Israeli Financial Woes: The Unavoidable Debt Amid Aggression on Gaza
The continuous Israeli aggression against Gaza has triggered economic crises within “Israel.” This stems from the expanding war expenses, coupled with decreasing revenues, larger budget allocations, and mounting debt.
This has prompted “Israel” to seek new sources of financing through issuing dollar bonds for the first time since the onslaught on the besieged enclave began on October 7, 2023.
The Israeli Ministry of Finance issued international bonds in U.S. dollars totaling $8 billion on March 6, 2023, with the bond demand reaching $38 billion, approximately 4.75 times the value of the bonds sought. The real deficit in Israeli Occupation’s 2024 budget is estimated at around 170 billion shekels ($47 billion), approaching 9 percent of the gross domestic product, necessitating an additional 40 billion shekels ($11 billion) by the government.
The amount of debt collected by the Comptroller General of the Israeli Ministry of Finance jumped from 1.5 to 2 billion shekels in the week before the war to 3.5 to 4 billion shekels per week after the aggression.
The Ministry of Finance expects to collect over 200 billion shekels ($55.5 billion) to cover the costs of the war, predominantly from the domestic market, according to the Israeli Comptroller General. However, Bloomberg estimates that more than $10 billion will be raised from international markets.
Sources of Liquidity
This issuance of international bonds coincides with Moody’s downgrade of the Israeli Occupation’s credit rating from A1 to A2 with a negative outlook, anticipating increased debt burdens in “Israel” above pre-war expectations on Gaza. It also indicated that escalating war with Hezbollah in Lebanon, on the other hand, increases the likelihood of a significant negative impact on the Israeli economy.
The agency downgraded the ratings of five major Israeli banks by one notch from A2 to A3, including Bank Hapoalim, Bank Leumi, Bank Mizrahi-Tefahot, Discount Bank, and First International Bank.
Economic journalist Mohammed Abdullah attributed Israeli Occupation’s resort to international bonds to the Israeli occupying state’s desire to complete funding for the war on Gaza. He pointed out in a statement to Al-Estiklal that “Israel” issued domestic bonds during the past five months of the aggression on the Gaza Strip, with their value being 80 percent higher each month than the local bonds previously issued.
Abdullah added that this indicates the high cost of the war, which the Bank of “Israel” estimated could reach $70 billion, a figure the Israeli budget cannot afford, thus necessitating borrowing or seeking other liquidity sources. The Bank of “Israel” expects war expenses to reach 255 billion shekels ($68 billion).
The direct war expenses for the years 2023-2025, including compensations and other civil war-related expenditures, are estimated to reach 215 billion shekels ($58.9 billion).
The continuous Israeli aggression against Gaza has triggered economic crises within "Israel." This stems from the expanding war expenses, coupled with decreasing revenues, larger budget allocations and mounting debt.
According to a report by Yedioth Ahronoth, the cost of the army’s fighting day in October 2023, including the recruitment of 360,000 reserve soldiers at the beginning of the war, exceeded $270 million before decreasing to $164 million due to the mass discharge of tens of thousands of soldiers in recent periods.
Reserve soldiers in the Israeli army receive $82 per day, totaling payments to reserve soldiers to about $2.5 billion.
Despite the $14.3 billion provided by the United States in the form of military aid and others, Abdullah believes this figure is small compared to the expected cost, especially since Israel needs cash liquidity to rebuild areas around Gaza (Gaza Envelope).
These loans that “Israel” is externally expanding coincide with Moody’s international credit rating agency downgrading Israeli Occupation’s classification to level A2 from A1, with a negative outlook.
This downgrade in rating affected the dollar bonds offered by “Israel” in the international market. The interest rate on bond prices increased by 20 percent compared to the last bonds issued by “Israel” about a year ago, according to Abdullah.
He pointed out that “Israel” boasted of a demand four times the bonds it offered, attributing it to the high return, which is the first attraction for investors.
Standard & Poor’s had also downgraded its future outlook for the Israeli Occupation’s financial center from stable to negative, expecting the economy to grow by 0.5 percent in 2024, down from 2.8 percent in previous estimates.
