IMF Praises Israel’s Economy, But Sees Judicial Reforms as a Threat

Bank of Israel/ Wikipedia

The International Monetary Fund (IMF) released its report on the outlook for Israel’s economy. While giving the country a good review overall, the IMF joined the chorus of those who say the controversial judicial reforms proposed by the government of Benjamin Netanyahu could bring the country’s economy down.

The news comes as Standard & Poor’s (S&P) chose to leave Israel’s credit rating unchanged at AA-. But just one month ago that fellow credit ratings agency Moody’s downgraded Israel’s credit rating for those same reasons. Moody’s downgraded Israel’s economic outlook from “positive” to “stable”, citing concerns over the “deterioration of Israel’s governance.”

The IMF praised Israel for its post-Covid performance calling its recovery from the crisis “remarkable,” adding that it was “anchored in strong fundamentals.” But the IMF added that the outlook is for growth to slow broadly in line with potential, as inflation falls to the targeted range by the end of 2024. However, the IMF found that Israel’s risk balance is “tilted to the downside,” reflecting, among other things, external risks and the continued uncertainty around the proposed judicial reform.

While Israel is expected to see a slowdown in growth for the same economic reasons as are effecting the rest of the world, the country’s domestic political turmoil was cited by the IMF as a factor for Israel seeing an economic downturn.

The IMF referred to “continued uncertainty” around the judicial reform plan saying that it “presents a notable downside risk to growth. Absent the emergence of a durable and politically sustainable solution, continued uncertainty could significantly increase the price of risk in the economy, tightening financial conditions and hindering investment and consumption, with potential repercussions for growth, also in the longer term.”

“Permanently lowering the uncertainty around judicial reform requires a politically sustainable solution that is clearly communicated and well understood both domestically and abroad.”

On the bright side for Israel, however, the IMF said the country’s fiscal policy should safeguard fiscal buffers while raising growth-enhancing spending. As for monetary policy, the IMF said with a tight labor market, positive output gap, and headline inflation above the target range, the policy stance should remain tight.

Massive protests have rocked Israel over the past few months, ever since Justice Minister Yariv Levin revealed the government’s plans to alter the nature of Israel’s judicial system. The government’s judicial reform plan would significantly curtail the power of Israel’s Supreme Court to nullify legislation passed by the Knesset and also limit the authority of Israel’s attorney general. The opposition charges this would harm Israel’s democracy, eroding foreign confidence and hurting its economy. And this is why the country is now on the brink of what some describe as the biggest societal clash in Israel’s history.