Bank of Israel Urges Wider Deficit to Deal With Coronavirus Fallout
Bank of Israel Urges Wider Deficit to Deal With Coronavirus Fallout
(Bloomberg) --
The Bank of Israel appealed to the government to open its wallet even at the cost of a wider deficit, to help grapple with coronavirus fallout that it expects will cause the local economy to contract by 2.5% this year.
“This is the time to support businesses and citizens so that the crisis will not deepen,” Governor Amir Yaron said at an unprecedented online news conference. “Without an economy there also won’t be health.”
Yaron’s pivot from deficit hawk to dove is part of a worldwide trend by central banks to ask governments to step up as the virus drives economies into decline, at a time when monetary policy can’t undo much of the damage. If at the start of the year he was warning of an overly wide gap, then he’s had to shift gears as the government’s stringent measures to contain the virus closet many people at home and shut down large parts of the economy.
The bank projects the gap will more than double to 7% of gross domestic product.
Political Constraints
The government has had to constrain its fiscal firepower because three inconclusive elections have left it without a permanent government since December 2018 -- and no updated 2020 budget.
It has so far put into effect crisis measures worth about 29 billion shekels over the past two weeks, largely composed of government-backed loans and payment deferrals. Under pressure to do more, Prime Minister Benjamin Netayahu asked officials on Sunday to come up with an “extensive and significant relief package.”
People familiar with the matter have said the government is looking at additional aid to businesses and workers worth up to 14 billion shekels.
The virus has infected more than 1,650 people in Israel and killed two.
Bank of Israel research department head Michel Strawczynski forecast unemployment would soar to 7% this year, but sees the economy rebounding in 2021 to expand 7.1%. He also also projected that the government’s debt load would rise to 70% of gross domestic product, from its current level of around 60%.
Israel’s central bank has taken a lead role in boosting the economy and markets during the outbreak. With its key interest rate already near zero, the Bank of Israel is focusing on boosting liquidity in debt and currency markets. Policy makers on Monday committed to purchasing 50 billion shekels ($13.6 billion) of government bonds in the secondary market to ease credit conditions and support activity, after announcing the relaunch of quantitative easing last week for the first time since 2009.
Deputy Governor Andrew Abir said the government debt will go on the central bank’s balance sheet. “The implication of that is an enlarged central bank balance sheet, which in the end I think will have a beneficial impact on the whole economy,” he said.
Along with purchasing government debt, the central bank is also using its large store of foreign-currency reserves to offer up to $15 billion worth of swaps to ease pressure for dollar liquidity among local lenders.
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