IMF Predicts Growth, Low Inflation for Israel

SINGAPORE - The 2007 budget approved by the cabinet on Tuesday is basically a good one, Bank of Israel Governor Stanley Fischer told TheMarker in an interview this week, shortly before leaving for the annual International Monetary Fund conference, which opens tomorrow in Singapore.

Israel will be represented at the conference by Fischer and Finance Minister Abraham Hirchson. The latter will address the conference next Tuesday, and will focus on the state of Israel's economy following the recent Lebanon war.

Senior Israeli bankers are also attending the conference, in order to hold business meetings with their counterparts from around the world.

In the interview, Fischer said that despite his overall satisfaction with the 2007 budget, he would have been happier had the cabinet decided to raise the value-added tax, as this "would add NIS 3.5 billion to the budget."

He also said that he is worried by two developments: the slowdown in the American economy, which is liable to negatively affect Israel's growth rate, and the ease with which ministers and Knesset members vote to increase government outlays.

"If we start to say that the size of the deficit doesn't matter and that it's possible to increase government spending," he said, "we will pay in terms of a decline in investments in Israel and a drop in the shekel's stability, price stability and the stability of the financial markets. Growth will decline and unemployment will rise."

The IMF's annual World Economic Outlook report, issued in honor of the conference, predicts average growth of 4.9 percent worldwide in 2007 - lower than this year's projected rate of 5.1 percent. The main reason for the downturn is the expected decline in the American economy's growth rate, from 3.4 percent this year to 2.9 percent next year.

For Israel, in contrast, the IMF predicts 4.4 percent growth next year, up from 4.1 percent this year. It also predicts that inflation will be low, at 2 percent.

In terms of unemployment, however, the report paints a grim picture of Israel: Only Greece, among all the countries in its category, has a higher unemployment rate. The report predicts that Israel's unemployment rate next year will be 8.5 percent.

Most of this year's IMF conference will be devoted to Asia, including the need for reforms of the financial sector in China and India; Asia's ties with the Middle East, particularly with regard to the oil industry; and the problem of poverty in southern Asia.

Asia will also be the focus of the most interesting fight at the conference: China and India, whose economies have both grown enormously in recent years, are seeking increased voting rights in the IMF to correspond with their increased economic weight. China, with an expected growth of 10 percent in both 2006 and 2007, is currently the world's fastest-growing economy.

However, Singapore's government has already moved to forestall one possible source of friction: In defiance of the IMF's request, it denied entry permits to several social activists, for fear that they would hold violent demonstrations during the conference.

Moti Bassok contributed to this report.