War Jeopardizes Israel’s Financial Stability

According to estimates by the Central Bank of Israel, the Jewish state’s defense spending in 2024-2025 will total about 255 billion shekels ($70.3 billion), or 13% of Israel’s GDP. Among the consequences of this surge in military spending, the Bank of Israel predicts an increase in the public deficit, which in turn will increase Israel’s public debt to 67% of GDP.

The other day the international rating agency Moody’s downgraded Israel’s rating from A1 to A2. Nevertheless, since the beginning of the armed conflict in the Gaza Strip (October 7, 2023), the Jewish state has not resorted to issuing foreign currency bonds in the public markets, limiting itself to raising $1.7 billion in private loans.

Paradoxically, the shekel has strengthened significantly over the past three months and has not only managed to recoup the losses of October 2023, but the Israeli currency has improved its position compared to the situation it was in before the war with Hamas. This is partly thanks to the Bank of Israel’s financial interventions, but partly this is one of the rather paradoxical consequences of geopolitical instability: no one expects the Bank of Israel to decide in the near future to revise downward the interest rate that has been at 4.75% from May 2023.

As for the conflict between Israel and Hamas, the situation is becoming less and less predictable after Israeli Finance Minister Bezalel Smotrich asked at a security cabinet meeting in Tel Aviv to oppose the Arab-American peace plan proposal for creating a Palestinian state. The minister, known for his orthodox and intransigent stance, called for a “clear solution” because “the idea (behind possibly adopting the plan – ed.) is that it is OK to kill Israeli citizens.”

“The Palestinian state poses an existential threat to Israel, as was demonstrated on October 7,” Smotrich added, referring to the attack launched against the Jewish state by the Palestinian Islamist movement Hamas. The finance minister said he expects his request to be supported by Israeli Prime Minister Benjamin Netanyahu, two ministers, and Knesset members Benny Gantz and Gadi Eisenkot, as well as all ministers present at the cabinet meeting.