THE STATE of ISRAEL (Name of Registrant)

Home , Ben Gurion Airport, Ramon Airport, Route 171 (Israel), Route 227 (Israel), Route 888 (Israel), Tel Aviv Light Rail

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 5 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2016 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO WHICH NAMES OF REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Chia Tiger Chief Legal Officer and Head of Israel Economic Mission – Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: DAVID MENCHEL, ESQ. Arnold & Porter Kaye Scholer LLP 250 West 55th Street New York, New York 10019

* The Registrant is filing this annual report on a voluntary basis.

1 THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 5 is to file with the Securities and Exchange Commission the Recent Developments in the State as of April 9, 2018, which is included as Exhibit D-5 hereto and which updates and amends the Current Description of the State previously filed as Exhibit D and the Summary Information and Recent Developments previously filed as Exhibits D-1, D-2, D-3 and D-4.

2 EXHIBIT INDEX

Exhibit Number

A: None.

B: None.

C-1: (P) Copy of the State Budget Proposal for Fiscal Years 2015–2016 (in Hebrew).**

C-2: (P) Copy of the State Budget Proposal for Fiscal Years 2017–2018 (in Hebrew).***

D: Current Description of the State of Israel.*

D-1: Recent Developments in the State as of September 6, 2017.*

D-2: Recent Developments in the State as of January 1, 2018.*

D-3: Recent Developments in the State as of January 10, 2018.*

D-4: Recent Developments in the State as of February 28, 2018.*

D-5: Recent Developments in the State as of April 9, 2018.

E: Form of Fiscal Agency Agreement, dated as of March 13, 2000, between the Registrant and Citibank, N.A. as Fiscal Agent.****

F: Form of Amendment No. 1, dated as of February 24, 2004, to Fiscal Agency Agreement between the Registrant and Citibank, N.A., as Fiscal Agent.****

G: Form of Amendment No. 2, dated as of January 5, 2016, to the Fiscal Agency Agreement, as amended by Amendment No. 1 to Fiscal Agency Agreement between the Registrant and Citibank, N.A., as Fiscal Agent.*

H: Opinion of the Legal Advisor to the Ministry of Finance of the State of Israel dated January 17, 2018.*

I: Opinion of Arnold & Porter Kaye Scholer LLP dated January 17, 2018.*

J: Underwriting Agreement dated January 10, 2018 by and among the State of Israel, Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Goldman Sachs & Co. LLC.*

* Previously filed. ** Previously filed by paper filing under cover of Form SE on January 6, 2016, pursuant to Rules 306(c) and 311 of Regulation S-T. *** Previously filed by paper filing under cover of Form SE on June 30, 2017, pursuant to Rules 306(c) and 311 of Regulation S-T **** Previously filed in connection with Registration Statement No. 333-184134.

3 SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in Jerusalem, Israel on the 9th day of April, 2018.

STATE OF ISRAEL

By: /s/ Gil Cohen Gil Cohen Senior Deputy Accountant General Ministry of Finance

By: /s/ Lior David-Pur Lior David-Pur Head of Government Debt Management Ministry of Finance

4 Exhibit D-5

RECENT DEVELOPMENTS

The information included in this section supplements the information about the State contained in the State’s Annual Report for 2016 on Form 18-K filed with the SEC on June 30, 2017, as amended from time to time (the “Annual Report for 2016”). To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2016, as amended from time to time, through the date hereof, the information in this section supersedes and replaces such information. Capitalized terms used but not defined in this section have the meanings ascribed to them in the Annual Report for 2016. This section is not complete and may not contain all the information that you should consider. You should read the entire Annual Report for 2016 and any supplement thereto carefully. Unless otherwise specified, amounts in NIS or US$ are presented in current prices without adjustment for inflation. Figures in this section are as of April 9, 2018, except as otherwise indicated.

Political Situation

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, but rather a set of basic laws that are granted special status, enabling judicial review by the Israeli Supreme Court. Israel’s constitutional jurisprudence is also grounded in judicial decisions and in the State’s Declaration of Independence. The President of Israel is the Head of State. The presidency is largely an apolitical, figurehead role, with the real executive power in the hands of the Prime Minister. The legislative power of the State resides in the Knesset, a unicameral parliament that consists of 120 members elected by universal suffrage under a system of proportional representation (see “State of Israel — Form of Government and Political Parties,” in the Annual Report for 2016). Israel signed peace treaties with Egypt in 1979 and with Jordan in 1994, but past efforts to achieve peace with Syria, Lebanon and the Palestinians have yet to bear fruit. Relations between Israel and the Palestinian Authority continue to be based on existing agreements.

