Israel WT/TPR/S/157/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) MAJOR FEATURES OF THE ECONOMY  
1. Israel has a temperate climate except in the sout hern and eastern areas where it is hot and dry.  
The topography is characterized by low costal plain, mountains in the central part of the country and 
deserts in the south and east.  The main natura l resources (albeit in limited quantities) are potash, 
copper ore, natural gas, phosphate rock , magnesium bromide, clays, and sand.1  Demography has been 
marked by large inflows of immigrants arriving ma inly from the former Soviet Union in the late 
1980s and early 1990s.  The population was estimate d at 6.8 million in 2004 and grew on average by 
around 2% per annum over 1999-04 (Table I.1).  Israel  is a high income country; its gross domestic 
product (GDP) was US$116.9  billion in 2004, i.e. a per capita GDP of US$16,942.  The official 
language is Hebrew, while Ar abic is used officially by the Arab minority.   
Table I.1 
Israel at a glance, 1994, and 1999-04  
 1994 1999 2000 2001 2002 2003 2004 
GDP  per capita (current US$) 13,829 16,629 17,703 17,108 15,727 16,597 16,942 
Population (million, end of period) 5.6 6.2 6.4 6.5 6.6 6.7 6.8 
Growth of population (annual percentage change) 2.6 2.8 2.4 2.1 1.9 1.8 1.8 
Fertility rate (births per woman) 2.9 2.9 3.0 2.6 2.7 3.0 2.9 
Life expectancy at birth (years) 78 78 78 78 79 79 79 
Female share in the labour force (%) 45.1 47.4 48.0 48.2 48.3 49.1 49.6 
School enrolment ratio, secondary (%) 88.0 88.1 93.2 94.4 .. .. .. 
Share of NDP        
    Agriculture 2.5 1.8 1.5 1.8 1.8 1.7 1.7 
    Industry 29.0 26.3 24.6 23.5 23.1 22.6 21.5 
        Manufacturing 20.3 18.3 17.6 16.7 15.9 15.3 14.4 
        Electricity, construction,  and water 8.7 8.0 7.0 6.8 7.2 7.3 7.1 
    Services  68.5 72.1 74.0 74.6 75.1 75.7 76.8 
Share in employment        
    Agriculture 3.2 2.9 2.2 1.9 2.0 1.8 1.9 
    Industry 27.2 22.0 24.0 23.4 22.5 22.6 22.6 
        Manufacturing .. 15.3 17.9 17.4 16.5 16.3 16.2 
        Electricity, constructi on and water .. 6.7 6.1 6.0 6.0 6.3 6.4 
    Services 69.6 75.1 73.9 74.7 75.5 75.6 75.6 
.. Not available. 
Sources :  Bank of Israel (2004 and 2005), Annual Report 2003 and 2004 ; Central Bureau of Statistics (2005), Statistical 
 Abstract of Israel, No. 56 ; CIA (2003 and 2004), The World Fact Book ; UNDP (2004), Human Development 
 Report 2004 ; World Bank, World Development Indicators Database . 
2. As a small economy based on innovation, Israel  depends heavily on international trade 
(nearly 90% of its GDP); its economi c growth is largely export led.  Israel ranks first worldwide in 
terms of the ratio of research and development (R &D) investment to GDP, second in terms of the 
quality of education, and third in terms of entrepreneurship.2  As a result, Israel's production pattern 
has shifted towards high-technology goods and services, intensive in skilled labour.  The shift is also 
motivated by increased competition from imports of traditional labour-intensive products originating 
in countries with relatively low unit-labour costs (Chapt er IV(4)(i)).  This contributed to the decline in 
the share of manufacturing, from some 20% of net domestic product (NDP) in 1994 to around 14% in 
                                                      
