Israel Finance Ministry, Yearly Pension Plan Report

STATE OF ISRAEL

Introduction

The State of Israel (the "State" or "Israel") is a highly developed, industrialized democracy. Since the beginning of the decade, Israel has achieved improvements in most economic indicators. From 1994 to 1998, Israel achieved average GDP growth of approximately 4.6% per year, a decline from the 1990 to 1995 period when average annual growth reached 6%. Growth was based on increased domestic demand due to immigration and the growth of high value-added industries such as electronics and high-technology medical equipment. The GDP growth rate in 1998 slowed to 2% as a result of cyclical factors, as well as a decrease in the number of immigrants, restrictive monetary and fiscal policies, a slowdown in world output, a slowdown in the peace process and other factors.

In recent years, Israel has made substantial progress in opening its economy. Major trade barriers and tariffs have been removed and, while Israel continues to experience trade deficits, total exports of goods increased by 4.7% in 1998. Israel has concluded free trade agreements with its major trading partners, and is the only nation that is a party to free trade agreements with both the United States and the European Union. In recent years Israel has signed free trade agreements with Switzerland, Norway, Iceland, Canada, Turkey, the Czech Republic, Slovakia, Slovenia, Poland and Hungary.

Since 1990, Israel's fiscal and monetary policies have been formulated and coordinated with the goals of reducing Israel's high tax burden, narrowing the Government's fiscal deficits, attaining levels of inflation similar to those in other industrialized countries, and enhancing economic growth. After periods of high inflation in the early 1980s, inflation has been stabilized. The inflation rate in 1998 was 8.6%, at the midpoint of the Government's target range of 7-10% for the year. The total budget deficit (excluding credit) has decreased from 4.1% of GDP in 1996 to 2.8% in 1997 and 2.4% in 1998, in accordance with the budget deficit reduction law. The current account deficit decreased from $6.6 billion in 1996 to $4.9 billion in 1997 and $2.3 billion in 1998. In connection with its economic policies, the Government has also pursued a policy of privatizing State-owned enterprises, including banks. Unemployment was 8.6% in 1998, below the peak of 11.2% in 1992, but higher than the 7.7% rate in 1997.

Israel's productive and highly educated population remains a principal strength. Based on a 1997 survey, approximately 35% of the Israeli population over the age of 15 has a university or other advanced degree. In addition, from 1990 through 1998, about 880,000 immigrants arrived, increasing Israel's population by approximately 19.5%. The new immigrants are generally highly educated and include a high percentage of scientific, academic, technical and other professional workers. Although this wave of immigration initially placed strains on the economy, raising the budget and trade deficits and contributing to a relatively high level of unemployment, these immigrants have been successfully integrated into the economy. Today, the employment rate of immigrants who came to Israel in the first half of the decade equals that of native-born Israelis.

Over the past two decades, Israel has made progress in reducing the state of hostility that has existed with Arab countries in the region that since the establishment of the State in 1948. The first peace agreement between Israel and its neighbors was the 1979 accord with Eg. In September 1993, Israel and the Palestinian Liberation Organization signed a Declaration of Principles, a turning point in Israeli-Arab relations. Since that time, the peace process has progressed with further agreements between Israel and the Palestinians, and the signing of a peace treaty with Jordan in 1994. Further agreements have also been signed between Israel and the Palestinians. As part of the 1994 Gaza Strip and Jericho Agreement signed in Cairo, and the 1996 Interim Agreement on the West Bank and the Gaza Strip signed in Washington, D.C., Israel withdrew from Jericho and much of the Gaza Strip, as well as from six additional West Bank towns. Further progress was made in October 1998, when Israel and the Palestinian Authority signed the Wye River Memorandum restating their commitment to the implementation of the outstanding interim obligations and the resolution of permanent issues through negotiations.

As a result of progress in the peace process and the partial lifting of the economic boycott by a number of members of the Arab League, Israel and its Arab neighbors, with the support of the international community, have taken several initiatives to encourage the development of economic relations among the countries of the region.

