When Fighting Stops, Battle to Rescue Damaged Economy Will Begin

Leading economists warn that only half of lost output will be retrieved, while Israel risks lower credit rating.

Eliyahu Hershkovitz

The economic cost of Operation Protective Edge will extend long after the fighting dies down, as the treasury tops up the defense budget, the tourism industry waits for the world’s travelers to return and the risk that a lower credit rating may saddle Israel with higher interest costs.

That is the view of a former government official interviewed by TheMarker as the operation marked its 13th day.

Doron Cohen, who was director general of the Finance Ministry until a year ago, estimated that the fighting would ultimately cost the economy between 8 billion and 10 billion shekels ($2.3-$2.9 billon), amounting to 0.75% to 1% of gross domestic product.

Cohen and others said that as long as the fighting continues, the economy will remain down 20%, most of that being suffered by small- and medium-sized business in the south and the tourism industry nationwide. But, Cohen estimated, about half of that 20% would eventually be retrieved by stepped-up output later in the year.

But Brig. Gen. (res.) Maharan Prosenfer, a former financial adviser to the army chief of staff and budget director in the Defense Ministry, said the final costs hinged on how long the conflict lasts. “If Protective Edge continues for more than a week or 10 days, the economy won’t be able to compensate for the lost output, which is something our leaders should be thinking about,” he said.

The tourism industry, in particular, will need more time to recover, because overseas visitors need to be convinced that the security situation has returned to normal, said Cohen. The government will have to act to encourage more domestic tourism, he suggested.

In the meantime, large parts of the economy – such as the high-tech sector, trading and banking – have been largely unaffected. Even restaurants and catering have been hurt less than they could have been, because the fighting has come during the three weeks before Tisha B’Av, when religious Jews are prohibited from holding weddings and other happy events.

The direct costs of Protective Edge have close to doubled since Israeli troops launched a ground invasion last Thursday. The daily costs to the army are now running at about 200 million shekels, compared with 110 million shekels during the air phase of the fighting, said Prosenfer.

However, he added, most of the costs came in the year before the fighting started, with as much as 50 billion to 60 billion shekels being spent developing the Iron Dome anti-missile system, other technology and in training, and putting safe rooms in private homes.

Cohen estimated that the total cost to the army of Protective Edge would be between 2 billion to 3 billion shekels, a figure that the Brodet Commission on military spending forecast would be the cost of fighting a short war.

Normally, the army should be able to cover the cost out of its regular budget, but because military spending was cut in 2014 and was due to be cut again in 2015, the army won’t be able to absorb all the costs and the treasury will have to make up some of it, Cohen noted.

Yarom Ariav, another former treasury director general, warned that the fighting could lead to Israel’s sovereign credit rating being cut, forcing it to pay high rates of interest on its foreign debt.

“The longer the operation lasts, the chances of interest rates rising and Israel’s credit rate falling will grow,” he said. “Also, Israeli commercial ties with other countries are likely to be hurt.”

Prosenfer said he was optimistic that the current round of fighting with Hamas would lead to a long cease-fire.

“I can say with confidence that Hamas has been launching missiles at Israel for 13 days in a row and nothing happened. Life in Israel continues as normal. That’s a big defeat for Hamas. It’s lost a significant deterrent asset,” he said. “Until the next time – if there is a next time – a lot of time will pass. This will create a period of security, political and economic quiet.”