1 CIA (2004). 
2 Institute for Management Development (2005).  R&D performance as measured by the ratio of total 
R&D expenditure to GDP; quality of education as measured by total public expenditure on education as a 
percentage of GDP and the extent to which university education meets the needs of the economy; entrepreneurship corresponds to managers’ entrepreneurship.  WT/TPR/S/157/Rev.1 Trade Policy Review 
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2004, while the share of services (the backbone of  the economy, with finance and business services as 
key activities) increased from around 69% to around 77%.   
3. The high level of R&D investment has also perm itted a number of agricultural activities to be 
maintained in spite of severe constraints such  as limited water resources and the preponderance of 
desert areas in Israel.  Between 1999 and 2004, th e contribution of agriculture to NDP remained 
relatively stable, at almost 2%, but its share in total employment decreased from around 3% to 2% 
(Table I.1).  The mining sector remains marginal in  the economy.  This, together with high production 
costs of the limited agricultural output, explains the high import content of manufactured goods. The 
economy is dominated by small and medium-size ente rprises, with substantial state ownership in 
selected areas (Chapter III( 4)(iv)), and relatively high public expe nditure (over 50% of GDP), mainly 
for security and social purposes (Chart I.1).  No netheless, Israel's gross external debt remains 
manageable (section (2) below).  Unemployment  remains high at 9%, though down from nearly 11% 
in 2003. 
01234567
1999 2000 2001 2002 2003 2004a0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00100.00
1999 2000 2001 2002 2003 2004Chart I.1
Fiscal position, 1999-04
Budget.
Israeli Central Bureau of Statistics (2005), Statistical Abstract of Israel, N°56 ;  and IMF (2005), Staff Country 
Report No. 05/103 . Per cent of GDP Per cent of Central Government expenditure
Interest paymentsGeneral government balance
Central government deficit 
(after foreign grants)Central government deficit 
(before foreign grants)
Wages and salaries 
(excluding defence)Subsidies and transfers
Defence (including wages)
Other expenditurea
a
Source:
 
 
4. Since the mid 1990s, Israel has successfully stabili zed inflation at low rates, after more than 
two decades of high inflation.  The national currency is the new Israeli sheqel (NIS).3  Israel accepted 
the obligations of Article VIII of the IMF Agreem ent on 21 September 1993.  In  January 2003, Israel 
abolished all foreign exchange c ontrols and fully liberalized capital movements.  Since 1 January 
                                                      
3 NIS is the abbreviation of the cu rrency while ILS is the International Organization for Standardization 
(ISO) code for NIS. Israel WT/TPR/S/157/Rev.1 
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2004, Israel's exchange regime has been reclassifi ed to 'independently floating', from the category 
'exchange rate within crawling bands'.4   
(2) RECENT ECONOMIC DEVELOPMENTS  
5. In recent years, the Israeli economy has been characterized by important economic up- and 
downturns.  In 1994-98, GDP rose at an annual averag e rate of 4.7%.  From mid 1999 to 2000, there 
was high economic growth, reaching 7.7% in 2000 (Table  I.2).  Growth was driven mainly by exports 
and private consumption, as well as by a rapid expa nsion of high-tech industries and tourism.  The 
economy began a rapid slowdown in 2000 due to the outbreak of violence in September 2000 and the 
fall of the NASDAQ, which adversely affected the high-tech sector.  Economic activities slowed 
down for about three years but then rebounded in 2004, as a result of a favourable global 
environment, improvement in the security situation,  and appropriate policies.  In 2004, GDP growth 
was estimated at 4.6%.  
6. The Israeli Government used to be substantially involved in nearly all sectors of the economy.  
However, over the past 15 years, it has implemente d ambitious structural reforms aimed at reducing 
its intervention in the economy, and enhanci ng competition in some essential industries.5  A s  a t  
November 2005, there were 95 government-owned companies. 
Table I.2  
Selected economic indicators, 1994-04 
 1994-98a 1999 2000 2001 2002 2003 2004
National accounts (constant prices)  
Real GDP, market prices (annual percentage  change) 4.7 2.2 7.7 -0.3 -1.2 1.7 4.6
 (Per cent of GDP)  
Final consumption  86.9 84.9 83.8 86.4 89.7 88.6 87.8
Private consumption  58.1 56.1 55.9 57.2 58.7 58.7 59.2
Public consumption  28.8 28.8 27.9 29.2 31.0 29.9 28.7
Gross fixed capital formation 25.0 22.8 21.6 21.2 18.7 17.0 17.4
Export of goods and non-factor services 31.0 36.1 39.8 35.1 37.2 38.7 44.0
Import of goods and non-factor services  41.6 39.2 40.4 38.2 41.1 40.2 44.5
Prices and interest rates  (Per cent) 
Consumer price inflation (end-period) 9.8 1.3 0.0 1.4 6.5 -1.9 1.2
BoI policy rate (annual rate) 14.1 12.1 9.3 6.8 6.8 7.5 4.2
Annual yield on Treasury bills 13.5 11.4 8.8 6. 5 7.4 6.9 4.8
Real effective exchange rate (1990=100)b 81.5 77.6 83.9 83.8 75.4 69.4 66.1
Savings  (Per cent of tota l national income)c 
Gross national saving 17.7 20.3 19.5 17.6 15.8 16.0 17.6
      Public sector -1.1 -1.5 -0.1 -1.8 -2.1 -3.9 -2.7
      Private sector 23.5 21.8 19.6 19.3 17.9 19.9 20.3
Public finance (Per cent of GDP)  
Central Government balance  -3.2 -2.4 -0.7 -4.4 -3.8 -5.6 -3.8
Taxes and fees on civilian imports 4.7 4.4 4.6 4.2 4.2 4.1 ..
Outstanding debt of the Central Governmentd 120.6 101.4 91.4 96.4 104.9 106.5 104.9
Monetary sector (end period) (Annual percentage change) 
Narrow money (M1) 14.1 3.3 11.0 14.2 15.6 0.5 18.1
M2e .. 21.9 15.3 15.5 6.1 2.2 4.5
     Table I.2 (cont'd) 
 