Geography

Israel lies on the western edge of Asia bordering the Mediterranean Sea. It is bounded on the north by Lebanon and Syria, on the east by Jordan, on the west by the Mediterranean Sea and Egypt, and on the south by Egypt and the Gulf of Eilat. Israel has a total land area (excluding the Gaza Strip and the West Bank) of approximately 21,500 square kilometers or 8,305 square miles, approximately the size of the State of New Jersey. Jerusalem is the capital of Israel.

Israel's climate varies considerably from region to region, with distinct seasons. In the south, rainfall is light, amounting to about one inch per year in the Arava Valley south of the Dead Sea, while in the north it is relatively heavy, amounting to about 44 inches per year in the Upper Galilee region. Generally, Israel has between 40 and 60 days of rain annually, mainly in the period from October through April. The average daily maximum temperature in the coastal areas ranges from 65°F in January to 90°F in August. In Eilat, located in the south, daytime temperatures reach about 70°F in January and may rise as high as 114°F in August.

Population

Israel's population, including Israeli citizens living in the West Bank and the Gaza Strip, was estimated on December31, 1998 to be 6.1 million. During the period from 1990 through 1998, Israel's population grew by more than 32%, largely as a result of immigration. In 1996, less than 10% of the population was 65 years of age or older, approximately 29% was between the ages of 35 and 64, approximately 32% was between the ages of 15 and 34, and approximately 30% was under the age of 15. Approximately 91% of the population lives in urban areas. Approximately 20% of the population lives in Israel's three largest cities: Jerusalem, Tel Aviv, and Haifa. According to the 1996 census, the populations of these cities were approximately 614,000, 349,000 and 263,000, respectively.

The Israeli population is composed of a variety of ethnic and religious groups. Of the total Israeli population, approximately 80.4% is Jewish, 14.5% is Moslem, 2.1% is Christian, and 1.6% is Druze. Israel's Declaration of Independence and various decisions by Israel's Supreme Court guarantee the freedom of worship for all Israeli citizens. Hebrew and Arabic are the official languages of Israel; English is commonly used.

Education. One year of kindergarten and ten years of primary school are compulsory for all Israeli children and are provided free of charge by the State. In addition, two more years of schooling, though not compulsory, are provided free of charge to all students. Twelve years of schooling are required for admission to a university in Israel. Based on a 1997 survey, approximately 35% of the Israeli population over the age of 15 has a university or other advanced degree. Israel has a large number of high quality educational institutions.

Health and Human Services. Israel has a ratio of approximately one doctor to every 300 people. All residents of Israel have access to medical care funded through a national health care fee. In addition, the Government makes available a wide range of social benefits to ensure support for children, the elderly, expectant mothers and the disabled. Israel's hospitals are of high quality, with technologically advanced facilities.

Immigration. Israel has experienced a continuing flow of immigrants over time, made possible in part by Israel's Law of Return, which provides that any Jewish immigrant is entitled to become a citizen of Israel. Since 1990, the flow of immigrants has increased dramatically. During 1990 and 1991, a total of 375,616 immigrants arrived in Israel, while the average annual number of immigrants to Israel from 1992 through 1998 was 72,100. The substantial flow of immigrants since the beginning of the decade, totaling approximately 880,000, has contributed 19.5% towards a population growth of approximately 31% over this period.
Table No. 2

Immigrants by Place of Last Residence⁽¹⁾

	Year
	1992-1993	1994	1995	1996	1997	1998
Asia	2,619	1,719	1,247	1,001	815	573
Africa
Ethiopia	4,511	1,197	1,312	1,411	1,661	3,110
Other	995	731	460	587	622	404
Europe
Former U.S.S.R.,including Central Asian republics	131,247	68,079	64,847	59,049	54,618	46,020
Other	8,030	4,474	4,140	4,216	4,136	3,245
Americas and Oceania
U.S.A.	3,902	2,118	2,253	1,990	1,858	1,598
Other	2,387	1,475	2,077	2,597	2,390	1,710
Notknown	171	51	25	68	121	33
Total	153,862	79,844	76,361	70,919	66,221	56,693

___________________

(1) Includes tourists who changed their status to immigrants or potential immigrants and excludes citizens who were born abroad to Israeli citizens and came to Israel to settle permanently.