In 2005, Israel withdrew completely from the Gaza Strip (“Gaza”), dismantling all Israeli communities in Gaza and all of its military bases there, as well as four Israeli settlements in the northern West Bank (see “State of Israel — International Relations,” in the Annual Report for 2016).

In the summer of 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. In June 2007, Hamas, a terror organization, assumed control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 into 2011. Operation Cast Lead did not materially affect the Israeli economy. From 2011 into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel launched Operation Pillar of Defense, a military campaign against terrorist targets in Gaza. Operation Pillar of Defense lasted eight days. In response to Hamas firing rockets from Gaza into Israel in the summer of 2014, in July 2014, Israel took defensive military action and commenced Operation Protective Edge with the goal of suppressing the rocket fire, some of which reached Israeli cities and towns almost 100 kilometers away from Gaza. The operation ended in August 2014.

Having been at a standstill since 2009 (despite a brief round of talks beginning in September 2010), Israeli-Palestinian peace negotiations were again initiated, under the auspices of the U.S. Secretary of State, in July 2013. Progress was made but, before the last phase of implementation of a prisoner release by Israel for which Government approval was imminent, the Palestinian Authority breached its commitments and submitted requests to accede to fifteen international conventions. While the talks were suspended, the Palestinians announced a unity pact between Fatah and Hamas, which would lead to a so-called national consensus government. Incorporating Hamas into the Palestinian government, under one guise or another, is unacceptable to Israel as long as Hamas rejects the three benchmarks of the International Quartet (namely, recognizing Israel, accepting existing Israeli-Palestinian agreements, and renouncing violence). Although Israel has expressed its willingness to negotiate without preconditions with Palestinian partners who accept the Quartet’s conditions, Hamas still refuses to do so, leaving negotiations at an impasse. However, improvements have been made in economic and security cooperation with the Palestinian Authority.

D-1 In September 2011, the Palestinian Authority filed an application for membership with the United Nations. In November 2012, the General Assembly upgraded the Palestinian Authority’s status in the United Nations from a “non-member observer entity” to a “non-member observer state.”

Beginning in October 2015, there was an increase in acts of violence against Israelis, mostly by individual Palestinians using knives or cars as weapons. This wave of violence was welcomed and encouraged by Hamas and, at first, also by the Palestinian Authority. The Palestinian Authority has, however, continued its security cooperation with Israel and has, in general, become more cautious in expressing encouragement for violence. The overall level of violence has declined, although with occasional renewed flare-ups.

Since January 2011, there has been political instability and civil unrest in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. This unrest has resulted in the removal of long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. The delicate relations between Israel and its neighbors could become even more fragile with the domestic turmoil and change in regimes. Instability in the Middle East and North Africa region have not so far materially affected Israel’s financial or political situation, and countries who have signed peace agreements with Israel have remained committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not thereby be affected. This uncertainty is highlighted by continued fighting in Syria and Iraq, where the Islamist militia group known as ISIS (Islamist State in Iraq and Syria) is challenging the territorial boundaries of both states. Recently, military efforts have decreased the presence of ISIS in Syria and Iraq, but there is growing concern regarding Shiite militias taking control over the relinquished territory and the creation of a land corridor from Tehran to the Mediterranean under Iranian influence.

Moreover, Israel monitors very closely the situation in Syria, in which many dangerous forces operate. The direct threat to Israel from the Syrian military has diminished. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and any spillover of radical forces along the border with Israel. Israel continues to monitor terror infrastructure in Syria and the effects of Iranian and radical presence in the area.

Fundamentalist regimes such as Iran present a deep concern for the international community and especially for states in the region. Since 2011, the prospect of a nuclear Iran has been at the center of international geopolitical discourse. The comprehensive agreement between the P5+1 group and Iran that was reached in July 2015 (Joint Comprehensive Plan of Action or “JCPOA”) conditions international economic sanctions relief, mainly United States and EU sanctions, on Iranian nuclear capabilities reduction and supervision by the International Atomic Energy Agency. With the economic sanctions relief, the primary United States sanctions and other types of sanctions (for non-nuclear activities, such as missiles and terror), will remain in place. There is evidence that Iran continues to violate United Nations Security Council resolutions, so far with limited success of deterrence by the international community.

The military buildup of Hezbollah with more sophisticated weapons that have greater accuracy and longer ranges is one of Israel’s main concerns. Iran, Hezbollah’s main sponsor, has increased its support to Hezbollah since signing the JCPOA, specifically by supplying weapons and parts, know-how, money and training.

