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Monday, 4 November, 2002, 12:16 GMT
Israel faces third year of recession
Stone throwing Palestinian boys face Israeli tank
The Palestinian uprising has severely hit the economy
Israel's central bank has warned there will be a third straight year of recession in 2003, as the global economy remains weak and the Palestinian uprising continues.

The Bank of Israel has predicted economic outcomes ranging from a 1% contraction in output to 1.5% growth.

Israel's high annual population growth means economic growth of less than 2% is considered recessionary.

The 2.5 percentage point range was adopted by the bank because of the uncertainties affecting the economy, including approval of the 2003 budget, the bank said.

Israel's "national unity" government collapsed last Wednesday because of disagreements over budget funding of settlements, some illegal, in the occupied territories.

Delays in passing the 2002 budget and concerns about the government's handling of the economy triggered a plunge in the value of the shekel this year.

Consumer prices have also surged, with annual inflation of above 8% expected this year, forcing the Bank of Israel to raise interest rates.

Budget stretch

The 2003 budget comfortably passed the first of three parliamentary votes last Wednesday.

The next day credit rating agency Fitch said there was no imminent threat to Israel's credit rating, despite the break-up of the government and a downgrade by rival agency Standard and Poor's (S&P).

Next year's 269.9bn shekel ($57bn; 36.4bn) budget cuts spending by 2% from 2002 and projects a deficit of 3% of gross domestic product from a projected 3.9% this year.

Lower tax revenues and higher military spending have forced the cuts, most of which will come from social programmes.

Finance Minister Silvan Shalom has promised the rating agencies he would maintain tight fiscal policies.

Statistical dispute

The central bank's projections mark a growing disagreement between it and the Finance Ministry, who usually issue joint forecasts

The government maintains a growth forecast of 1% for 2003.

The economy is expected to contract 0.9% in 2002.

The bank also expects rising unemployment, reaching between 11.7% and 12% in 2003 from an expected 10.5% rate this year.

Private consumption, investment in fixed assets, exports and imports are all expected to decline.

Debt default?

Despite the economic troubles, Israel's low foreign debt levels and financial support by the US government are expected to prevent a financial crisis.

"The probability of a default today is higher than the probability of default two years ago but it is still extremely low," said Victor Shohet, economist at Deutsche Bank in Tel Aviv.

Israel's public debt is expected to hit 107% of GDP in 2002, up from 98% at the end of 2001.

Only 10% of Israel's out of an outstanding external debt of about $27bn is held by ordinary foreign investors, while the rest is held by special untraded state bonds held by Jews around the world and in bonds guaranteed by the US.

See also:

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