Source: Central Bureau of Statistics.

Approximately 86% of all immigrants to Israel since the beginning of the decade have come from the former Soviet Union. Many of these immigrants are highly educated. Approximately 63% of the immigrants who arrived during the period 1990 through 1997 and who were above 15 years of age had over 13 years of schooling. Approximately 56% of immigrants who worked in their place of last residence had scientific, academic, technical or other skilled jobs. This influx of highly skilled workers has contributed to the growth of the Israeli economy since the beginning of the decade.

Form of Goverment and Political Parties

The State of Israel was established in 1948. Israel is a parliamentary democracy, with governmental powers divided among separate legislative, executive, and judicial branches. Israel has no formal written constitution. Rather, a number of basic laws govern the fundamental functions of the State, including the electoral system, the government, the legislature, and the judiciary. These laws are given special status by Israeli courts relative to other laws and, in some cases, cannot be amended except by an absolute majority vote of the legislature (the "Knesset"). In 1992, the Knesset adopted two additional basic laws that guarantee the protection of property, life, body and dignity, as well as the right to privacy and freedom of occupation. All citizens of Israel, regardless of race, religion or sex, are guaranteed full democratic rights. Freedom of worship, speech, assembly, press and political affiliation are embodied in the country's laws, judicial decisions and Declaration of Independence.

The President is the head of state and, until recently, was elected by the Knesset for a five-year term. Due to a recent reform, the next President will be elected by the Knesset for a single seven-year term. The President has no veto powers and the duties of the office are mainly ceremonial. The current President, Ezer Weizman, first elected in February 1993, was reelected in February 1998 for a second term of five years.

The legislative power of the State resides in the Knesse, a unicameral parliament that consists of 120 members elected by universal suffrage under a system of proportional representation. The entire country constitutes a single electoral constituency. Each party receiving more than 1.5% of the total votes cast is assigned Knesset seats in proportion to its percentage of the total national vote. Knesset elections are held every four years, unless the Knesset votes for elections to take place earlier.

The Prime Minister is the head of Israel's government and appoints a cabinet to assist in governing the country. Prior to the 1996 election, Israeli citizens voted for a particular party and its slate of legislative candidates, which included that party's candidate for Prime Minister in the top slot. In the 1996 elections, for the first time, the Prime Minister was elected by a direct vote, separate from, but simultaneous with, the vote for a party slate. The Prime Minister is elected for the same term as the Knesset. If a 61-vote majority of the Knesset votes no confidence in the Prime Minister, the Knesset dissolves and general elections are held for the Knesset and for Prime Minister. Alternatively, a vote of 80 Knesset members may remove the Prime Minister from office without dissolving the Knesset. In the latter case, a special election for Prime Minister would be held to select a successor to serve the remainder of the Prime Minister's term.

Israel has two major political parties, One Israel and Likud. Since the establishment of the State of Israel in 1948, the Government has been a coalition government led by one of these two parties and supported by a majority of the members of the Knesset. At the end of January 1999, the Knesset voted to dissolve, and general elections were held on May 17, 1999. Ehud Barak, the One Israel party candidate, was elected Prime Minister with 56% of the popular vote.
Table No. 3

Distribution of Knesset Seats by Party

	Number of Seats
One Israel	26
Likud	19
Sefardi Observants of the Torah ("Shas")	17
Meretz	10
Israel Be'aliya	6
Israel Bamercaz	6
Shinui.	6
National Religious Party ("Mafdal")	5
M.D.A. - R.A.M	5
United Torah Judaism ("Agudah")	5
Israel Beiteinu.	4
National Coalition	4
Democratic List for Peace and Equality (Hadash)	3
Am Echad	2
B.L.D.	2
Total	120

