As an IMF delegation completed its annual visit of Israeli financial institutions and delivered an interim report, the Bank of Israel released some disturbing news. There is an “unprecedented” hole over US$1.0 billion in the Israeli government budget for 2012. The bank blames extra expenditure on social issues, which means that the deficit will become recurring, while treasury officials point to a downturn in tax revenues.

Which begs the question, what do our friendly international financiers think about the country’s economy?

To date, Israel has escaped the worst of the international dips and bends of recent years. Nearly 5% growth in 2011, and the IMF still believes the economy will expand by almost 3% in 2012. Great stuff. Add in to that stat that unemployment is expected to remain “acceptable” – about 6.5% – and things look rosy.

The IMF operatus memorandi is to make constructive criticism. It points to faults that can be corrected, before they have an adverse effect. With regard to public expenditure, the report was explicit:

The top priority is to keep public debt on a downward track over the medium term. This will maintain confidence in Israel despite strained international markets, and so allow some flexibility in the deficit path in the short term…..

Ooops! Whatever the reason for the gap, it has to be plugged and fast. Otherwise, gains made over several years can dissipate very quickly.

Another area for ripe for structural change concerns the ultra orthodox and Arab sectors of the populations, both known to be relatively poor and where large families predominate. Female employment is well below the national average.

Quite simply, the IMF estimates that if people in these sectors worked as much as in other parts of the population, GDP would accelerate by 15%. Just to rub the point in, the IMF noted that within a generation, the two groups will constitute around 50% of the whole population.

The plethora of other recommendations imply that Israel’s financial mandarins have much work to do. These include: –

• Implementing a tax for holders of more than one property
• Instituting mechanisms for handling a crash of a major financial institution
• Reducing intervention by the central bank in the foreign currency markets.

Overall? Not too bad at all, especially compared to other and larger economies in the OECD. There again, this is a global dynamic economy, where you cannot rest on your laurels.