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Israel’s economy is creaking under the effects of its assault on Gaza

June 5, 2024 at 12:00 pm

Israeli shekels. [Christopher Furlong/Getty Images]

The consequences of Israel’s military assault against the Palestinians in Gaza are ongoing, dealing blows to the occupation state from every direction, the latest of which is at the economic level. Newspaper headlines report from time to time that yet another global ranking company has rated Israel as low. That is what international credit rating companies have done, while the regime in Tel Aviv fears that the ongoing assault on Gaza will contribute to the apparently endless wave of price increases in Israeli markets.

The lack of a political horizon for Gaza not only erodes what Israel claims as security and military “achievements”, but also creates a situation in which the current price increases may merely be a preview of what Israelis can expect in the future. This may push the government to provide unconvincing justifications to economic leaders to prepare for further price increases. This is likely to happen if it continues the war without giving a horizon for ending the offensive.

The Israelis believe that the primary reason for the insane rise in prices is that investors do not like the political uncertainty, as well as the ongoing war in Gaza. The value of the shekel has reacted to this uncertainty. The exchange rate with the US dollar is now less than 3.6 shekels, after initial investor optimism that the war wouldn’t last long.

READ: ‘Every reason’ to think Netanyahu is extending Gaza war for self-preservation: Biden

It is now in its eighth month, and there is more pessimism among investors within the occupation state, who have realised that there is no political desire for a permanent ceasefire. They have started to sell the shekels that they hold, because its weakness means that imports are more expensive as they are priced in Euros or dollars. The extra costs are passed on to consumers.

Israel’s economic problems do not end with the weakness of the shekel, though.

Fuel is priced in dollars, so it costs Israelis much more to buy. Moreover, the treasury is running out of money, so the cost is creeping up. Until the beginning of this year, the tax on fuel was relatively under control, but with the rising deficit due to the war, Finance Minister Bezalel Smotrich was forced to cancel fuel subsidies. The price of fuel has risen from 6.94 shekels per litre to 8 shekels.

These increases have a negative impact on every family’s monthly expenses, with an increase of around 200 shekels due to the rise in fuel prices in recent months. Transport and production costs have all gone up, as has the price of electricity. The increases are all passed on to consumers.

The war on Gaza has brought with it another blow to Israeli consumers, this time from their government. There is a huge budget deficit due to the sharp increase in military expenditure and the fall in revenue. This means that an increase of value added tax to 18 per cent planned for 2025 could be brought forward, which means automatic price rises for goods and services across the board.

With international doubts growing about the ability of the occupation state to fulfil its economic obligations, its reputation is being damaged day by day. Israelis fear that they will be viewed as a “backwards” country.

Many Israeli citizens believe that the economic crisis affecting their country’s international reputation exacerbates the hit that it took last year over the Netanyahu government’s attempt to remove the oversight by what is supposed to be an independent judiciary of proposed legislation. The onslaught against the Palestinians in Gaza has added fuel to the fire.

Although Israelis claim that their international credit rating will rise immediately after the end of the war, the survival of the right-wing regime in Tel Aviv depends on the continuation of the war and the elimination of any political solution. It’s a Catch 22 situation, because that state of affairs is unlikely to change anytime soon, so uncertainty remains, and tax increases become more essential in order to reduce the budget deficit, but it is not going to fall as long as the war continues. In the meantime, Israel’s economy is creaking under the effects of its assault on Gaza.

READ: Experts warn of consequences of American universities divesting from Israeli companies

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.