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Israel may be proud of its banking sector - many believe that its regulation is the reason that the country weathered the global financial crisis relatively well. But the International Monetary Fund thinks there's still room for improvement.

Yesterday the IMF its report on Israel's economy, which included criticism and suggestions regarding fiscal and monetary policy.

It also praised Israel for how it handled the global financial crisis.

The IMF expects Israel's GDP to grow 2.5%, exports to increase 5.4% and imports to increase 6.3% this year. Unemployment will average 7.4%, while inflation will drop to 2.1%, it predicts.

The GDP-to-debt ratio will grow by 1%, to 80.9%, it adds.

The report is based on figures that are now two months old. Since then the economy has improved, both in Israel and around the world. Bank of Israel economists recently lifted their GDP growth forecasts for the year to 3.5%.

Despite all the positives the Israeli government needs to be better at sticking to its deficit caps, as the country has a rather large debt that is only getting larger. Even though Israel's economy began recovering from the crisis relatively quickly, appreciatory pressure on the shekel may present new risks, the report notes.

Therefore, Israel needs to limit public sector wage agreements this year, in part as a signal to the private sector, the IMF states.

Plus, Israel needs to make sure all its individual government programs conform to the state budget framework. A fiscal policy reform is in order, including medium-term debt targets, in order to give the proper emphasis to reducing debt and to enabling short-term fiscal flexibility.

The IMF isn't big on the Bank of Israel's currency market intervention. It praises recent steps taken by the bank, including its departure from soaking up foreign currency, and also likes the bank's decision not to raise interest rates. The IMF emphasizes that the authorities are obliged not to set specific exchange rate goals, and says it wants to see an end to the bank's dollar purchases except in extreme situations.

Israel should push through the new Bank of Israel Law as quickly as possible, it adds.

Even though the Israeli banking sector handled the financial crisis well, regulation can still be improved, the report says. To improve transparency and stability it suggests thorough stress testing, periodic reports from the central bank on the sector's fiscal stability and greater coordination among the regulators.

Some of the report's authors also recommend a formal mechanism to insure the public's deposits. The IMF directors praised the importance Israel places on regulating non-bank financial institutions, and suggesting increasing the budget and staffing levels in this area.