Lockdown Will Delay Recovery to Pre-crisis Levels Till After 2021

Michel Strawczynski, the Bank of Israel’s head of research, estimates the measures are costing Israel’s economy NIS 9 billion a day

Shelly Appelberg
Shelly Appelberg
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Michel Strawczynski, director of research at the Bank of Israel, March 28, 2018
Michel Strawczynski, director of research at the Bank of Israel, March 28, 2018Credit: Mark Neyman / GPO
Shelly Appelberg
Shelly Appelberg

With Health Ministry experts warning that Israel may have to stay in lockdown for more than 90 days to contain the coronavirus, the cost to the economy will be massive.

In a preliminary estimate, the Bank of Israel predicted that 32% of economic activity would be shut down based on the rules being enforced during the second lockdown, more than the 25% that was brought to a halt by the first lockdown in March and April. It assumed that the current lockdown would end with the Sukkot holiday October 9.

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But the National Information and Knowledge Center for the Struggle Against Coronavirus said on Tuesday that at the current rates of contagion, the country will need 90 days to reduce the rate of new cases to the target level of 400 a day. Prime Minister Benjamin Netanyahu even suggested the lockdown might continue until a vaccine is developed.

Prof. Michel Strawczynski, director of research at the Bank of Israel and a member of the monetary policy committee, estimates that an extended lockdown will cost the economy about 9 billion shekels ($2.6 billion) a week, meaning a total cost of more than 115 billion shekels over 90 days.

“We had no choice but to return to a lockdown,” he said in an interview. “I’m still hoping that the infection rate will enable us to go back to less harsh methods, like the traffic light system, whose cost to the economy is smaller.”

But Strawczynski said Israel should be able to cope with a second lockdown better than it did the first one because government-assistance programs are being put into effect more quickly, pointing to grants being made to the self-employed and households that have been hurt the worst in the crisis, as well as relief for the most badly affected businesses (those whose turnover has fallen by more than 25%).

“This aid is being given side by side with the program for bank loans set at an interest rate of 0.1% on behalf of the Bank of Israel, which is requiring the banks to lend to small businesses and help the economy to survive the second lockdown,” he said.

In August alone, he noted that 4 billion shekels of the 9 billion allocated was loaned to small businesses, and the allocation can be increased as needed. The Finance Ministry has another 18 billion shekels allocated to a small-business aid fund and has asked the Knesset to approve doubling the amount.

“I believe businesses that have the option of staying afloat by taking loans and continuing to operate will get through the lockdown,” Strawczynski said.

He admitted he did not have accurate figures on the number of businesses that have collapsed during the crisis. As to households, a simulation by the Bank of Israel showed that families supported by two self-employed breadwinners stood the biggest risk of being left without income.

“But that analysis was done before the current lockdown and now the risks are rising again,” Strawczynski said.

Prof. Avi Simhon, who chairs Netanyahu’s National Economic Council, remains optimistic that the economy will rebound quickly after the crisis. Do you agree?

Strawczynski: “In a forecast we published before the [current] lockdown, we predicted that in 2021 the economy would not reach the level if would have if it had continued at its pre-coronavirus rate of growth The same for unemployment. Following the new lockdown … we’ll be in a lesser place at the end of 2021 than we were before the coronavirus.”

Is Israel experiencing capital flight due to the crisis?

“Israel isn’t suffering from capital flight,” he said. “It’s a problem well known to developing countries and in countries with very high levels of foreign debt. Israel is characterized by low foreign debt, so the phenomenon doesn’t trouble the Israeli economy.

As to the exchange rate, he said: “At the start of the crisis, after a jump in the rate, the Bank of Israel intervened. Today, the situation has return to normal and there’s no sign of capital flight. We continue to have a surplus in our balance of payments during the coronavirus period.”

Is there any concern about the Israeli banking system’s stability due to the crisis?

“We have no concerns about the banks,” said Strawczynski. “The Bank of Israel has conducted stress tests and the results have led us to the conclusion that the system is functioning well. The banks’ financial results showed lower profits, as was the case in all sectors during the coronavirus, but it hasn’t led us to worry about the banking system’s stability.”

Debt is rising all over. What will that mean for the State of Israel and for households?

Strawczynski: “The most important debt you have to remember is government debt. A crisis like this brings about a big drop in GDP, which in turn lowers tax collections, which in turn leads to a rise in government deficits. The deficit is forecast to rise in 2020 to 13% of GDP, which will increase public debt to about 80% of GDP.

“This trajectory is typical of developed countries. Israel’s strength is that we started with a low debt-to-GDP ratio, compared to the rest of the world,” Strawczynski said. “If in some developed countries the increase due to the coronavirus crisis is to over 100% of GDP, then we can say we’re in a good place and that the economy can meet the debt level even if there’s a crisis.”

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