The judicial power in Israel is exercised by the Supreme Court, District Courts, and Magistrate Courts, as well as municipal courts, labor courts, administrative tribunals, and religious courts. The five District Courts (located in Jerusalem, Tel Aviv, Haifa, Beersheva, and Nazareth) hear all cases not within the limited jurisdiction of the Magistrate Courts or the specialized courts and also hear appeals from the Magistrate Courts. The Supreme Court has ultimate appellate jurisdiction over all decisions rendered by District Courts. The Supreme Court also exercises original jurisdiction sitting as the High Court of Justice in matters in which it considers it necessary to grant relief in the interests of justice and which are not within the jurisdiction of any other court or tribunal. In its capacity as the High Court of Justice, the Supreme Court hears petitions in matters of constitutional and administrative law, reviewing acts of the executive branch and the Knesset. In addition, the High Court of Justice may order religious courts and labor courts to adjudicate any particular matter, or to set aside any proceeding held, or decision given. Judges are appointed by the President upon election by the Judges' Election Committee, the majority of whose members represent the legal profession. Marital and family matters, and certain other personal matters, are handled by religious courts. Separate religious courts exist for the various religions.

National Institutions

Israel has four so-called National Institutions: the Jewish Agency for Israel (the "Jewish Agency"), the World Zionist Organization, Keren Hayesod, and the Jewish National Fund (collectively, the "National Institutions"). The National Institutions, which predate the formation of the State, perform a variety of non-governmental charitable functions. Each of the National Institutions is independent of the Government and finances its activities through private and public sources, including donations from abroad. In 1998, the National Institutions were responsible for net unilateral transfers into Israel of $399 million.

International Relations

Over the past two decades, Israel has made progress in reducing the state of hostility that has existed between itself and the Arab countries in the region since the establishment of the State of Israel in 1948. As a result of the historic visit to Israel by the president of Egypt in 1977 and intensive negotiations held by the two countries, Egypt and Israel signed a peace treaty on March 26, 1979, which was the first between Israel and one of its neighboring countries. In 1991, the Madrid Conference marked the start of a broader peace process in the Middle East. In September1993, the mutual recognition and the signing of a Declaration of Principles between Israel and the Palestinian Liberation Organization (the "PLO") was a turning point in Israeli-Arab relations. Negotiations between Israel and the PLO progressed, and steps toward a longer-term understanding between the parties have been taken. A number of interim agreements were concluded and the Palestinian Authority (the "PA") was established. The PA has gradually taken responsibility for administering self-rule areas. In October 1998, Israel and the PA signed the Wye River Memorandum restating their commitment to the implementation of the outstanding interim obligations and the resolution of permanent issues through negotiations.

On October 26, 1994, Israel and Jordan signed a peace treaty. After resolving issues relating to borders and water, Israel and Jordan entered into negotiations to promote economic cooperation and planning of regional economic development initiatives. In addition to political and economic discussions between Israel, Egypt and Jordan, in recent years, Israel has begun to establish economic and political relations with other Arab countries in the region, both in Africa and the Gulf states.

Although Israel has entered into various agreements with Arab countries and the PLO, and various declarations have been signed in connection with the efforts to resolve some of the economic and political problems in the Middle East, no prediction can be made as to whether, and under what terms, a full resolution of these problems will be achieved. To date, Israel has not entered into a peace treaty with either Lebanon or Syria. In Lebanon, since the withdrawal in 1986 of the Israeli forces from most of the southern part of the country occupied during the 1982 Lebanon War, Israeli forces have held positions in a "Security Zone" intended to protect the north of Israel. Various armed groups are conducting periodic military activities against the Israeli forces as well as against the Israeli civilian population. Israel has recently announced it was prepared to consider a withdrawal from the "Security Zone" in southern Lebanon based on UN Resolution 245. No prediction can be made as to when or whether such withdrawal might take place.

Since 1948, the members of the Arab League have maintained a trade boycott of Israel. The primary tier of the boycott prohibits the importation of Israeli-origin goods and services by member states. The secondary tier of the boycott prohibits individuals in Arab League states from engaging in business with foreign firms that contribute to Israel's military or economic development, and the tertiary tier of the boycott prohibits business dealings with firms that do business with blacklisted entities. In September 1994, the Gulf Cooperation Council (which includes Qatar, Oman, Bahrain, United Arab Emirates, Saudi Arabia, and Kuwait) declared their intention to lift the secondary and tertiary trade boycotts of Israel, signifying a major shift in Israel's relations with several Arab nations in the region. In addition, four other Arab League members (Algeria, Djibuti, Mauritania and Somalia) do not enforce the secondary and tertiary boycotts of Israel.

