in Israel’s debt ratio and the government’s financial support initiatives to assist those affected by the conflict.
