GlobalWide News
The Economist on the economic cost to Israel of launching a ground operation in Gaza. Not three weeks after Hamas plunged Israel into war, the conflict is already taking its toll on the country’s economy. The shekel’s exchange rate against the dollar has fallen to its lowest level in more than a decade. The price of insuring the country’s debt obligations against default has skyrocketed. All businesses from real estate developers to restaurants have closed, and the central bank has lowered its economic growth forecast from 3% to 2.3% for 2023. Can Israel withstand the economic strain?
In 1973, arms spending and the conscription of 200,000 reservists for the Doomsday War brought Israel to the brink of financial collapse. In 2002, the country’s Central Bank estimated that a single year of intifada (Palestinian uprisings that erupted periodically from the late 1980s through the 2000s) cost 3.8 percent of GDP. To avoid catastrophe, Israeli authorities must address three challenges.
The first is employment. There are not enough laborers to support both the economy and the war. Since October 7, more than 360,000 reservists, or 8% of the country’s workforce, have been mobilized into the armed forces. Israeli charity Start-Up Nation estimates that a tenth of workers from the manufacturing sector have been drafted into the army. By law, firms can only hire temporary replacements for those called up, which is not an attractive option for job seekers. There is another source of labor shortages. Many low-skilled jobs in Israel are performed by Palestinians from the West Bank. And they are hard to replace due to labor shortages.
The second problem for policymakers is the decline in private consumption. Shoppers have changed their habits and are now sitting at home. Restaurants and shopping centers are empty. Those that have opened see that there are few customers. Tourism has come to a halt. Entire towns have been evacuated. The government is prepared to support business, except for big business, with subsidies as it did in the covid. Tax payments have been postponed.
The third is managing the financial costs of the conflict. Israel’s debt is currently about 60% of GDP, a modest figure for such a rich country. Even assuming the war lasts until the end of the year, it is projected to rise to 62%. The central bank has solid foreign exchange reserves of $170 billion. In addition, America will help, if, of course, President Joe Biden manages to wring $14 billion out of Congress for military aid.
However, the longer the conflict continues, the more the risks will increase. Israel’s primary budget deficit is projected to rise from 3% of GDP to 8% in 2024.
The government won’t be able to pay its way forever, which is one reason why a chorus of local politicians insist that a ground invasion of Gaza must be carried out immediately. Other economies may have sustained far greater damage in the past in pursuit of military victories, but that’s little consolation to those who have to bear the costs in Israel this time around.
The entire article can be read at the link https://www.economist.com/finance-and-economics/2023/10/26/israels-war-economy-is-working-for-the-time-being
