Pillar of Defense Could Cost Israel Hundreds of Millions in Lost Production

Israel's latest Gaza offensive could cost the economy hundreds of millions of shekels in lost production, based on the experience in Operation Cast Lead and the Second Lebanon War.

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Based on Operation Cast Lead that began in late December 2008, defense and finance ministry officials can roughly gauge the cost, though much depends on how long Pillar of Defense lasts and how severe the fighting rages.

Cast Lead lasted 22 days and cost NIS 3.8 billion. After the hostilities, the Defense Ministry received NIS 2.45 billion from the Finance Ministry and funded the rest from its own resources. Following the Second Lebanon War in 2006, which lasted a month, the Finance Ministry gave the army a special allocation of NIS 8.2 billion, in addition to sizable funding to replenish emergency supplies.

On Thursday, the shekel suffered a significant drop. The dollar's representative rate was set at NIS 3.952, continuing the greenback's gain during the fighting with Hamas and other Palestinian groups. Thursday's gain was about 0.9%, and the euro rose more than 1% against the shekel. The representative rate was set at NIS 5.0431.

The defense establishment receives annual reserve funding of about NIS 800 million for wartime expenditures. Since Operation Cast Lead, the Israel Defense Forces has not drawn on the reserves, so it has accumulated funds that would cover the direct cost of several days of fighting.

Ground ops cost more

There are major differences between the costs for the current air strikes on the Gaza Strip and an operation such as Cast Lead, in which the ground forces took part. An aerial war, even with naval support, is usually much less expensive, even though the weapons involved may be more expensive than the tanks and artillery used in a ground offensive.

The estimated cost of operating an unmanned aircraft is about $1,500 per hour, or roughly NIS 6,000. An hour's flight time for a helicopter is about $5,000, or NIS 20,000, while operating a fighter jet for an hour is estimated at about $15,000, or NIS 60,000.

The deployment of reserve soldiers costs the National Insurance Institute on average NIS 450 per day per reservist; it also costs the IDF itself for provisions such as food.

There are also indirect costs from such an operation, including productivity losses as reservists take leave from their regular jobs. But in the current fighting, much of the south is affected by the hostilities. Factories and offices are expected to scale back operations or close temporarily.

There are about 1,000 plants in the areas of the south being hit hard by rocket fire, not to mention the many other businesses in the region. Protracted fighting could therefore cause a major loss of production.

Because schools in the south have been closed, many parents have had to stay home from work.

National Insurance Institute payments to workers absent from their jobs could also be substantial. Of course, one must also consider the cost of property damage from rocket attacks. Cast Lead produced NIS 100 million in property damage.

Deferral for tax reporting

Among the Finance Ministry's measures to ease the situation for businesses in the line of fire is a one-week deferral of certain tax-reporting obligations. Those reports were due on Thursday, the 15th of the month.

In addition, banks supervisor David Zaken has instructed the banks to take a number of steps to ease the situation for residents within 40 kilometers of the Gaza Strip. He told the banks, for example, to ease the credit lines available to customers in areas threatened by missiles from Gaza, rather than return checks for which there are insufficient funds.

In practice, Zaken has let the banks permit these customers to temporarily exceed their credit lines. He has also authorized the banks to accept telephone requests for banking services for which customers have not signed written agreements authorizing such transactions.

Zaken said the leniency policy will be adjusted as warranted by the situation on the ground.

Prime Minister Benjamin Netanyahu's government is expected to expand IDF operations in Gaza and is not interested in a cease-fire at the moment, senior officials involved in Operation Pillar of Defense said on Thursday.

The IDF was ordered to increase air strikes on Gaza and to complete preparations for a ground operation, after Netanyahu consulted with Defense Minister Ehud Barak and Foreign Minister Avigdor Lieberman.

According to a senior official who was briefed after the consultation, "We're not talking about a cease-fire; it's not on the agenda."