The shock of the war left the Israeli economy at a crossroads, witnessing a visible slowdown in trade, investment and service activity.
These challenges have not only impacted the economic situation but have also brought social and political challenges that have impeded the path of continuous growth that has lasted for almost two years.
According to a report released by Moody's rating agency, the ongoing war is costing Israel $269 million every day. The report is based on a preliminary study that takes into account estimates from the Israeli Ministry of Finance. This means that the war has cost Israel $61.9 billion in losses since it began about 230 days ago.
The budget deficit rose to 7% of GDP in the first four months of this year, reaching $35.7 billion from April 2023 onwards, according to Israeli Finance Ministry data. This is above the government's forecast of 6.6% for all of 2024.
The budget deficit reached $3.16 billion in April, according to the Treasury Department, an unprecedented figure since the 2008 global financial crisis.
The war forced the government to dramatically increase defense spending, accounting for about two-thirds of total spending in four months, while tax revenues fell, causing revenues to fall by 2.2 percent.
The government plans to raise about $60 billion in debt and raise taxes this year to meet fiscal needs. Average monthly bond sales have tripled since the war began, meaning the government has raised about $55.4 billion from domestic and international markets since October, according to Bloomberg estimates.
As the financial burden of the war mounts, Israel has been hit by a succession of blows from international rating agencies, which is naturally affecting its external financing. After Moody's downgraded Israel's sovereign rating by one notch to A2, Standard & Poor's followed suit in April, lowering its rating from AA- to A+.
The Bank of Israel is widely expected to keep short-term interest rates unchanged for a third consecutive time when it meets on Monday, given the uncertainty over the extent of the impact of the ongoing war with Hamas.
In January, the Monetary Policy Committee cut the key interest rate by 25 basis points following 10 consecutive rate hikes in a strong tightening cycle from a record low of 0.1% in April 2022, before pausing it in July.
A Reuters poll showed inflationary pressures pose a risk of further interest rate cuts for the rest of 2024.
Annual inflation continued to rise to 2.8% in April after falling to 2.5% in February.
Amid talk of the possibility of Israeli military rule in the Gaza Strip, Yedioth Ahronoth newspaper reported, citing official documents, that such a strategy in the Gaza Strip would cost Tel Aviv more than 20 billion shekels ($5.4 billion) per year. The newspaper reported that Israeli security officials are preparing an analysis to study the financial impact of establishing a military government in the Gaza Strip.
The fate of the Israeli economy during and after the war will depend heavily on several factors, including political and security stability, transformation of various economic sectors, and the evolution of regional conflicts. Despite the existing challenges, some expect the Israeli economy to recover at a moderate pace, but this does not eliminate the need to further promote growth and stability, given the geopolitical uncertainty facing the region.
Karnit Furug, a former governor of the Bank of Israel, said in an interview with The Jerusalem Post that the government's response to the economic challenges arising from the Israel-Hamas conflict was out of proportion to the situation.
She explained that the proposed measures – some of which have been approved by the Knesset, while others have been postponed or will be implemented in the future – are insufficient to address current challenges.