                                                      
4 See IMF (2005) for more details. 
5 Prior to the reforms, ownership of the economy was divided between the Government, the Histadrut 
and the private sector, with the Govern ment and the Histadrut owning large shares of several key industries.  
The Histadrut is a trade union, accoun ting for about 85% of employees.  It is also active in social services, 
education and cultural activities, and economic development projects. WT/TPR/S/157/Rev.1 Trade Policy Review 
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 1994-98a 1999 2000 2001 2002 2003 2004
External sector  (Per cent of GDP, unless otherwise specified) 
Trade balance -6.4 -3.1 -0.6 -3.1 -3.8 -1.4 -0.5
Current account  -4.9 -1.6 -1.1 -1.4 -1.2 0.7 1.3
Financial account  1.6 2.1 1.4 0.5 -0.7 -2.3 -2.2
      Foreign direct investment, net 1.4 2.2 1.5 2.6 0.8 1.6 -1.3
      Portfolio investment, net 3.9 1.8 1.9 -1.4 -1.9 -0.7 3.1
Total external debt (end of period) 52.4 59.8 56.5 58.3 64.9 63.5 63.7
      Short-term external debt (STED) 19.4 27.9 24.6 25.8 29.1 27.5 24.9
      STED/International reserves (per cent) 167.5 79.0 83.6 81.6 79.8 86.2 87.0
Debt-service ratiof .. .. .. .. 25.0 26.1 23.4
International reserves (US$ billion)g  11.8 22.6 23.3 23.4 24.1 26.3 26.2
International reserves (months of imports)g  3.6 6.7 6.0 6.5 6.8 7.1 6.1
Merchandise trade (imports plus exports , US$ billion) 52.5 56. 6 65 58.8 58.5 62.5 66
 (Twelve-month growth rate, end of period, per cent) 
Merchandise export growthh 9.4 15.7 20.8 -10.3 -1.5 9.3 21.6
Merchandise import growthi 5.3 14.5 13.6 -8.7 0.8 3.7 19.1
Memorandum item: 
    Nominal GDP (US$ billion)  90.6 104.0 115.4 113. 8 104.2 110.4 116.9
.. Not available. 
a Annual average. 
b Decrease equals appreciation. c Total national income = GDP + net unilateral transfers from abroad. 
d Not including net lending, 1994-98 average is only for 1995-98. 
e M2 = M1 + interest-bearing local-currency deposits and ot her deposits + treasury bills. 
f Debt service as a share of exports plus transfers. 
g Total reserves, excluding gold. 
h Current US$. i Latest date: September 2004. 
 
