Financial Times; Oct 24, 2002
WORLD NEWS: Israel struggles with double weight of war and slowing economy
By Sharmila Devi in Jerusalem
The talk in Jerusalem last week was how big the rats would grow living off the rubbish piling up in the streets as municipal workers went on strike to demand pay rises.
Fear that terrorists would use the rubbish as cover for bombs soon forced a clean-up in the cities at least, but the battle between public sector workers and the government rumbles on.
The strike is the latest reminder for Israelis that the two-year intifada is exacting a heavy price not just in human lives but economic pain as unemployment and inflation march upwards and growth and productivity head south, exacerbated by the global slowdown.
The economy contracted by 0.9 per cent last year and a similar figure is expected this year. Unemployment is 10.3 per cent and inflation is forecast at more than 8 per cent this year, from 1.4 per cent last year.
Silvan Shalom, finance minister, yesterday said Israel was thinking of asking the US for loan guarantees, believed to be for loans of billions of dollars. Israel last received US guarantees for loans of $10bn around 10 years ago to help absorb thousands of immigrants from the former Soviet Union.
Only two years ago, Israel was called "Silicon Wadi" following the success of its high-technology sector. Now the standard of living has retreated to the level of seven years ago, according to a study by Tel Aviv University. The study is based on the Central Bureau of Statistics' forecast of a 2.9 per cent drop in per capita gross domestic product growth to Shk73,500 (ý9,800) this year.
Mr Shalom made a dramatic intervention earlier this week to protect Israel's international financial standing when he flew to London without telling any of his ministers to try to prevent a downgrade by the credit ratings agency Fitch. Israel won some respite as Fitch on Tuesday announced the foreign currency rating was unchanged at A-minus and only lowered the local currency rating to A from A-plus.
Fitch said high public debt at 103 per cent of GDP and a high budget deficit at 8 per cent of GDP were second only to Japan among investment-grade countries.
The pressure on Israel is increasing daily as investors wait to see if the country will put in place promised austerity plans and avert the ongoing threat of a sovereign downgrading by Fitch or the other ratings agencies.
Analysts are hoping the government will manage to pass the 2003 budget, delivered to parliament yesterday, by the end of the year. The Likud party of Ariel Sharon, prime minister, faces strong resistance to the planned spending cuts of Shk8.7bn from his coalition partners as well as opposition parties.
Analysts said it was probable the budget would be passed, with no party wanting to be responsible for bringing the government down, but that severe problems would remain.
"Even if the budget goes through, the basic problem is that it just maintains the status quo. We need a growth-oriented policy to stop the decline in GDP," said Pinchas Landau, an economic analyst. "The economy can no longer bear the onerous combination of a domestic recession and a war."