Tourism and Real Estate
The costs are not limited to the military aspect alone but also include negative repercussions on the private sector, which saw a decline in activity due to the war’s aftermath, as well as a decrease in the number of employees due to the army’s call-up of most of these employees, who are officers and reserve soldiers.
The state is supposed to compensate the companies affected by the activity downturns in the first three months of 2024 with about $3 billion, according to Yedioth Ahronoth.
Compensations will not be limited to this amount but will also include damages to settlements along the border with Lebanon, which may amount to around 5–7 billion shekels ($1.37–1.91 billion), in addition to an initial value ranging between 15 and 20 billion shekels ($4.10–5.47 billion) for the damages incurred to properties in Gaza Envelope’s settlements.
The Israeli economy contracted by 20.7 percent on an annual basis during the last three months of 2023 after the initial estimate indicated a contraction of 19.4 percent.
As for the entire year of 2023, the economy grew by 2 percent, compared to 6.5 percent during 2022. Abdullah believes that several sectors were directly affected, notably tourism.
The number of incoming tourists decreased by 80 percent during the last quarter of 2023, dropping to 180,000 tourists compared to approximately 930,000 tourists in the last quarter of 2022.
The stagnation in the tourism sector led to the layoff of 15,000 hotel employees in the tourist city of Eilat.
Statistics from the statistical office revealed a 76 percent decline in the sector’s activity, which contributes around 3.7 percent to the gross domestic product, during October 2023 alone.
Air traffic decreased by more than half on an annual basis during November 2023, with the number of flights reaching 2,000 compared to 5,000 flights in 2022.
This resulted in a decrease in the number of tourists to 39,000 instead of 370,000. However, December 2023 recorded approximately 53,000 tourists instead of the monthly average of 300,000.
The real estate industry in “Israel” deteriorated, coinciding with the ongoing aggression on Gaza and the decline in construction operations due to the lack of Palestinian labor, which constituted the backbone of the industry (90,000 workers), and the increase in interest rates on the shekel to 4.75 percent, before being reduced in January 2024 to 4.5 percent.
The Israeli costs extend beyond the military to affect the private sector, which experienced reduced activity post-war and a decrease in employment due to the army's enlistment of many employees in the war on Gaza.
New construction operations witnessed a 15 percent decline at the end of 2023, indicating a slump in the real estate market affecting supply and demand, according to a report by the Israeli Ministry of Housing.
Property sales recorded their worst performance in 30 years in 2023, with 70,000 apartments sold, alongside a decline in mortgage loans in the local markets by 13 percent on an annual basis during January 2023, reaching 5.5 billion shekels ($1.5 billion).
Abdullah stated that the construction sector currently employs 15 percent of its total workforce amidst labor shortages.
Attempts to recruit labor from India, China, Thailand, and Bangladesh have failed due to the high cost of foreign labor, as employers incur expenses for recruitment, housing, and health insurance, in addition to the fact that the salary cost is double that of recruiting Palestinian workers, whose average daily wage ranges between $80 to $100.
The labor shortage in “Israel” led to an approximately 10 percent increase in average monthly wages on an annual basis, exceeding $3,500.
This imposed increasing costs on the Israeli economy and unprecedented financial pressures on its sectors, particularly labor-intensive ones like construction.
Approximately 92,000 Palestinians were working in construction sites within “Israel” before Operation al-Aqsa Flood, but they were laid off and excluded for security reasons. However, there are still about 20,000 foreign workers.
This led to the closure of nearly half of the construction sites there, while the active ones operate at 30 percent of their capacity, according to the Contractors and Builders Association in “Israel.”
Data from the Israeli Interior Ministry showed that more than 17,000 foreign workers left “Israel,” including 9,855 Thais in agriculture, over 4,300 workers in construction, and about 3,000 in nursing.
The Central Bank of “Israel” estimated the cost of the labor shortage in the Israeli Occupation at $618 million weekly.
Agriculture and Technology
Regarding agriculture, Abdullah pointed out that this sector, which is the main source of food alongside the food industry, has been significantly affected.
He mentioned that the settlements in the Gaza Envelope, which serve as Israeli Occupation’s food basket, along with the lands located on the northern border with Lebanon, which come second, have not been utilized or their crops harvested due to the aggression and the lack of sufficient labor.
Most of these agricultural areas have become closed military zones, “so even farm owners will not be able to enter their lands as long as this war persists,” he said.