Sources : IMF (2002), Israel: 2002 Article IV Consultation, Staff Report ; IMF (2004), Country Report N° 04/173 , Statistical 
 Appendix; and IMF (2004), 2004 Article IV Consultation, Staff Report ;  and Central Bureau of Statistics. 
 
7. Monetary policy is under the responsibility of th e Bank of Israel and is aimed at achieving an 
inflation target set by the Government.  Accordi ng to the law, the Bank of Israel does not provide 
loans to finance public deficit.6  Its main policy instrument is a the short-term (up to one year) 
treasury bill (makam).  In spite of the shocks aff ecting the economy at the beginning of the decade, 
the sheqel remained stable  until late 2001 when the Bank of Israel reduced its policy interest rate (the 
so-called "headline" interest rate) by 2 percentage  points (to 3.8%) in the framework of a policy 
package.7  As a result, the sheqel depreciated sharply.  In response, the central bank raised its headline 
rate to 9.1% in June 2002;  th is strengthened the sh eqel and reduced inflationary pressures.  In 
January 2003, Israel abolished all foreign exchange  controls and fully liberalized capital movements. 
The monetary policy was then relaxed, with a gradua l reduction of the headline rate to 7.5% in 2003, 
to 4.2% in 20048, and 3.7% in 2005.  
                                                      
6 New central bank legislation was presented to the Knesset (the Israeli Parliament) in November 2005 
in order to replace the 1954 Central bank Law.  The new legislation will confirm price stability as the main 
objective of monetary policy, and the independence of the Bank of Israel. 
7 At the end of 2001, it became clear that the Centra l Government balance woul d record a major deficit 
and exceed the target (2.4% of GDP).  As expected, inflation decreased, real interest rates rose, and the sheqel 
appreciated.  To avoid adverse consequences on exports and investment, the Government and Central Bank reached a joint decision  which included a cutback in budget expenses, an interest rate cut, the abolition of the 
ceiling on the issuance of Treasury Bills, an increase in th e share of investments that institutional investors were 
permitted to invest abroad, and a modification of the exchange rate band.      
8 IMF (2002), (2003a), and (2004a). Israel WT/TPR/S/157/Rev.1 
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8. The high growth of the economy at the beginning of the period under review contributed to a 
major improvement in the Government budget balance,  reflecting both an increase in tax revenues and 
the Government discipline in terms of public spending .  As a result, in 2000, the Central Government 
deficit of 0.7% of GDP was well below target (Table I.2).  The 2000 economic downturn, however, 
implied falling revenues and combined with an incre ase in security-related expenditure, this led to an 
increase in public deficit to 4.4% of GDP in 2001.   In 2002, the budget was adjusted twice and the 
targeted deficit was increased  from 1.7% to 3.9% of GDP.9  As a result, the debt/GDP ratio rose to 
around 107% in 2003.  These developments and the repeated adjustments of the budget affected 
market confidence in the Government's ability to cont rol public deficits and thereby the public debt, 
which triggered an increase in long-term interest ra tes on ten-year indexed bonds, from 4.0% to 5.7% 
from January to December 2002. 
9. In an attempt to regain credibility, a deficit target of 3% of GDP was included in the 2003 
budget but proved to be based on unr ealistic revenue projections as the fiscal gap eventually rose to 
5.6% of GDP.  New targets were introduced in 2004,  defining limits for the total budget deficit at 4% 
in 2004 and at 3% in each year from 2005 to 2010.10  In addition, real growth in government 
expenditures (excluding expenditur es on hospitals) would be limited each year to 1% from 2005 
through 2010.  The tax reforms launched in January 2003 included a gradual lowering of the marginal 
tax rate on labour income to be completed by 20 10, and a reduction of the rates on capital gains and 
dividend income from abroad to the levels imposed on  investments in Israel, i.e. 20% as of 2006.  The 
upturn in economic activities that began to materia lize in mid 2003, and fiscal discipline allowed the 
Government to meet its commitments with a 2004 deficit of 3.8% of GDP.11 
10. Despite the high economic growth and the rapid increase in demand in mid 1999-2000, 
inflation remained low, owing mainly to excess dom estic supply, the appreciation of the sheqel, the 
reduction of purchase taxes on some durable goods, and the tight monetary policy stance.  In 2000, the CPI inflation was nil, well under the official target of 2% to 3%.  However, in early 2002, the sheqel depreciation largely passed-through to domestic  inflation and the CPI inflation jumped to 
6.5%; in response, the Bank of Israel sharply raised  its headline rate.  This, and the improvement in 
the political environment, the appreciation of the sh eqel against the U.S. dollar and the weakness in 
economic activity rapidly reduced inflationary pressu res.  In 2003, the CPI inflation rate turned 
negative, to -1.9%, against 1.2% in 2004.  Du ring the 12-month period up to November 2005, the CPI 
inflation rate reached 2.7%, within th e inflation target of 1% to 3%.   
11. The impact of the economic downturn on the current account was limited as the general 
worsening of the trade deficit over the period (section (3) below) was partly offset by the fall in payments of factors, particularly investment income  earned by foreigners.  Th e current account deficit 
therefore increased moderately to 1.4% of GDP in 2001.  Since 2002, the current account has 
improved steadily, due to the improvement of both the trade and services accounts.  At the same time, 
a sharp decline in capital inflows, particularly fore ign direct investment, led to a severe deterioration 
of the capital and financial account (Table AI.1).   
                                                     
