The path to a fragile ceasefire deal between Israel and Hamas in Gaza proved hard enough. The governance and economic aftermath of a lengthy war will prove even harder. No one is sure who will hold the reins of power in battle scared Gaza or where the vast resources for post-war reconstruction will come from.
Israel has been successful in extinguishing the ‘ring of fire’ with which Iran surrounded Israel by de-fanging proxies: Hezbollah in Syria and Lebanon, Hamas in Gaza and the Houthi in Yemen.
The 15-month Israeli campaign in Gaza saw the capabilities of Hamas decimated but not eliminated, has been at a huge economic cost. The cost of rebuilding Gaza is estimated to be $50 billion (£41bn).
Governor of the Bank of Israel Amir Yaron has expressed hope that the ceasefire deal ‘is a turning point away from 7th of October (2024) that horrible day. It should pave the way for rehabilitation…growth which will help the region.’ Israel itself faces a £20 billion bill for restoring homes, farms, Kibbutzim and infrastructure in the North of the country close to the Syrian and Lebanese borders. Some 80,000 people, Jews and Israeli Arabs, were evacuated to safer locations further South during the conflict.
Hezbollah rocket fire damaged and destroyed schools, home, farm buildings and other infrastructure. Israel also faces a muti-billion cost of helping to restore Southern villages and towns bordering Gaza such as Kibbutz Be’eri where more than 100 people were slaughtered on October 7.
The source of the finance for the reconstruction of Gaza, if some kind of administration can be restored, is unknown. In the past, however, gas rich Qatar, which hosted ceasefire talks, has been a lead donor. It has paid towards infrastructure and has been permitted, by Israel to distribute cash, directly to Palestinian citizens.
For the moment the focus in Gaza, as populations return to their homes (or what remains of them) is humanitarian aid. Funds are being made available by charities and UN backed organisations to restore hospitals and health centres and provide critical fuel and food supplies. Thousands of trucks, corralled by UN agencies, have entered the territory.
Israel’s economy was in good shape at the start of the country’s longest ever military operation. Unemployment was low at just 3pc, the debt to national output ratio was 60pc and on a declining path. The country held $200bn of official reserves. By the standards of most of the G7 wealthy nations, where the ratio of debt to national output is at or close to 100pc, the country was in a relatively good shape.
Debt soared over the last year to 69pc of GDP. The economy is extraordinarily resilient because of the domination of the high-tech sector which contributes an astonishing 18pc to the country’s annual output. Much of the cost of the conflict was covered by increasing state borrowing.
Alex Brummer
Some has been met by higher taxes and public spending cuts with budgets allocated to the two million or so residents of Arab communities, inside Israel, among those reduced. The cost of deploying civilian reservists, who dropped out of the workforce, is put at $3bn (£2.5bn).
At present the construction sector faces serious problems in rebuilding rocket damaged facilities because of the absence of Palestinian workers who previously would enter Israel from the West Bank and (a lesser extent) Gaza.
Israel’s economy was in good shape at the start of the country’s longest ever military operation
The ceasefire immediately has improved prospects for Israel to meet its budget shortfall. Since the fragile accord the credit agency Moody’s has said the accord ‘will reduce the downside to Israel’s finances.’ Fitch agrees but notes the fiscal position is weaker than before the war. If the ceasefire holds it says the negative risks, to the country’s sovereign ‘A’ rating on global markets could be reduced.
Central bank governor Yarom, a former professor of economics at the prestigious Wharton Business School in Pennsylvania, is hopeful of bringing down interest rates in the second half of the year. But first he wants to see inflation, currently running at 3.2pc, back within the 1pc to 3pc range.
Yaron’s presence in Davos last month (JAN) and his confidence about restoring fiscal stability and lowering interest rates shows a degree of optimism about Israel’s prospects which has been absent. It demonstrates that intense activity by the Palestinian inspired Israel boycott movement, around the globe, may have done less lasting damage than feared. The world needs Israel’s advanced autonomous driving, telecoms, chip design and energy tech.
Restoring economic normality in Gaza after a harsh and destructive bombing campaign is more difficult. It is not made any easier by the breakdown of relations between Jerusalem and Palestinian refugee agency UNWRA. The best hope must be for a durable peace and provisional Palestinian administration in Gaza there. That might help unlock a Gulf led effort (with Trump Administration backing) to restore the region’s broken infrastructure.
It requires overcoming right-wing opposition in the Knesset which remains determined to prosecute war.
- Alex Brummer is a Jewish News columnist and City Editor of Daily Mail
