Treating a Sick Economy

Jerusalemites walk and shop at the Mamilla Mall near Jerusalem's Old City on June 4, 2020. Israelis are back in the shops – but unemployment remains at an unprecedented high. Photo by Olivier Fitoussi/Flash90

 

With stadiums emptied, malls shuttered, trains idled, airports nearly desolate, and a strict curfew confining them to within 500 metres of their homes, Israelis this year missed the vistas and fragrances of a blossomy spring that followed an unusually rainy winter. 

Fortunately, the tightest restrictions that the Government had imposed in March in response to the coronavirus pandemic had largely been lifted by June. 

Unfortunately, the dramatic economic impacts of the pandemic could not be as easily reversed. Then again, there is reason to believe that the initial shock has been absorbed, and that the journey to recovery, while young and long, is nonetheless underway – providing the impact of Israel’s current “second wave” of coronavirus infections does not derail it. 

Israel’s response to the medical challenges of the pandemic was ranked by the Economist Intelligence Unit as the fourth-best in the developed world – reflecting early and decisive pre-emptive measures that also benefitted from the country’s tightly controlled borders, relatively young population, and long experience in coping with emergency situations.

However, what worked well epidemiologically has been derided by some as economically excessive, inspiring fiery debates between the Health Ministry’s medical professionals and the Treasury’s economists. Nonetheless, the international context of a global, and thus inescapable, crisis is not a matter of debate, and neither is the severity of the recession it has spawned. 

The most economically destructive anti-pandemic measure was likely the Government’s order that employers must allow no more than 30% of their workers to be physically present at their workplaces. Thousands were consequently sent on furlough or simply dismissed. 

The other great shock was caused by the near-complete halting of flights into and out of the Jewish state. 

In terms of the stark numbers, these measures initially spiked unemployment from a negligible 3.9% to roughly a quarter of the workforce, representing a jobless rate that is more than double any Israel has ever experienced before. 

At the same time, the government’s NIS 88.4 billion (A$37 billion) stimulus and compensation program, including new health spending, unemployment payments, tax deferments, and emergency payments to shuttered businesses, created a NIS 46.2 billion (A$19.5 billion) budget deficit for the first five months of the 2020 fiscal year.

That’s almost the size of the deficit for all of 2019, which was NIS 52.2 billion (A$22 billion).

Fortunately, things have improved a bit since the initial shocks, as the Government began easing lockdown restrictions. By June, the Government reported that 275,000 furloughed workers had returned to work, and the head of the Labour and Welfare Ministry’s Labour Service has estimated that, by September, the unemployment rate should decline to around 10%. 

Better yet, economists also estimated the Government will manage to finance the growing deficit by new bond issues abroad. Previous fears that the deficit would run so deep that covering it would require printing money – and risk courting an inflationary spiral – seem to have been dispelled. 

Israeli law currently forbids printing money to cover deficits, as a result of the 1985 hyper-inflation crisis and the stabilisation plan which ultimately ended it. Printing money to deal with the current crisis would have required new legislation – which in turn might have generated a sense of historic retreat and economic pessimism. 

Still, by late June, it was clear that the pandemic’s economic impact would last longer and run deeper than many had initially hoped. 

Two good indicators of this reality are the conditions of the national airline El Al and of Israeli energy tycoon Yitzhak Teshuva. 

El Al had been in trouble prior to the crisis, having lost NIS 207 million (A$86.7 million) in 2019. It was therefore in no position to sustain the huge economic shortfalls caused by having its fleet grounded during the pandemic, even after firing 17% of its workforce and cutting the pay of its remaining employees by 20%. 

The result has been negotiations with the Government that might lead to the privatised company being re-nationalised, with the Treasury offering to guarantee NIS 250 million (A$105.3 million) in private loans for the company, and to buy up to US$150 million (A$218.4 million) in shares at a public offering, should the stock not be taken up by private investors. 

Meanwhile, Yitzhak Teshuva, a self-made real estate tycoon and one of Israel’s wealthiest people, had been the main beneficiary of Israel’s newly found offshore gas fields in the Mediterranean through his ownership of the Israeli petroleum company Delek. Having thus become an energy baron, in recent years he has invested in oil drilling in the North Sea, Canada and the Gulf of Mexico. 

In May, with energy prices in free fall, his heavily leveraged foreign investments proved beyond his means, and for a while, he seemed to be on the brink of insolvency. Fortunately for him, he managed to reach a deal with his creditors for the latter to take a major haircut on his debts. Even so, his financial reputation is now badly dented, and his situation looms as a reminder of the unpredictability and volatility of the coronavirus economy. 

