IMF Completes 2026 Article IV Mission in Israel
Israel’s economy is showing considerable resilience in the aftermath of the recent Gaza ceasefire. Economic activity has surged, leading to an optimistic growth projection for the near term. However, several risks still loom, particularly regarding potential renewed regional tensions.
IMF Completes 2026 Article IV Mission in Israel
According to the staff’s assessment, output growth in Israel is anticipated to rise from 2.9 percent in 2025 to 4.8 percent in 2026. This increase is largely attributed to a rise in private consumption and a rebound in investment, while government spending is expected to decline.
Economic Challenges Ahead
Despite the positive outlook, various challenges remain. Elevated defense spending, higher risk premia, and reduced non-Israeli worker availability are expected to hinder long-term growth. This may result in an adjusted growth forecast of approximately 3.5 percent over the medium term, down from 4 percent prior to the conflict.
- Projected growth: 2.9% (2025) to 4.8% (2026)
- Medium-term growth forecast: 3.5%
- Pre-conflict growth rate: 4%
Furthermore, risks such as a re-escalation of regional conflicts remain a significant concern. Such developments may heighten risk premia, dampen consumer and investor confidence, and ultimately stifle growth while driving inflation higher.
Fiscal Position and Debt Dynamics
The fiscal landscape in Israel has deteriorated sharply due to ongoing conflicts, with public debt projected to escalate from 60 percent of GDP in 2022 to 68.6 percent by the end of 2025. The central government balance shifted from a surplus of 0.6 percent of GDP in 2022 to a deficit of 6.8 percent in 2024, largely driven by soaring defense expenditures.
- Public debt forecast: 60% (2022) to 68.6% (2025)
- Deficit projection for 2026: 3.9% of GDP
To manage this debt, further fiscal consolidation is essential. Measures should prioritize revenue growth while looking to minimize the impact on civilian spending, which remains crucial for economic stability.
Labor Supply and Productivity Improvements Needed
Enhancing labor supply and productivity is a pressing need. Structural reforms are urgently required to revive pre-conflict growth potential. Areas for improvement include:
- Increasing participation among Israeli-Arab and Haredi populations.
- Strengthening educational outcomes and skills development.
- Improving infrastructure to support economic expansion.
The government’s ongoing Economic Plan for Reducing Gaps in Arab Society (Taqadum) has yielded some improvements, particularly in female employment and educational outcomes. A successor program is anticipated for 2027 to continue addressing these gaps.
Monetary Policy and Financial Stability
The current moderately tight monetary policy has successfully helped curb inflation. As economic conditions gradually stabilize, the Bank of Israel is expected to adjust the policy rate toward neutral levels by year-end. However, vigilance remains vital due to possible inflationary pressures linked to supply constraints and labor market tightness.
Banking sector stability appears strong, with well-capitalized and profitable institutions. Nonetheless, significant risks persist, notably regarding banks’ exposure to real estate. Regular monitoring and stress tests are recommended to safeguard the financial system during these uncertain times.
Conclusion
The IMF’s 2026 Article IV mission underscores the necessity for Israel to implement strategic fiscal measures and structural reforms. These actions will be vital in stabilizing the economy, enhancing resilience, and promoting sustainable growth amidst ongoing challenges.
