International Monetary Fund Says Israel Should Use Growth to Upgrade Lagging Infrastructure

Report sees 3-3.5% growth ahead, but says congestion on the roads and low participation of ultra-Orthodox communities in the labor market hurts economic growth

Craig Beaumont, IMF Mission Chief for Israel, speaks with Bank of Israel Governor Karnit Flug at the Israeli Finance Ministry in Jerusalem, March 14, 2018.
REUTERS/Ronen Zvulun

Israel’s economy is strong and will remain that way for the next few years, and that presents an opportunity for the country to undertake reforms and make badly needed infrastructure investments, the International Monetary Fund said on Wednesday.

Israel gross domestic product grew 3.4% last year, with wages climbing 3.3% and the jobless rate falling to a historic low of less than 4% at the start of 2018. The IMF predicted the economy would expand at a 3.5% over the next few years, but with productivity growing at a relatively modest at 0.75% annually, Israel’s economic growth will slow to 3% a year in subsequent years, it said.

Craig Beaumont, the IMF mission chief, told a news conference in Jerusalem that Israel should leverage its strong economy to boost infrastructure spending and reverse more than a decade of insufficient investment.

“That’s accumulated over time to a shortage, especially in the transportation area which is seen in Israel having the worst traffic congestion in the OECD,” he said.

He said the poor state of public transportation caused Israelis to rely too much on private automobiles and that the resulting congestion on Israeli roads was having a negative impact on growth. “And that situation could get worse as the population keeps on growing, incomes are rising and people’s desires to have cars keeps rising,” he warned.

In a jam
Number of kilometers a vehicle travels per one
kilometer of road in 2014

Beaumont suggested that since the timeframe for infrastructure projects is lengthy, Israel should undertake short-term measures such as ride-sharing, carpooling and even introduce a congestion charge like London has done.

“The traffic situation is weighing on productivity,” he said.

Another danger spot for the economy, the IMF noted, was Israel’s ultra-Orthodox and Arab communities, both of which represents the fastest-growing segments but suffer low rates of labor force participation and education.

Employment rates of Haredi men and Arab women have risen in recent years, but remain a very low 47% and 35%, respectively, the report said. It expressed concern that the rate for Haredi men had stopped growing in recent years, which it said pointed to the need to avoid undermining incentives to work.

Narrowing the gaps in employment and hourly wages by half – leaving the proportion of part-time workers unchanged – could raise output by almost 14%, the IMF pointed out.

On housing, the IMF said the recent slowdown in prices was probably due to new taxes on property investors and the government Machir L’Mishtaken (Buyers Price) program. But it warned that a drop in new construction would probably lead to a renewed acceleration in prices.

Investing in public transportation to help longer-distance commuting would help ease the pressure.

On fiscal policy the IMF said was opposed to the government continuing to set budget deficit targets of 2.9% of gross domestic product. A level of 2.5% would allow for further debt reductions, which would help Israel in case of an economic shock, the IMF said.

Shai Babad, director general at the Finance Ministry, pointed out that the actual deficit was 2.1% in 2017 and should come below 2.9% this year. But the IMF report noted that the lower figures were probably due to one-time factors and shouldn’t be relied on as a benchmark for policy.