June 19, 2016

Bottom line: Another large current account surplus — over $3bn per quarter has become the norm. This is despite the massive increase in Israel’s trade deficit in the last two quarters (Q4 2015 and Q1 2016), and underlines the critical role played by the services sectors, primarily software and start-ups, in creating and maintaining what is now a ‘chronically large’ balance of payments surplus.

In the financial account of the balance of payments, FDI inflows totaled almost $3bn and portfolio investment inflows another $2bn, while Israeli investment overseas shrivelled.

Because the current account data is so critical, yet is widely ignored in the media and barely understood among the general public, I will first give some general background.


  • A country’s current account is the summary of all its transactions with the rest of the world over a defined period(usually a quarter or a year). It has four main components: trade in goods; trade in services; primary income; secondary income.
  • Israel’s current account has the following characteristics:
    • trade in goods: includes manufactured goods of all sorts; diamonds (raw and polished); energy products (imports only); other raw materials.
    • trade in services: includes tourism (both directions); transportation services (air and sea, passengers and cargo); and, critically, ‘other services’, which includes software and computer consultancy; scientific R&D — including proceeds from sale of start-up companies; and other consultancy services.
    • primary income: comprises income from labour — income of foreign workers in Israel less income of Israelis working abroad; and income from capital — payment of interest and dividends on Israeli investments overseas less payments on foreign investments in Israel.
    • secondary income: unilateral payments made by foreign entities to a) the Israeli government (including government-to-government aid); b) Israeli institutions (e.g. hospitals, educational estabishments, etc.) and c) individuals (German restitution payments, personal bequests, gifts etc.) less unilateral payments made by Israeli entities to foreign entities.




  • The current account surplus in January-March 2016 was $3.32bn, slightly more than in the preceding quarter and the year-earlier quarter, but in line with the average quarterly surplus in 2015.
  • This came despite the sharp increase in the deficit on trade in goods, which totaled $1.5bn in Q1 2016 and $1.6bn in Q4 2015.
  • The surplus on trade in services was an all-time record at almost $4bn –covering much of the shortfall created by the increased deficit in goods.
  • The other components of the current account were mildly negative: primary income generated a deficit of $1.1bn, $50mn more than in the previous quarter, while the surplus on secondary income dropped by $200mn to below $2bn.
  • Perhaps the most important element in the latest data was the revision of all the current account figures for 2013-2015! The surplus for every quarter in these three years was revised upwards — except that for Q4 2015, which was revised sharply downwards. The total cumulative adjustment was an increase in the cumulative surplus in 2013-15 of more than $3bn.
  • The financial account saw surpluses on both main investment streams: direct investment into Israel amounted to $2.95bn, compared to $1.45bn of Israeli direct investment abroad. Inward portfolio investment totaled $2.06bn, versus only $0.6bn of outward flows.  
  • This left the Bank of Israel as the ‘investor overseas of last resort’, with reserve assets rising by $3bn to almost $95bn.
  • Israel’s net external assets rose sharply over the first quarter, from $68.5bn to almost $80bn.
  • The net foreign creditor position rose slightly, to $119.3bn.

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