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Israel's economic performance in 2007 was exceptional due to its responsible fiscal and budgetary policies, as well as the Bank of Israel's appropriate interest rate policy, the International Monetary Fund's Executive Board stated in conclusions released at the end of last week.

The IMF report summarized its 2007 consultations with Israel. At the end of 2007, an IMF delegation visited Israel and met with senior officials from the treasury, the central bank and other institutions. At the end of the visit the delegation released a short but extremely positive report on the Israeli economy, which served as the basis for the IMF Executive Committee discussion.

The report is probably the best one any major international institution has ever written on the Israeli economy, praising "sound policy implementation." At the same time, the report said Israeli economic growth was also due to strong global growth last year, too.

As to the less rosy side of the picture, the IMF warned: "While public debt has declined in recent years, its still elevated level leaves the economy vulnerable to shocks, and debt reduction remains a priority ... Further improvements to the financial sector framework would enhance the economy's resilience ... Economic growth is likely to remain strong, although external conditions are becoming less supportive."

The IMF also observed: "Given continued solid growth and growing capacity constraints, domestic inflationary pressure would probably mount, although the recent appreciation of the shekel has lowered external inflationary pressure ... Interest rates may have to be at a higher level once external demand reaccelerates. External downside risks to activity and heightened risk premiums argue for caution in raising rates over the near term."

Swiftly adopting the draft Bank of Israel law would strengthen the economy's institutional foundation, and the flexible exchange rate regime is serving Israel well, said the IMF.

The governor of the Bank of Israel, Stanley Fischer, said in response to the report that it was good to hear the IMF supports the government's continued fiscal policies and the central bank's interest rate policies.

Fischer told a group senior executives from kibbutz industries after the report was released Thursday that the Israeli economy naturally attracted large volumes of investment because of its excellent condition. And this stream of investments will only continue as the economy continues on its successful path, explained Fischer, and the shekel will continue to strengthen.

This makes price stability especially important now, when the growth in world trade may possibly fall and developed countries are suffering from a financial crisis, said Fischer.