 
9 The published fiscal deficits are computed by excluding the part of interest related to CPI indexation 
of public debt service.  Public deficits are then smaller than when measured conventionally.  The IMF estimates 
the difference to be about 1% to 2% of GDP in recent years.  
10 In the framework of the Disengagement Program Implementation Law, the Government was allowed 
to further increase its 2005 deficit by 0.4% of GDP and public budgetary expenditures by 1% during 2005-06. 
11 The Government’s emergency economic programme of 2003 included a temporary public-sector 
wage reduction of 4% on average, and postponement of cost of living adjustments and bonuses until June 2005; 
a uniform 12% cut in Ministries' budgets ; a reduction in transfers to local authorities; a sharp cut in welfare 
benefits; an increase in taxes on the employment of foreign workers; and a broadening of the tax base through the reduction of geographic exemptions. WT/TPR/S/157/Rev.1 Trade Policy Review 
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12. The ratio of gross external debt to GDP has re mained stable and manageable over the period 
under review.  It increased slightly with the deteri oration of the current account deficit to around 65% 
in 2002, then declined to around 64% in 2004.  Curr ently, the average maturity is 6.5 years.  Since 
2002, debt assets have outweighed debt liabilities so th at, the net external debt has been negative.  
Official international reserves (excluding gold) more  than cover short-term liabilities (Table AI.1);  
they represent between 6 and 7 months of mercha ndise imports. In 2004, some 43% of the external 
public debt was owed to the Jewish Diaspora and 47 % backed by the U.S. Government (guarantees).12 
Short-term external public debt remains low (at around 2% of GDP in 2004).   
(3) TRADE PERFORMANCE AND INVESTMENT  
(i) Trade performance 
13. Israel's merchandise exports increased strongly in 1999 and 2000, thanks to a global 
economic environment mainly favourable to the hi gh-tech and tourism subsectors. Imports also 
increased substantially due to high growth in domestic demand and the sharp increase in the price of 
imported oil.  As a result, the trade deficit d eclined to 0.6% of GDP in 2000 (Table AI.1). 
14. The early 2000s recession deeply affected Israel’s  foreign trade.  Exports fell by more than 
10% in 2001, the drop being particularly important fo r exports to the Palestinian Authority and in the 
subsector of tourism.  At the same time, imports also decreased, due partly to the fall in fixed capital investment resulting from the economic downturn.  However, the trade balance was negatively 
affected as the reduction in exports was greater than the decline in imports;  the trade account deficit 
increased to 3.9% of GDP in 2002.  The improve ment in the political situation and the global 
environment as from 2003, led to a surge in exports (of high-tech products in particular) by around 
12% and by 20% in 2004.  The economic recovery also led to a significant increase in imports but to a 
lesser extent; in consequence, the trade deficit declined to around 2% in 2004. 
15. The main features of Israel's merchandise trade have not changed significantly since its last 
Review.  The share of agriculture in total mercha ndise exports dropped during the economic downturn 
and then recovered to its previous level.  Ma nufactured products (incl uding diamonds) remain the 
major exports, accounting for more than 90% of total merchandise exports (Table AI.2).  The share of 
diamonds in merchandise exports has increased significantly, from 27% in 1998 to around 36% in 2003.  On the contrary, exports of clothing have  contracted due to the rise in international 
competition. 
16. On average, manufactured products account for mo re than 80% of merchandise imports.  In 
particular, machinery and transport equipment, fu el, and other semi-manufactures (notably diamonds 
whose imports have significantly increased during the review period) are the most important items (Table AI.3).  Imports of fuel (11.5% of merchandi se imports in 2004) have increased steadily; this to 
a large extent reflects the upward evolution of the oil price.  Consumption goods account for about 12% of merchandise imports and investment goods for around 15%.
13   
 
