Israel’s Central Bank Governor Tries to Assure International Markets

Last October, at a conference of the International Monetary Fund in the United States, the Governor of the Central Bank of Israel Amir Yaron sought to reassure the world about what he described as “the strength of the Israeli economy.” He said that “The Israeli economy is strong and stable. It has robust and healthy economic foundations. We are a global leader in innovation and technology. The Israeli economy has known how to function and to recover from difficult periods in the past and to return to prosperity rapidly.”1 According to press reports, global financial markets are watching with concern and analysts are warning about mismanagement by Prime Minister Benjamin Netanyahu’s government and Finance Minister Bezalel Smotrich. At the same time, questions have been raised about the source of funding for the current war on Gaza, as unemployment is rising, with about 120,000 workers pushed on the unemployment roster because of the war.

In his quest to reassure the world, Yaron continued that the Israeli economy entered the war with good economic data, the size of the public debt amounted to 60 percent of the gross domestic product, with a budget deficit of 1.5 percent of the GDP. He said that the war will lead to a reduction in estimates of Israeli economic growth by 1 percent in each of 2023 and 2024, and that the volume of debt will rise next year to 65 percent of GDP.2

In an article in Calcalist, a publication published by Yedioth Ahronoth newspaper, economic analyst Adrian Filot disputed Yaron’s statements as unusual. Mentioning estimates of local and international economists, including former senior officials in public and private institutions, Filot said that economic conditions will be worse than Yaron’s presentation.

The Cost of the War on Gaza Thus Far

According to Israeli reports, the cost of the war on Gaza amounted to 35 billion shekels (NIS), 22 billion in military expenditures and 13 billion in civilian-related expenses (the dollar exchange rate, at the time of publication, was NIS 3.73).3 Analysts and economic experts say that experience has shown that covering the cost is possible, and sources will be found for payment, which is why the main criticism is directed at Smotrich and Netanyahu, because of their mismanagement of the economic crisis. The criticism is focused on their profligate spending, especially that done in favor of the parties participating in the government. Analysts say the priorities need to change profoundly.

Many analysts believed that Israel is facing a crisis similar to that of 2002 that lasted for more than two years during the second Palestinian intifada, when instead of addressing the crisis, government spending did not pay attention to military expenses, which deepened the deficit in the public budget. According to analysts, this approach led to a loss of confidence and almost to a financial collapse, in mid-2002 when the dollar was worth NIS 5, the interest rate on government bonds rose to 12 percent, and Israel was on the verge of bankruptcy. That crisis forced Israel to appeal to the United States for financial guarantees to help it sell bonds on the international market.

In an article in Haaretz’s The Marker, economist Meirav Arlosoroff wrote that “just as the loss of protection on October 7 cost us 1,200 dead, 240 kidnapped, and 3 divisions conducting a ground operation in Gaza, the loss of protection for the state budget can also cost us financial damage and a horrendous budget. This is why the government must now and immediately announce a cut of six billion shekels from the coalition government’s budget.”

“No one knows how to predict the end of the war; prolonging it for many months and expanding it to another front with Lebanon are great dangers,” she added. “Economic policymakers warn against making predictions for 2024, but the estimate that the cost of the war will be more than NIS 100 billion is becoming more likely. Pessimists are talking about NIS 200 billion, which is about 10 percent of Israel’s GDP.”

Arlosoroff asks about “the likelihood that Israel’s economy will endure a NIS 100 billion shock,” stating that the answer depends on how the economy is run. “Recently, the first phase of the struggle over the management of the economy has been resolved in a worrying way. Smotrich decided to overspend beyond the 2023 budget to the tune of NIS 35 billion. Israel now needs to invest whatever is needed to win the war, but there are plenty of options regarding the economy’s readiness for these huge expenditures and Smotrich has chosen to do little.” She added that “global financial markets expect responsibility in the Israeli budget, and Israel should do everything to reduce the national debt.” Basically, if these remedies are not provided, confidence in the Israeli economy will suffer.

Relatedly, last week the Central Bank of Israel called on the government to seriously reduce the state budget for the current and next years, and in particular the huge budgets allocated to the requests of the parties that make up Benjamin Netanyahu’s government, based on last year’s coalition agreements which primarily benefit the constituencies of these parties, especially the ultra-Orthodox (Haredim), as well as the settlers and the religious Zionists.

Finance Minister Smotrich sought to ignore calls to freeze these funds and maintained one NIS billion of the budget for the aforementioned parties, as these agreements stipulated that a total of NIS 13 billion would be spent over 4 years for their benefit.

Data of Israel’s Economy in the War

Inflation: Inflation in October, the first month of the war, increased by 0.5 percent, according to the Central Bureau of Statistics last week; thus, inflation in the first ten months of this year recorded an increase of 3.4 percent, above the ceiling set by the economic policy of the Bank of Israel in the last 15 years, which is 3 percent. Inflation was affected by the increase in food prices (0.9 percent), vegetables and fruits (3.9 percent), and clothing and shoes (3.2 percent). The census bureau said that it had some difficulty collecting market data in areas that are closer to the war than others, especially the south and the far north of the country.

According to analysts and experts, inflation this month and the next two months will be “negative,” as a reflection of a slowdown in economic activity and market movement, despite the fact that credit card companies have reported in recent days a rise in public spending.

Unemployment: Several reports issued by the Israeli government’s Social Security Administration (the National Insurance Fund) said that 120,000 Israelis have been added to the unemployment roster since the outbreak of the war on October 7. Most of these were put on unpaid leave, meaning not completely losing their jobs. They are entitled to unemployment benefits, and according to estimates, the cost of unemployment arising last month amounted to NIS 1.2 billion. According to the latest estimates by the same administration, about 5,000 male and female workers join the unemployment, unpaid leave roster every day.

Cost of displacement: According to estimates by the Finance Ministry, the cost of those displaced from their homes—and who were accommodated in hotels or temporary homes—will be about NIS 10 billion per year. These are concentrated in the vicinity of the Gaza Strip and less so close to the Lebanon border. The cost also covers social allowances and the rehabilitation of homes and towns damaged by the attacks of October 7.

Continued Rise in the Value of the Shekel

The value of the shekel against global currencies continued to rise, exchanging at NIS 3.73 to the US dollar on November 17, 2023, the same rate recorded last August 14. The value of the shekel rose during 3 weeks by 8.6 percent from October 27, which was a peak in 12 years.

The pace of the shekel’s rise increased to its current level two weeks before the war, when the Bank of Israel announced the sale of $8.2 billion to protect the value of the national currency, out of $30 billion previously announced by the bank. After this actual sale, Israel’s foreign currency reserves remained at $191 billion, which is also a record volume.

However, according to local and international reports, the decline in the value of the dollar globally contributed to the rise in the value of the shekel. As reported last week, Israeli analysts warn that the factors of the shekel depreciation are still present due to the ongoing war.

This paper was first published in Arabic by Madar-Palestinian Center for Israeli Studies, Ramallah, Palestine.

*Image source: WikiMedia
1 “Remarks by Bank of Israel Governor Prof. Amir Yaron to the G30 Forum Convened at the Annual IMF and World Bank Conference,” Press Release, Central Bank of Israel, October 15, 2023,
2 Ibid.
3 More recent estimates by the Finance Ministry put the figure at $51 billion, equivalent to 10 percent of GDP. See “War with Hamas to cost Israel over $50 billion, Calcalist reports,” Reuters, November 5, 2023,