Bloomberg reported that the Israeli Central Bank presented its most detailed assessment yet of the economic repercussions of Israel’s war on the Gaza Strip, choosing to maintain interest rates to stabilize markets. The Central Bank’s updated forecasts estimate the conflict’s total impact on Israel at 198 billion shekels, approximately $53 billion, with defense spending accounting for over half this amount.
An Israeli financial consultancy, Leader Capital Markets, estimated Israel’s losses from the Gaza war at around $48 billion for the current and next year. The Ministry of Finance indicated that the war costs the economy nearly $270 million daily.
The Central Bank’s research team has lowered its expectations for Israel’s economic growth, now anticipating a GDP growth of 2% this year and next, compared to previous estimates of 2.3% in 2023 and 2.8% in 2024. The Finance Ministry shares similar GDP projections for this year but expects slightly weaker future gains.
According to Bloomberg, Israeli Central Bank Governor Amir Yaron warned that the financial impacts of the war would persist in the medium term. He urged the government to exercise caution while preparing a new budget, emphasizing the need to maintain a responsible fiscal framework alongside addressing the war-created needs, even in emergency situations. He also stressed the importance of reducing long-term new expenditures by the government.
There is currently a broad debate within Israel regarding anticipated changes in its current budget. The Central Bank officials have criticized the government’s reluctance to cancel planned spending on religious programs and settlements in the occupied West Bank while under pressure to fund the war effort.
Bloomberg reported that the worst armed conflict Israel has seen in half a century has devastated its economy, paralyzing many businesses and companies, disrupting consumer demand, and depleting the labor market. This follows the October 7 attack. Israel plans to finance most of its budget spending through debt. Financial experts suggest that the Israeli government shows no inclination to change its political priorities for greater financial discipline and focus on growth-enhancing policies.
In a statement accompanying the Central Bank’s decision on Monday, policymakers nearly repeated last month’s guidance, stating that the focus should be on stabilizing markets and reducing uncertainty, along with price stability and economic activity support.
Bloomberg noted that sentiment has sharply turned since the last meeting of the Bank of Israel’s monetary committee a month ago, when the shekel was suffering its longest losing streak in nearly four decades. The Central Bank stated on Monday that recent exchange rate volatility implies that the weakening shekel still poses a risk to reducing Israel’s inflation rates to the targeted range.
This analysis by the Israeli Central Bank highlights the significant economic challenges faced by Israel in the aftermath of the conflict. The substantial financial burden of the conflict underscores the complexities of regional tensions and their far-reaching economic implications. The situation in Israel reflects broader issues faced by countries involved in conflicts, where economic stability and growth are often deeply affected by security concerns and defense spending. This scenario presents a challenging balancing act for policymakers, who must navigate fiscal responsibility while addressing urgent security needs.
