The Swords of Iron conflict, unfolding over the past three months between Israel and Hamas, has presented a formidable challenge to the Israeli economy. Once the fighting subsides, a critical question needs to be addressed: What will be the aftermath for the economy and its diverse sectors? What government actions need to be taken to effectively reimburse damages and propel the nation back on the track of economic stability?
Hi-tech sector navigates unprecedented challenges
In the turbulent landscape of 2023, the Israeli hi-tech sector weathered a perfect storm of challenges, including the proposed government judicial overhaul, global recession, and rising interest rates. The tragic Hamas massacre on October 7 marked a nadir, triggering a subsequent war that left an indelible mark on the sector. Start-ups, already struggling to secure capital, face an uncertain outlook for improvement in the first quarter of 2024.
Despite these adversities, there remains an undercurrent of optimism fueled by the resilience and determination of the hi-tech sector. The hope is that the critical role played by this sector in the Israeli economy, coupled with the anticipated resurgence of the US market (a primary focal point for Israeli start-ups), will catalyze a surge in investments, mergers, and acquisitions throughout 2024.
A notable development has been the mobilization of entrepreneurs and developers for reserve duty during the conflict. This unexpected detour may lead to the cultivation of a fertile ground for the generation of innovative ideas, potentially reinvigorating the start-up landscape and bringing an end to the eight-year decline in the establishment of new start-ups.
Post-war, a comprehensive government strategy is essential to rebuild confidence in the hi-tech sector. Addressing regulatory concerns, providing financial incentives, and fostering a supportive ecosystem for start-ups will be crucial. The government should actively collaborate with industry leaders to identify opportunities for growth and innovation, ensuring that the hi-tech sector remains a driving force in Israel’s economic recovery.
Tourism sector faces prolonged and gradual recovery
The Israel-Hamas war has dealt a severe blow to Israel’s tourism industry, plunging it into a state of disarray. With nearly no airlines operating and international visitors canceling plans, the tourism sector is grappling with a profound loss of income. Unlike the predictability of the post-COVID era, the uncertainty surrounding the conflict has created a unique challenge for tourism planning.
The impact extends beyond international tourism, as internal travel within Israel has also suffered. The war has disrupted the usual flow of domestic tourism, with people hesitant to embark on journeys within the country amid the ongoing conflict. The timing compounds the issue, as Passover and Easter plans have already been made, diverting attention away from Israel as a destination.
Recovery in the tourism sector is anticipated to be a prolonged and gradual process. The longer the conflict persists, the more extended the recovery period becomes. The psychological toll on the nation, with many residents personally connected to those affected by the conflict, adds a layer of emotional involvement that further delays the return to normalcy.
Statements from government officials, including the prime minister’s acknowledgment of a protracted war, have a direct impact on tourism planning. The prospect of an extended conflict dissuades potential visitors from making travel arrangements, contributing to a holding pattern that extends well beyond the immediate aftermath of the war.
Food sector grapples with complex challenges
The ongoing conflict has stretched beyond the two-month mark, revealing a complex web of challenges ensnaring Israel’s vital food sector. Agricultural regions, traditionally responsible for supplying a significant portion of the nation’s produce, now bear the scars of the conflict.
Loss of crops due to direct physical damage and challenges faced by farmers cultivating amid heightened security concerns have led to a substantial loss of agricultural output.
The conflict’s disruptive influence extends beyond the fields, affecting supply chains and workforce availability. Foreign laborers, apprehensive about their safety, left the country, leaving a critical labor shortage. The government’s grants, with incentives for locals to engage in agriculture and construction, have partially addressed the labor shortage.
While the increased dependence on imports has not led to severe impacts on prices thus far, the sustainability of this arrangement remains uncertain as the conflict persists. The loss of agricultural land and labor continues to exert influence, shaping decisions about upcoming seasons, and there are growing concerns about the potential long-term impact on food security.
Post-conflict recovery in the food sector necessitates a holistic approach. Investments in infrastructure repair, technology adoption, and agricultural innovation are vital to restore the productivity of damaged regions.
Moreover, government grants to incentivize local engagement in agriculture should be sustained, promoting long-term food security. Collaborative efforts with international partners can also contribute to rebuilding a resilient and self-sufficient food supply chain.
Government compensation challenges
The government, recognizing the profound impact of the conflict, has committed NIS 1 billion ($248 million) to a dedicated agency, the Tekuma (Revival) Administration. Headed by Brig.-Gen. (Res) Moshe Edri, the agency will focus on rehabilitating the southern Gaza border communities devastated by the conflict. Its initial period of activity is set at five years, with the potential for additional funding.
The Tekuma Administration is designed to be a multifaceted entity, addressing not only the physical reconstruction of affected areas but also implementing strategic measures to stimulate economic activity and social recovery. The comprehensive approach includes infrastructure rebuilding, support for local businesses, and initiatives to reinvigorate the cultural fabric of these communities.
However, at the same time, delays in compensation from the Israeli government for businesses affected by the conflict have become a significant concern. The Compensation Fund reported that as of December 18, all claims under the revenue support program have been dealt with, either automatically or with a 60% initial payment. Nevertheless, delays have occurred, primarily due to the high number of claims, which exceed 40,000.
The CPA Institute is willing to assist on an individual basis if provided with details and the exact date the claim was filed. This delay in compensation adds to the challenges faced by businesses already dealing with decreased sales and a mobilized workforce.
Streamlining the compensation process is imperative for economic stability. The government should invest in digital platforms and streamline administrative processes to expedite compensation disbursement. Collaborating with industry associations and financial institutions can ensure that businesses receive the necessary financial support promptly, facilitating a smoother recovery process for those affected by the conflict.
Conclusion: Navigating the path to recovery
As Israel navigates the complexities of recovery on multiple fronts, the path ahead remains challenging but not insurmountable. The resilience of the hi-tech sector, the gradual recovery of the tourism industry, and the strategic responses in the food sector are indicative of the nation’s determination to overcome adversity.
The government’s commitment to addressing compensation issues will play a crucial role in facilitating the much-needed recovery of the Israeli economy in the coming months.
Although the resolution of the war remains elusive, strategic measures can pave the way for a transformative “day after.” The economy, albeit a challenging journey, has the potential to embark on a positive trajectory if the right steps are diligently taken. However, even if it manages to retrace its pre-conflict path, the road to greatness will undoubtedly demand continued effort and resilience.