17. Israel's trade has been affected by the geopoliti cal situation that prevails in the Middle East, 
and that has seriously impeded trade between Israel  and its neighbours.  As a result, Europe and the 
United States remain Israel's main trading partners ;  this trade is conducted mostly under preferential 
agreements (Chapters II(6)(ii) and III(2)(iii)(b)).  The share of Israel’s exports to the United States  
has increased during the period under review, while the importance of exports to and imports from 
                                                      
12 U.S. guarantees cover most of Israel's external public debt maturing in the next three years (IMF, 
2005b). 
13 Central Bureau of Statistics (2005).  Israel WT/TPR/S/157/Rev.1 
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Europe has declined somewhat.  In 2004, the Eu ropean Union and the United States accounted for 
27.8% and 36.7% of Israel's exports, and for 41% and 14.9% of its imports .  Imports from Asia 
increased from 10.8% in 1997 to 17.4% in 2004, whil e exports to this region decreased from around 
19% to 18% over the same period (Tables AI.4 and AI.5). 
18. Israel's services trade account reflects its economic business cycle (Chapter IV(5)(i)). 
However, high growth in exports of services has led to a surplus in the servi ces balance since 1999.   
In 2004, the services balance showed a surplus of US$2.3 billion (Table AI.1).  The largest services 
components, both in terms of payments and receipts,  are travel, and freight and transportation.  The 
tourism subsector was affected by the deterioration of the security environment at the end of 2000, but 
it rebounded as soon as the situation improved, to rec over to its pre-2000 level (Chapter IV(5)(v)).   
(ii) Foreign investment 
19. Direct investments in Israel by non-resident s accounted for about 9% of gross fixed capital 
formation in 2004, down from around 20% in 2003.  Isr ael used to rely heavily on foreign investment 
to finance its current account deficit.  However, during the period under review, the surplus of the 
capital and financial account decreased, turning into  a deficit in 2002.  In 2004, the capital and 
financial account deficit was around US$2 billion.  This  evolution is explained mainly by the sharp 
fall in foreign investment in Israel in 2002 and in 2004 (Table AI.1). 
20. Net direct investment in Israeli has fluctuated  over the period under review (Table I.3).  Net 
portfolio investments dropped from net inflows of US$2.5 billion in 1998 to net outflows of US$0.5 billion in 2003.
14  This is mainly explained by the cha nges in the internal investment climate 
and the resulting variations of foreign investment in Israel, in particular portfolio investment, by non-
residents.  Between 1997 and 2003, about 50% of total foreign investment in Isr ael was in the form of 
direct investment, while about 29%  was in the form of portfolio investment.  In 2004 however, non-
resident investment grew slightly, but with a shar p decline in direct investment and a strong increase 
in portfolio investment (81% of total investment by non-residents in 2004). 
Table I.3 
Foreign investment, 1998-04 
(US$ billion) 
 1998 1999 2000 2001 2002 2003 2004 
Net financial account ((a) – (b))  -72 1,623 2,351 1,094 -656 -1,438 -2,914 
Distribution by sector        
Non-banking private sector  1,042 1,827 3,395 623 -1,812 588 644 
Banks  -563 1,005 -59 1,140 530 -2,610 -4,620 
Government  -551 -1,210 -985 -669 626 583 1,062 
(a) Total investment in Israel by non- residents  5,786 7,473 11,684 5,343 3,498 6,002 6,649 
Distribution by sector        
Non-banking private sector  2,953 4,829 10,094 4,295 3,502 4,658 6,649 
Banks  1,570 2,384 1,644 1,317 117 -558 -1,095 
Government  1,263 259 -54 -269 -122 1,901 1,095 
Distribution by type of investment        
Direct investment  1,893 3,115 5,076 3,635 1,769 3,939 1,619 
Portfolio investment  2,402 2,581 5,058 112 714 2,011 5,394 
Other investment  1,491 1,777 1,550 1,596 1,014 51 -364 
(b) Total investment abroad by res idents 5,858 5,850 9,333 4,249 4,154 7,440 9,563 
Distribution by sector        
Non-banking private sector 1,911 3,002 6,699 3,672 5,314 4,071 6,006 
Banks 2,133 1,379 1,703 178 -413 2,051 3,525 
Government 1,814 1,469 931 400 -747 1,318 32 
Table I.3 (cont'd) 
                                                      
