Finance Ministry Says U.S. Defense Aid Restrictions Won’t Impact Israel

As part of an update to the aid agreement with the U.S., Israel committed to gradually reduce the use of funds it receives for non-American procurement

Hagai Amit
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IDF soldiers training, July 16, 2020
IDF soldiers training, July 16, 2020Credit: IDF Spokesperson
Hagai Amit

The State Comptroller’s Report published last week said the Defense Ministry was expected to cut acquisitions from Israeli defense industries by 5.6 billion shekels a year starting in 2028, as a result of an update to the aid agreement between the United States and Israel.

Under the update, Israel needs to gradually decrease its use of U.S. aid money for non-American acquisitions, through 2028, at which point Israeli acquisitions will be forbidden entirely.

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This will deal a severe blow to Israeli industry, at a value of an estimated $1 billion a year.

The Defense Ministry and the Israel Defense Forces have done nearly nothing to prepare for the new situation that will be facing Israel’s weapons industry and defense establishment - even though the agreement starts scaling back the sum permitted for non-American acquisitions as of next year, the report said.

But it seems the Treasury isn’t concerned about the deal having much impact.

At a debate on the issue held by the State Control Committee on Tuesday, Sapir Ifergan, a representative of the Finance Ministry’s Chief Economist’s Office, said an examination of the effects on Israel’s small and medium-sized defense firms found that the agreement was not expect to have any macro-economic impact. Ifergan said the ministry’s analysis showed the decision not to permit U.S. aid dollars to be converted into shekels would not hurt Israel’s economy, and that if it did, the damage would be minimal.

The large defense companies aren’t expected to be hurt, because they meet the terms for dollar-denominated acquisitions, and no shockwaves are expected to be felt within the labor market since Israel’s defense firms have been aware of this plan for a decade.

At the most, employees who retire won’t be replaced, she said.

“The most serious scenario forecast by the Defense Ministry rests on a mistaken central assumption.

The scenario it describes is that the Defense Ministry’s 2028 shekel-denominated budget is billions of shekels smaller than its 2018 budget. According to their analysis, the Defense Ministry’s gross approved budget (subtracting surpluses and not including foreign military financing, which was 60 billion shekels in 2018, and will come to six billion shekels less a decade later or 54 billion shekels in 2028.

Defense budget data over the past decade shows that this isn’t realistic; for example, between 2010 and 2019 the nominal defense budget grew by 40% after subtracting the foreign military funding, which translates into a 2.8% annual increase in real terms.”

Ifergan said the Defense Ministry’s presumption that every dollar that would no longer be converted into shekels had previously gone directly to the defense industries was mistaken. If the defense budget increases by 1 billion shekels, this doesn’t mean that defense acquisitions increase by exactly 1 billion shekels, she said; likewise, a 100-million shekel budget cut doesn’t translate directly into a 100-million shekel cut in acquisitions.

Israel’s defense establishment needs more dollar acquisitions than it currently receives in U.S. aid money, she said.

“Thus, the assumption that shekel acquisitions will be replaced one-for-one with dollar acquisitions is problematic, as it presumes that the total sum of acquisitions will not increase by 2028, relative to 2019,” she added.

In contrast, representatives of Israel’s defense industries said they were already feeling the impact of the new agreement.

“The report says that the detrimental impact of the agreement on Israel’s industry will be felt in a few years, but it’s already here now,” said Amit Tesler, owner and chairman of Magam Safety.

“The American terms mean we can’t protect our own industry,” he said, noting that production at his factory in northern Israel continues even under the threat of missile fire.

“The Defense Ministry found that we’re essential, but this hasn’t done anything for me,” he said. “A large portion of my workers are on unpaid leave.”

If this process continues, hundreds of thousands of workers in the defense industries will be out of work.

Tal Dekel, CEO of TGL, said his company was also in dire straits.

The company has two or three months of remaining orders, while its civilian orders have dropped precipitously.

“Without help in the form of future acquisitions, it’s not clear we can get through the year,” he said.

Ziva Iger, head of the industrial partnership office in the Economy Ministry, said she’d heard of companies closing Israeli plants to reopen production facilities in the United States.

Defense Ministry chief economist Zeev Zilber said some 90% of Israel’s defense acquisitions go to three industries, which in turn create work for a long chain of companies. The risk to Israel’s local industries goes beyond the defense companies, he said.

Multi-year acquisitions are an anchor for the defense companies, and this is being thrown into uncertainty, he said.

Committee Chairman MK Ofer Shelah said four years have passed since the new agreement was signed, and very little has happened since then. “The defense and finance ministries haven’t had a real discussion about the implication of a cut totaling billions of shekels to the shekel-denominated acquisitions, and small and medium-sized companies are feeling the impact in the meanwhile.

“If the government doesn’t wake up, thousands of workers in Israel’s outlying areas are going to be unemployed, important defense knowledge will be lost, and during an emergency we’ll find ourselves without crucial supplies,” Shelah said.

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