As a result of progress in the peace process and the partial lifting of the boycott, Israel and its Arab neighbors have taken several initiatives to encourage the development of economic relations among the countries of the region. The formation of additional regional economic organizations has been proposed to enhance cooperation between Israel and other countries of the region. Among these, the most important are the Middle East Development Bank ("MEDB"), the Middle Eastern-Mediterranean Tourist and Travel Association ("MEMTTA") and the Regional Business Council ("RBC").

Israel maintains a close economic, diplomatic and military relationship with the United States. Israel receives economic and military assistance from the United States in amounts which have averaged approximately $3 billion per year since 1987. In 1991, the United States provided Israel with an additional one-time special grant of $650 million due to expenses incurred by Israel as a result of the Gulf War. In 1992, the United States approved up to $10 billion of loan guarantees during U.S. fiscal years 1993 through 1998 to help Israel absorb the recent influx of immigrants. See "Public Debt-External Public Debt."

In early 1998, Israel initiated discussions with the U.S. government regarding the phasing out of U.S. economic assistance while increasing foreign military assistance over a period of several years. These discussions are part of Israel's overall economic plan to strengthen its economy, implement new reforms, and gradually reduce its reliance on economic aid.

As a result of the peace process, the number of countries that have diplomatic relations with Israel has risen signi. Israel currently maintains diplomatic relations with more than 160 countries. Israel has established or re-established commercial, trade, and diplomatic relations with several republics of the former Soviet Union, nations of Eastern Europe, and other countries that had been aligned politically with the former Soviet Union. Furthermore, the developments toward peace in the region, and the easing of the trade boycott, have facilitated the growth of commercial, trade and diplomatic relations with several Asian countries, including Japan, South Korea, China and India.

Membership in International Organizations and International Trade Agreements

Israel is a member of a number of international organizations, including the United Nations, the World Bank Group (including the International Finance Corporation), the International Monetary Fund (the "IMF"), the European Bank for Reconstruction and Development, and the Inter-American Development Bank.

Israel is a signatory to the General Agreement on Tariffs and Trade ("GATT") of 1947 and 1994 (the World Trade Organization Agreement (the "WTO")), which provides for reciprocal lowering of trade barriers among members. Under the WTO, Israel is eligible to receive a number of trade preferences that are available only to certain participants, including duty-free treatment of its exports to certain countries pursuant to the Generalized System of Preferences. Israel is one of the founding members of the WTO.

Israel has entered into free trade area ("FTA") agreements with its major trading partners and is the only nation that is a party to free trade agreements with both the United States and the European Union (the "EU"). In addition, Israel has recently concluded free trade agreements with both the Czech and Slovak Republics, Hungary, Poland and Slovenia. In 1996, Israel concluded FTA agreements with Turkey and Canada. In 1975, Israel entered into an FTA agreement with the EU that provided for the gradual reduction and ultimate elimination of tariffs on manufactured goods and certain agricultural products. In July 1995, Israel concluded negotiations with the EU for a new agreement regarding financial services, government procurement, cooperation in research and development, additional agricultural products, and improvement in Israel's access to European markets in the advanced industry and high-technology sectors. In 1985, Israel and the United States entered into an FTA agreement that resulted in the elimination of all tariffs on all products effective January 1, 1995. The FTA agreement with the United States also has resulted in the elimination of certain non-tariff barriers to trade between the two countries. In 1992, Israel concluded an FTA agreement with the European Free Trade Association that applied largely to manufactured products.

Israel's FTA agreements allow Israel to export products with little or no duties to the United States and most Western industrialized nations. In March 1996, the Council of Ministers of the OECD approved Israel's request to participate in the organization's activities, and Israel has accordingly joined certain OECD committees as an observer.

On February 22, 1999 Israel's admission to the EU research and development program was approved, recognizing the special status of Israel as a key technological player in the global arena. The program gives Israel access to $15 billion of R&D tenders within the EU countries.