Bank of Israel/ Wikipedia
The Bank of Israel on Wednesday issued a dire warning about the state of Israel’s economy, saying it has been harmed by the legislative programs promoted by the government of Prime Minister Benjamin Netanyahu. The corps issue here is the Netanyahu government’s controversial judicial reform plan. Israel’s political opposition charges that the plan will cause irreparable damage to its democratic nature because it includes removing the power of Israel’s Supreme Court to serve as a “check” on government actions.
The warning came by way of the Bank of Israel’s financial stability report, which is published twice a year. In this report, the bank’s economists express their assessment regarding the exposures to the main risks faced by the financial system, analyze the main exposures and evaluate potential risk scenarios.
“The legislative processes caused an increase in uncertainty in the business sector and among key players in the financial markets in Israel and around the world, the uncertainty was expressed in a negative sentiment towards Israel,” stated the Bank of Israel.
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“The uncertainty surrounding the legislative changes increased the risk premium of the economy and was accompanied by a devaluation of the exchange rate which contributed to an increase in inflation, a decrease in stock prices and increased volatility in the foreign exchange market and financial markets,” it added.
The Bank cited the fact that in the first half of 2023, the Tel Aviv 125 index fell by 2.1%; even though, at the same time all the major stock indices in the world rose. Also, in the first six months of 2023, the Shekel decreased by 2.7% against the US Dollar, while the Dollar dropped in value against other major currencies during the same period.
On the bright side, the Bank of Israel did state, “the local financial system remains stable.”
The Bank also explained that, in the reviewed period, the financial system in the economy was affected by two main factors: one, the continued tightening of monetary policy and the slowing of economic growth in Israel and the world, along with difficulties in the global banking system; And the second, uncertainty surrounding the consequences of the legislative changes regarding the legal system in Israel on the functioning of the economy and the financial system as a whole. If these processes – in Israel and in the world – intensify, they may challenge the system in the medium term.
The monetary tightening, required due to the ongoing inflation, and the moderation of growth were manifested in the increase of the risk indices – and with them the pricing – in the real estate market and in the financial markets and in the increase of credit costs. Against this background, households and businesses are faced with the heavy burden of debt service.
Massive protests have rocked Israel since January when 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 greatly 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 in the country and hurting its economy. And this is why the country is now on the brink of what some are describing as the biggest societal clash in Israel’s history.