The aggression resulted in a 75 percent loss of agricultural crops in the Gaza Envelope and 80 percent of milk and egg production, in addition to leaving 29,000 workers in these agricultural lands.
The farms in the Gaza Envelope constitute 30 percent of the land allocated for vegetable cultivation in “Israel,” according to data from the Israeli Central Bureau of Statistics.
According to Ami Yifrach, the head of the Farmers Union in Israel, the Gaza Envelope produces about 75 percent of consumed vegetables, 20 percent of fruits, 6.5 percent of milk, 70 percent of tomatoes, in addition to 37 percent of carrots and cabbage, and 60 percent of potatoes.
In turn, Dr. Naser Abdelkarim, a professor of financial and economic sciences at the College of Graduate Studies at the Arab American University in Ramallah, said that the Israeli economy has been affected in all sectors, especially in the field of technology, due to the aggression on Gaza, noting that the GDP has lost about 8 percent of its size so far.
Abdelkarim, speaking to Al-Estiklal, pointed out that it is expected that the losses of the Israeli GDP will rise to $60 billion by the end of 2024, “regardless of whether the aggression continues or stops.”
Seventy percent of Israeli technology companies face operational difficulties, with many of them facing closure due to funding shortages and the summoning of many of their employees from the reserves to military service, forcing them to cancel projects and suspend startups, according to a survey conducted by the Israel Innovation Authority.
The labor shortage in the sector has pushed average wages to exceed NIS 29,000 ($8,000), at a time when 40 percent of sector companies face difficulties in obtaining funding after canceling or freezing a group of investments.
Israeli technology exports fell by 7.8 percent during the fourth quarter of 2023 to NIS 4.1 billion ($1.1 billion), according to data from the Israeli Central Bureau of Statistics.
The sector employs about 195,000 people, representing 10.4 percent of the total Israeli workforce, making it the fastest-growing sector in terms of employment in “Israel.”
The technology sector accounts for about 20 percent of Israeli Occupation’s gross domestic product.
American Support
The Israeli Occupation’s debt reached about NIS 1.12 trillion ($299.18 billion) at the end of 2023, up from NIS 1.03 trillion ($275.13 billion) at the end of 2022, due to the accumulated burdens resulting from the aggression.
It is expected that the debt-to-GDP ratio will reach 63 percent in 2023, up from 58 percent in 2022, and is expected to reach 75 percent in 2024, with the widening budget deficit expected to reach 9 percent, according to Bloomberg, by this year.
The increase in Israeli debts comes at a time when government revenues have sharply declined since the outbreak of the aggression, and public spending is increasing, and the costs of insuring government bonds, which are expected to increase by about $19 billion this year.
This has led the Israeli Occupation government to adopt an austerity policy aimed at bolstering the depleted public treasury by imposing additional taxes on local banks totaling $700 million over the next two years.
Under the tax amendment, banks will pay an additional 6 percent of the profits from their activities in “Israel” in 2024 and 2025.
Abdullah believes that the increase in Israeli debt does not pose a significant danger due to American support for the Israeli Occupation economy.
However, he pointed out that the danger lies in the transformation of the Israeli economy from a magnet for startups to an unattractive destination for investments.
He pointed out that over the past two or three decades, the debt-to-GDP ratio had declined from 60 to 45 percent, but today, it has risen to 69 percent, which is a significant number.
However, most of this debt is owned by the United States and American investors, which makes the danger of debt on the Israeli economy not great.
With “Israel” expanding its domestic and foreign borrowing, the government is working to rationalize its spending by freezing government hiring and increasing taxes, especially as its defense spending doubles.
For his part, Nasr Abdel Kareem, professor of Finance and Economics in the graduate studies department at the Arab American University in Ramallah, believes that the Israeli economy entered the war strong and dynamic due to massive foreign investments in previous years, especially in the energy and advanced technology sectors, as well as the increase in the volume of its commodity and service exports.
He pointed out to Al-Estiklal that “Israel” entered the war, and the public debt-to-GDP ratio is among the lowest in industrialized countries.
He stressed that the Israeli economy is capable of withstanding the economic repercussions of the war for a long period that may extend for years, especially in light of the infinite American support for “Israel.”
