The IMF says that the strengthening of the shekel in the past few years has hurt the economy's competitiveness and lowered the growth rate. The Article IV Consultation on Israel predicts that the shekel will continue to strengthen, hurting output.

The IMF predicts 3.5% GDP growth for Israel in 2011, a drop in the unemployment rate to 5.5%, and inflation of 2.7%.

The IMF also fully supports the Sheshinski committee recommendations. "The first use of such tax receipts should be to reduce public debt, given that overall revenues will be modest on current estimates of the volume of gas. But if large additional finds are made, revenues should be placed in a sovereign wealth fund for intergenerational equity and to avert Dutch disease," it says.

The IMF also neither objects to nor supports the Bank of Israel's interventions in the foreign currency market. Although there are signs of over-appreciation by the shekel, which is eroding competitiveness by the economy, more foreign currency purchases by the Bank of Israel are liable to be ineffective, cause losses to the bank and affect its credibility.

The IMF says that the best option is additional fiscal consolidation, especially by not using the budget reserves included in the two-year budget. The IMF praises how Israel has succeeded so far in handling the global economic crisis.

The IMF concludes, "Steps taken to withdraw policy stimulus have been appropriate." Interest rate hikes helped lower inflation back to within the target range. "The resilience of the economy has been strengthened by the adoption of new fiscal rules capping spending and deficits, a new Bank of Israel Law, and by the entry into the OECD."

However, the IMF cautions, "Strains have emerged. In particular, inflation expectations have risen towards the upper end of the target band, nominal house prices have boomed, and the shekel has appreciated significantly. Though all these developments reflect Israel’s relatively strong economic performance, the authorities will need to keep them under control." It advises that additional measures, on top of interest rate hikes and budget cuts may be needed to avoid compounding upward pressure on the shekel.

"But if fiscal policy remains as planned, policy rates may need to rise further and more rapidly than planned, even if this puts further upward pressure on the shekelin order to stem inflation."

Published by Globes [online], Israel business news - www.globes-online.com - on January 25, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011