The central bank of Israel is forecasting an increase in the country's debt-to-GDP ratio due to the costs of military conflict and compensation spending, along with the financial impact of the COVID-19 pandemic. The debt-to-GDP ratio is expected to rise from 60.5% in 2022 to 62% in 2023, and further to 65% in 2024, according to the bank's estimates.
This projection comes amid concerns over the budget deficit for 2023 and 2024, which the central bank anticipates will be 2.3% and 3.5% of GDP respectively. These figures contrast starkly with a surplus recorded in 2022. The shift is attributed to ongoing conflict in Gaza, with costs related to military needs and compensating citizens impacted by Hamas' deadliest attack yet undetermined.
An official from the Accountant General’s department has questioned these estimates, suggesting that they may be optimistic when compared to the $49 billion spent on COVID measures. In response to these concerns, Finance Minister Bezalel Smotrich affirmed the government's commitment to necessary war and compensation spending.
In addition to war-related expenses, Israel's economy has been grappling with the effects of the COVID-19 pandemic. In 2020, COVID-driven spending led to a budget deficit of nearly 12% of GDP and a debt-to-GDP ratio of 72%. Despite this, Israel experienced a robust recovery from the economic slowdown induced by the pandemic.
Bank of Israel Governor Amir Yaron emphasized the need for responsible fiscal policy moving forward. He pointed out that while Israel had a relatively low budget deficit before the war and a long-term debt portfolio, it will need to raise more debt to accommodate these unforeseen expenses.
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