Commentary | The War Will Have Long-Term Economic Consequences

The war in Gaza may cost Israel up to a quarter of a trillion shekels, a huge sum for a relatively small country like Israel

Commentary | The War Will Have Long-Term Economic Consequences

The war in Gaza may cost Israel up to a quarter of a trillion shekels, a huge sum for a relatively small country like Israel. Climbing out of this deep hole will require obtaining huge loans abroad should the government opt out of raising taxes.

Those loans will be more expensive than previously due to the rise in interest rates, and Israel may be perceived as a higher-risk country, further increasing the interest incurred. Israel's image as a dangerous country will also harm the state's revenues received from tourists who hesitate to visit.

The Israeli economy entered the war relatively strongly; it enjoyed various advantages, including the high-tech industry. The decrease in investments may now harm it; there is a worldwide decrease in high-tech investments. Concerning Israel, its image as a strong and stable country may be damaged following the war, with all the financial consequences that follow.

There are additional wartime elements to note: the recruitment of full-time workers for the Army reserves, a drop in productivity due to a national depression (which may continue after the war ends), and a brain drain, even from the high-tech sector. If other important professionals (from vital fields such as medicine) decide to leave Israel after the war, even temporarily, there will be a negative impact on the economy. There is also a decrease in private consumption and household incomes, resulting in a decrease in GDP.

The government will incur additional expenses, including assistance to all wartime evacuees and support of the physically and mentally wounded soldiers and civilians. Apart from the restoration of the settlements surrounding Gaza, it will be necessary to establish a strong defense system there, including the actual border of the Gaza Strip, to prevent another catastrophe.

To date, Hamas has suffered a heavy blow. It may be hit even harder in the future, but it's also likely that its military arm will survive this, having been forged in battles. Hamas may not be able to conduct another broad and successful attack like the one on October 7, but Hamas - or other organizations in the Gaza Strip - may take more limited, still damaging, actions against Israel and her civilians.

In Israel, increased preparation for extreme scenarios is anticipated. Even with the low probability of recurrence of an October 7 event, the trauma incurred will lead to investment in training. Additionally, ‘perimeter lines’ may be imposed on the borders of Lebanon, Judea and Samaria (the West Bank), and also within the Green Line. If so, a policy of this magnitude will involve serious costs.

Fighting at an intense pace, with immediate preparation to carry it out and in the framework of a confrontation with Hezbollah (which is stronger than Hamas), will require the continued mobilization of a massive number of reserves. About 350,000 people were conscripted during this war, partially paralyzing the economy. From an economic perspective, Israel will not be able to maintain this pace for an extended period.

The depletion of IDF munitions during the war necessitates an increase rather than a renewal of supplies. This is especially true if a conflict with stronger enemies arises.

As part of the lessons learned from this war, the IDF will improve the organization of its forces, regular and reserves, and purchase various weapon systems and means of warfare, which will involve considerable expense. They must also prepare for the possibility that Iran will try and produce nuclear weapons, leading to a potential Israeli attack on Iran and all the resulting economic effects.

Additional steps in the security and defense field will be improving the protection of the Israeli population, predominantly in the northern and southern regions. Emergency food and medicine stocks must be improved and increased. This is of particular importance in the event of a prolonged war threatening the shipping lanes and Israel's trade.

The few Houthi attacks during the war were a clear signal of this. The Houthis in Yemen, with Iranian assistance, could disrupt shipping by attacking the vital strait, the gateway to the Red Sea, at Bab al Mandab. There is also a substantial threat in the Mediterranean since Hezbollah has very effective long-range sea-coast missiles, which could hit the port of Haifa or disrupt shipping lanes to and from Israel.

International shipping companies may refuse to come to Israel entirely or import costs could increase with rising shipping insurance.

There are a series of significant expenses, some amounting to billions of shekels. Fully investing in every field will not be possible. Making difficult decisions regarding priorities will be necessary; Israel cannot afford to neglect other sectors related to war preparation, such as health.

Other vital areas not directly related to the security field must be supported, but cutting back where it is not essential will be necessary. Much will depend on the ability of the economy to recover from the support Israel will receive from other countries, primarily the United States.

The continued political tension and friction in Israel will also greatly affect Israel's ability to deal with its challenges on the economic level and that will need to be addressed as well.

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