Prof. Stanley Fischer, Governor of the Bank of Israel (13 July 2006)

The Israeli modern and hi-tech oriented economy is dynamic and strong, based on the combination of a solid industrial base and a responsible governmental monetary and fiscal policy. Enjoying a rapid growth of 5.3% in 2005 and over 6% in the first quarter of 2006, the Israel economy is on a very positive path, and the current events will have only limited and short time effects.

The financial system in Israel continues to operate normally and the Bank of Israel is closely monitoring developments. Bank of Israel Governor Stanley Fischer indicated that as long as the government adheres to its responsible fiscal policies and continues to implement its economic reforms, the economy will remain stable and can continue to grow.

The financial markets are operating normally and without disturbance, including clearing of foreign currency, capital market and the stock exchange. Despite declines at the beginning of the crisis, the stock market has been exhibiting stability and the shekel has increased in value against the dollar.

"Before the escalation of violence, Israel’s economy was set to grow by over 5% this year with the current account in surplus, foreign investment strong and inflation heading back within the 1% to 3% target band," said Richard Fox, Head of Middle East and Africa Sovereign ratings at Fitch in London. "Crucially, even if the economy now slows, Israel’s public debt dynamics have improved to an extent that the debt to GDP ratio will continue to fall.”
(Fitch’s Ratings report on Israel, 14 July 2006)

Israel has a robust and stable economy reflected by rapid growth, low inflation, strong local currency and current account in surplus.

The annual growth during the first half of 2006 was at the rate of 6%, providing a good start for strong annual growth in 2006, even if it suffers a temporary limited slow growth in the third quarter of 2006.

The economic figures for first half of 2006, were very high, and provide a solid base for good annual figures. For example:

  • Foreign investment in Israel, during January-June 2006 amounted to $11.9 billion, 20% more than the $9.95 billion invested during all the year in 2005.
  • The Israeli government finished the first half of 2006 with a budget surplus of more than one billion dollars, and will therefore not need to increase the budget framework.
  • Hi-tech start-ups exits during the first half of 2006 amounted to $1.43 billion, while the total exits from Israeli start-up companies during all year 2005 reached $1.45 billion.
  • During the first six months of 2006, Israeli high-tech companies raised $764 million from both Israeli and foreign investors, 4% more than in the first half of 2005.

Prime Minister Ehud Olmert and Minister of Finance Avraham Hirchson made it clear that the government would maintain a responsible fiscal policy, and that they had no plans to increase the budget framework.

Finance Minister Hirchson announced that in light of the fact that the government has already crossed the mid-point of 2006 with a budget surplus of NIS 4.7 billion, the budget will not be breached as a consequence of the unexpected expenditures in the security budget and the deficit level will remain within the 2006 budgetary law. In this context, it can be indicated that the government is committed to maintaining a responsible budget structure and real government expenditures will not exceed 1.7% for the year, while the deficit will not rise above 2% of the GNP.

The tourism sector is expected to suffer a lower volume of activity in the short term, however it should be noted that its weight on the total economy of Israel is rather limited (~1.5%). Being a hi-tech and export oriented economy, Israel’s economic development and growth depends mainly on the developments in the global economy, rather than temporary local security crisis.