Key Points
Two years of war erased $57 billion from Israel’s economy — and the costliest chapter may only be starting. The Bank of Israel‘s 2025 annual report, released Monday, quantified the Israel war cost of the Gaza campaign at 8.6% of annual GDP, a figure that excludes the four-week-old conflict with Iran now roiling global energy markets, The Rio Times, the Latin American financial news outlet, reports.
Israel War Cost Reveals Deep Economic Scars
The 177 billion shekel loss covers October 2023 through 2025, encompassing the Gaza campaign and operations in Lebanon. GDP grew just 1% in 2024 and 2.9% in 2025 — well below the pre-war trajectory that central bank governor Amir Yaron said would have delivered 5.2% growth this year.
The debt-to-GDP ratio climbed for three consecutive years, reaching 68.5% by the end of 2025. Interest payments hit 58 billion shekels ($16 billion), roughly 7% of GDP. The central bank said the country’s pre-war fiscal cushions — low debt, large foreign reserves, and a trade surplus — are now visibly thinner.
Diplomatic Isolation Hits Trade
The report revealed a measurable trade penalty from international criticism. Exports to eight European Union countries considered hostile to Israeli policy fell by $1 billion in 2024 and $1.5 billion in 2025. The central bank noted that trade with other partners increased, but the pattern suggests political positions are directly influencing commercial flows.
Labor shortages compounded the damage. Tens of thousands of reservists were pulled from civilian jobs for extended periods, while Palestinian workers — roughly 30% of the pre-war construction workforce — remain barred from entering Israel. The tight labor market reflected constrained supply rather than economic strength, pushing wages up without a corresponding increase in output.
Credit rating agencies have already responded. S&P downgraded Israel twice in 2024 before stabilizing the rating at A with a stable outlook in late 2025 following the Gaza ceasefire. The renewed Iran conflict puts that rating under fresh pressure, with investors watching whether the fiscal deterioration triggers another downgrade cycle.
The Iran War Adds a Second Shock
The June 2025 twelve-day war with Iran cost 0.3% of GDP on its own. The current campaign, which began February 28 under Operation Epic Fury, is orders of magnitude larger. Israel’s cabinet approved a revised 2026 budget adding $13 billion in war spending, and the central bank warned that with a higher deficit and lower growth, the debt ratio will keep rising.
The global energy shock from the Hormuz closure is cascading across economies. Brent crude surged past $100 for the first time since 2022, with the International Energy Agency describing the disruption as the greatest energy security challenge in history. For Latin America, the consequences cut both ways — oil exporters benefit from higher prices, while importing nations face accelerating inflation that threatens to derail monetary easing cycles across the region.
Israel War Cost Will Keep Rising
Governor Yaron was blunt about what lies ahead. Defense spending will remain elevated for years, the burden of military service will drag on economic capacity, and the government has yet to produce the multi-year fiscal plan the central bank is explicitly demanding. Israel’s high-tech sector — which generates 17% of GDP and 57% of exports — provided a crucial buffer, but even that advantage has limits.
The $57 billion figure is already historic. What remains uncounted — the Iran campaign, the Hormuz disruption, the long-term cost of a permanent war footing — will almost certainly dwarf it. For markets watching the Middle East, the Bank of Israel report is less a final tally than a down payment on a bill that keeps growing.