Following the shock of war, the Israeli economy found itself at a crossroads, as it witnessed a clear slowdown in commercial, investment, and service activity. These challenges were not only limited to the economic aspect, but were also social and political challenges that led to the country deviating from the path of continuous growth that had lasted for almost two years.

Day after day, the cost of the war increases its burden on the Israeli economy, as it costs Israel $269 million daily, according to a report issued by the international rating agency Moody’s, based on a preliminary study from the estimates of the Israeli Ministry of Finance, which means that after about 230 days of... The war cost Israel $61.9 billion.

The war bill also has a major impact on Israel's finances, whose budget is expected to record a deficit that exceeds the specified target. According to data from the Israeli Ministry of Finance, the fiscal deficit rose to 7 percent of GDP, in 4 months of the current year, reaching $35.7 billion since April 2023, which is higher than the government’s estimate of 6.6 percent for the entire year of 2024. It is also an unprecedented number since the global financial crisis in 2008, according to the Ministry of Finance, which indicated that the fiscal deficit last April alone amounted to $3.16 billion.

The war forced the government to increase spending significantly, as it witnessed a significant increase in defense spending, which accounted for about two-thirds of spending in 4 months, which in turn recorded an increase of approximately 36 percent. In contrast, revenues declined by 2.2 percent, due to a decline in tax payments.

The government's public finances are facing clear pressures, as it plans to raise about $60 billion in debt this year and increase taxes to meet its financial needs. Knowing that the average monthly bond sales tripled after the outbreak of the war, according to Bloomberg estimates, which indicated that the government had collected about $55.4 billion since last October, from domestic and foreign markets.

In light of the growing financial burdens resulting from the war, Israel was receiving blow after blow from international rating agencies, which of course affected its attempts to raise external financing for the war. After Moody's lowered its sovereign rating for Israel by one notch to A2, Standard & Poor's joined in April and lowered the rating from AA- to A+.

In light of the continued great uncertainty about the extent of the impact of the ongoing war on the sector, it is widely expected that the Bank of Israel will leave short-term interest rates unchanged during its meeting on Monday, for the third time in a row.

“Expansionary fiscal policy, upward inflation surprises and persistent geopolitical risks mean this is not the time to think about monetary easing,” said Alina Slyusarchuk, an economist at Morgan Stanley. “We do not see interest rate cuts on the table before the fall of this year.”

In January, the Monetary Policy Committee reduced the key interest rate by 25 basis points, which followed 10 consecutive increases in interest rates, in a strong tightening cycle from the lowest level ever at 0.1 percent in April 2022, before a temporary pause. Last July.

According to a Reuters poll, further interest rate cuts during the rest of 2024 are at risk due to inflation pressures emerging again.

The annual inflation rate continued to rise in April to 2.8 percent, after falling to 2.5 percent in February.
In light of talk about a possible Israeli military rule in Gaza, Yedioth Ahronoth newspaper reported, citing an official document, that any military rule in Gaza would cost Tel Aviv no less than 20 billion shekels ($5.4 billion) annually. The newspaper reported that the institution Israeli security prepared an analytical document to study the financial consequences of establishing a military government in the Gaza Strip.

It indicated that the cost of building an additional corridor to the Strip is estimated at approximately 150 million shekels ($40.4 million). According to the report, in addition to these numbers, additional costs will include the reconstruction of the Gaza Strip (including infrastructure, hospitals, schools, and roads) in addition to establishing the infrastructure for the military government and other related expenses. The report also stressed the need for 400 positions to manage the Israeli military administration in the Strip.

In an interview with the newspaper "Jerusalem Post", the former governor of the "Bank of Israel", Karnit Flug, confirmed that the government's response to the economic challenges resulting from the war was not worthy of the level.
She pointed out that the proposed measures (some of which were approved in the Knesset, while others were postponed or planned to be implemented in the future) are not sufficient to address the challenges that Israel is currently facing.