Israel political crisis could cut 2.8% a year from GDP, central bank warns

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Financial Times

3/4/2023

The fallout from the Israeli government’s controversial plan to overhaul the judiciary could knock an average of 2.8 per cent annually off economic output over the next three years, the country’s central bank has warned. The battle over the plans drawn up by Israeli prime minister Benjamin Netanyahu’s hardline new government — which would significantly weaken the powers of the judiciary — has sparked the biggest wave of protests in a decade, and plunged Israel into its deepest political crisis for years. After three months of demonstrations and a brief general strike last week that closed banks, shops, ports and Israel’s Ben Gurion international airport, Netanyahu agreed to postpone the reforms to allow time for dialogue. However, several government officials have said in recent days that if no agreement is reached by the time parliament reconvenes at the end of the month, they will push ahead, raising the prospect of further protests and disruption. In a forecast released with its decision to raise its benchmark rate from 4.25 per cent to 4.5 per cent on Monday, the Bank of Israel said it had modelled two scenarios “in view of the tremendous uncertainty due to the legislative processes regarding the judicial system and their economic implications”. In the first, in which the dispute over the overhaul was smoothly resolved, the central bank forecast growth of 2.5 per cent this year and 3.5 per cent in 2024. But in the second scenario, in which the judicial changes affected Israel’s risk premium, exports, consumption and investment, the hit to GDP would be between 0.8 per cent and 2.8 per cent per year on average over the next three years. The central bank added that the second scenario was “accompanied by a higher level of uncertainty than the standard forecast, regarding the intensity and persistence of the shocks”, and that this was why it had decided to present the forecast for a single three-year block. Government officials say the changes — which would give the ruling coalition greater control over the appointment of judges and severely limit the top court’s ability to strike down laws — are needed to rein in an overly activist judiciary.

But critics — who include former and serving security officials, former central bank chiefs, technology sector executives and the political opposition — see the plans as a politically motivated power grab that will undermine checks and balances, pave the way for the evisceration of minority rights, foster corruption and damage the economy. Israel’s Start-Up Nation Policy Institute think-tank said on Sunday that venture capital investment in the country’s start-ups had dropped to $1.7bn in the first three months of the year, the lowest quarterly figure since 2018 and down from a record first quarter of $6.7bn a year earlier. The sector’s performance had been shaped by worsening global economic conditions and the battle over Israel’s judicial overhaul, it said. “While it is impossible to separate the two effects — the ongoing global recession and the domestic unrest — the combination severely jeopardises the future of Israel’s high-tech sector.”

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Financial Times