The International Monetary Fund on Monday cautioned the Israeli government that its continuous growth might be hampered if measures to stop rampant house prices and growing poverty rates won't be taken.
A panel of experts with the IMF said in a report submitted to the Israeli Finance Minister Yair Lapid and Israel's central bank that the risks to its economic outlook are "tilted to the downside. "
The inflating housing prices might have created a real estate bubble, said the IMF, adding that a correction of prices might reverse growth downward and "pose financial stability risks."
The panel advises the Bank of Israel to revise its low interest rate policy. The central bank designed this policy in order to curb the shekel, which has strengthened by 8.7 percent over the past year and drastically harmed the profits of exports.
However, the IMF cautioned that Israel's low interest rate environment could "fuel further house price increases."
Rather, the IMF panel recommends Israel to further restrict the size and risk of mortgages. Most importantly, the panel said, the government should implement the Housing Cabinet's decisions of November to construct 150,000 apartments in ten years through a new governmental company that will expedite the project.
The IMF also urges the government to reduce poverty and inequality, which are the highest among developed countries, and to address the low labor participation rates of Jewish ultra- Orthodox and Israeli Arab, who comprised about quarter of the population.
"More progress is needed in areas such as public infrastructure, transportation, child-care services, and enforcement of labor regulations," the IMF said. "Advancing the structural reform agenda will be critical for raising long-run sustainable growth," it added.
Israel growth is projected "to remain flat in 2013 at 3.5 percent and moderate slightly to around 3.25 percent in 2014," the report predicts. The country owes much growth this year to the newly discovered offshore gas fields, which will contribute to its Gross Domestic Product a full 1 percent in 2014.