14 The definition of portfolio and dir ect investment varies from country to country .  In Israel, direct 
investment is defined as negotiable shares and negotiable convertible secu rities amounting to more than 10% of 
the company's equity, non-negotiable securities, shareholde rs' loans, and real estate.  Portfolio investment is 
defined as negotiable securities. WT/TPR/S/157/Rev.1 Trade Policy Review 
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 1998 1999 2000 2001 2002 2003 2004 
Distribution by type of investment        
Direct investment  1,163 831 3,337 689 982 2,068 3,037 
Portfolio investment  -107 831 2,150 1,112 2,515 2,498 1,051 
Other investment  3,072 3,186 2,957 2,595 1,279 1,561 5,161 
Reserves assets-neta 1,730 1,001 890 -145 -622 1,314 314 
a Public sector. 
Source :  Bank of Israel, Foreign Ex change Activity Department. 
21. By the end of 2004, Israeli holdings abroad we re of about US$99.9 billion, of which US$16.0 
billion in direct investment, US$42.6 billion in portfolio investment, and US$41.6 billion in other forms of investment, with the private non-banki ng sector holding around 48% of Israel’s foreign 
assets, and the banking and public sectors respectively holding around 23% and 28%.
15  
(4) OUTLOOK  
22. In the mid- term, subject to continued improve ment of the security situation and favourable 
global environment, Israel's economy is expected to  register high growth owing to its human capital, 
the level of education, its advanced technol ogical know-how, its well- developed institutional 
infrastructure, and strong commitment to orient  fiscal and monetary policies towards attaining 
macroeconomic stability.   The Government is strongly committed  to its economic recovery plan, 
including the deepening of structural reforms, mainly the privatization of key areas such as oil 
refineries, the banking sector, and the armament industry, and the restructuring of the electricity and water sectors.  
 
23. The consistent reduction in govern ment spending is aimed at ma intaining public deficit under 
control to enable future reduction in the tax burden.   In particular, additiona l tax reductions on labour 
and corporations planned until 2010 are design ed to promote entrepreneurial projects and 
employment.  Fiscal discipline is expected to redu ce the level of public debt, freeing capital resources 
for the business sector, lowering long-term interest  rates, thereby encouraging investment and 
sustainable growth.  Given mild inflationary pr essures and the necessity of accelerating recovery, the 
Bank of Israel is not expected to change the direc tion of its monetary policy and it is likely to refrain 
from raising the short-term real interest rate.   
24. In the medium term (up to 2010), the Government  expects GDP to grow at an annual rate of 
4% (2.3% for GDP per capita).  This performance should be supported by an average export growth 
of about 5% per annum, in line with growth prospe cts for world trade.  These developments should 
provide the foundations for average annual growth in employment by 2.7%, while unemployment is 
expected to decline at a constant  pace from the current level to abou t 6%, its estimated natural level. 
25. The main challenges to the favourable n ear and medium-term outlook are the high 
vulnerability of the economy to an adverse global environment, especially the high-tech market, and 
the political situation in the region, including security  issues.  Moreover, fiscal consolidation could be 
hampered by real interest rate rises, exchange rate depreciation, or slowdown in real GDP growth. 
                                                      
15 Central Bureau of Statistics (2005).