More broadly, Israel’s important tourism, entertainment, and restaurant industries have been severely crippled, even after the Government allowed eateries to partially reopen, and reception centres to hold events of up to 250 people. 

 

Nonetheless, when viewed from neighbouring capitals, Israel’s pandemic economic dilemmas probably seem enviable. 

In Iran, the Government’s initial denial of the coronavirus threat, and its admission of flights from China well after others had banned them, resulted in more than 150,000 reported infections by June, and wild rumours about thousands of unreported fatalities. The pandemic’s financial pressure led Teheran to request from the International Monetary Fund an emergency US$5 billion loan, while Iranian currency has hit historical new lows, with US$1 buying close to 200,000 rials at the end of June.

In Lebanon, the effect has been even worse, as the already vulnerable Lebanese pound’s depreciation accelerated. By mid-June, it had plunged by 70% in its dollar value over the last nine months. Protesters had been taking to the streets to express their anger over the desperate economic situation even before the outbreak, as Beirut reached the brink of insolvency. 

The pandemic, however, only multiplied mistrust in the Government, and also against Iran’s Lebanese proxy Hezbollah, and generated a sense of despair that saw protesters in Beirut and Tripoli clash with police, at times attacking them with firebombs, while absorbing tear gas and rubber bullets in return. 

Debt-ridden Lebanon’s economic crisis is underpinned by protracted governmental paralysis and fiscal waste, aggravated by the presence of an estimated one million Syrian refugees, all of which led to imposition of capital controls. This, in turn, has resulted in soaring food prices and unemployment, and a cash crunch that most Lebanese households are feeling acutely. 

Things are even worse in Syria, where the pandemic’s pressure is dragging down the Government’s effort to attract badly-needed foreign investments in order to rehabilitate and re-ignite its ravaged economy, while the war still goes on, although limited in scope and confined to specific areas. The Syrian lira, which last September traded on the black market at 650 to the US dollar, had sunk by mid-June to more than 3,000 to the dollar, as new US sanctions went into effect. 

With large parts of the country reportedly suffering from food shortages, thousands have taken to the streets in multiple locations, openly demanding President Bashar Assad’s departure, in scenes reminiscent of the beginning of the Syrian civil war in 2011. 

Israel’s economic crisis is obviously of an entirely different nature, largely resembling what the rest of the developed world has had to face in the wake of the coronavirus pandemic. 

Then again, the economic burden that has so suddenly befallen every household is creating social pressures of a sort no Israeli Government has had to face since the great economic crisis of 1985. 

The business sector’s disgruntlement convinced the Government to fully reopen the school system by mid-May, earlier than most other OECD nations. 

The rationale was that the pandemic’s initial wave had been weathered, and the school lockdown was a major burden for the workplace, since it forced parents to stay home with their kids. 

However, shortly after students returned, there were coronavirus outbreaks in schools in major Israeli cities, soon resulting in more than 40 schools being once again shuttered. 

Even so, pressure to open the economy intensified, most notably from artists and stage workers who held well-attended and loud demonstrations outside the Knesset, demanding that theatres reopen, and that Prime Minister Binyamin Netanyahu meet with them to hear their demands. 

Netanyahu, who could hear the protests through his office window, met with their representatives, and soon announced that public performances would resume – but audiences will be limited to 500 people. 

While these and other restrictions began to be lifted, the number of infections began rising, exceeding 250 new cases per day in mid-June, after having declined the previous month to nearly zero. 

Referring to the international travel lockdown, Netanyahu has promised that the skies will be reopened on August 1 to a limited set of “green” countries with low infection rates, most notably Greece, a favourite destination for Israeli vacationers. 

Optimists see this as a light at the end of the tunnel. Pessimists see it as proof that most of the world will remain inaccessible for at least the rest of the year. 

Both pessimists and optimists agree the virus is far from eradicated, and expect it to continue to impact every aspect of their lives at least until the middle of 2021. 

What sets it apart from Israel’s previous economic crises is its global scope, and the realisation that its eruption had nothing to do with Israeli policies, actions or inaction, and that, in coping with it, Israel is in the same boat as the rest of mankind. 

In this regard, it fits both halves of a pair of contradictory Hebrew adages: one says that a plight shared by a multitude is half a consolation, while the other says that a plight shared by a multitude is a consolation only for fools.