D-2 In December 2017, the President of the United States recognized Jerusalem as the capital of the State of Israel and announced plans to relocate the U.S. embassy from Tel Aviv to Jerusalem. The full extent of the implications of the U.S. President’s announcements on Israel, the surrounding region and the international community is uncertain.

Israel’s Prime Minister, Benjamin Netanyahu, is under investigation in connection with three cases involving integrity-related offenses. About one month ago, the Israeli Police transferred the investigation material to the General Prosecution for two of the three files. The Police’s investigation in the third case is still ongoing.

It is important to note that this stage of the proceedings is purely investigatory and does not imply that an indictment will be filed. Pursuant to Article 17 of Israel’s Basic Law: Government, the Attorney General is to assess the materials provided and reach a decision as to whether indictments should be filed. It is already apparent that further investigations will be necessary in the first two cases, before a decision on indictments can be reached.

Population

Israel’s population, including Israeli citizens residing in the West Bank, but not including foreign nationals residing in Israel for employment purposes, is estimated at 8.63 million as of the end of 2016. This is an increase of 2.0% from 8.46 million in 2015, following 2.0% growth in 2015 from 8.30 million people in 2014 and 2.0% growth in 2014 from 8.13 million people in 2013. Between 1990 and 2016, Israel’s population grew by 89.3%, largely as a result of immigration from the former Soviet Union. In 2015, 11.0% of the population was 65 years of age or older, 31.8% was between the ages of 35 and 64, 29.0% was between the ages of 15 and 34, and 28.3% was under the age of 15. 91.2% of the population lives in urban areas, with 18.7% of the population living in Israel’s three largest cities: Jerusalem (population 857,800), Tel-Aviv (population 429,500) and Haifa (population 278,000).

The Israeli population is composed of a variety of ethnic and religious groups. In 2015, 75.0% of the total Israeli population was Jewish, 17.6% Muslim, 2.0% Christian, and 1.6% was Druze. The State’s Declaration of Independence and various decisions of the Supreme Court of Israel guarantee freedom of worship for all Israeli citizens. Hebrew and Arabic are the official languages in Israel, while English is commonly used.

In 2009, the Haredi Jewish community comprised approximately 9.9% of Israel’s population. The Haredi community is characterized by a high fertility rate, which is expected to gradually increase its demographic share among the general population. Based on the demographic projections of the Central Bureau of Statistics, it is anticipated that by 2019 the Haredi community will comprise 12.4% of the population, and by 2039 it will comprise 19% of the population. The Haredi community is also characterized by a relatively low participation rate in the labor market, particularly among men.

There is concern that Haredi demographic trends may, over the long-term, contribute to a lower aggregate participation rate in Israel’s labor market, thereby adversely affecting GDP growth. The impact of Haredi demographic growth may be significant with respect to tax revenue, due to lower revenues from taxation of labor. However, due to several governmental initiatives, in recent years there has been a steady increase in the participation rate among the Haredi community. It is anticipated that these governmental initiatives will continue to positively affect the Haredi participation rate, thereby moderating the negative impact of Haredi demographic trends on Israel’s long-term economic and fiscal prospects. Some of the significant governmental initiatives over the last three years include:

x Vocational training – which provides a variety of professional courses, with varying levels of Government funding, for the benefit of the Haredi population.

x Engineering courses – which include making available engineering courses for graduation diplomas from within the ultra-Orthodox women’s teacher seminaries , and subsidized engineering courses for men.

x Entrepreneurship services – which are aimed at encouraging the opening of businesses by members of the Haredi population, including entrepreneurship courses, business mapping, financing channels and business centers. The activities are carried out through the Small and Medium- Sized Enterprises Agency, a division of the Ministry of Economy.

The total budget allocated for these four initiatives over the last three years was approximately NIS 200 million.

D-3 Immigration

Israel has experienced a continuous flow of immigrants, in part due to its Law of Return, which provides that Jews, those of Jewish ancestry, their spouses and converts to Judaism, have the right to immigrate and settle in Israel and gain citizenship. In 2012, 16,560 immigrants arrived in Israel, a decrease of 2.0% compared to 2011. In 2013, 16,929 immigrants arrived in Israel, an increase of 2.2% compared to 2012. In 2014, 24,112 immigrants arrived in Israel, an increase of 42.4% compared to 2013. In 2015, 27,908 immigrants arrived in Israel, an increase of 15.7% compared to 2014. In 2016, 25,977 immigrants arrived in Israel, a decrease of 6.9% compared to 2015.

Between 1990 and 2003, a substantial influx of immigrants, totaling 1.1 million, increased Israel’s population by more than 23%, putting total population growth for that period at 42.5%. Approximately 83% of the immigrants came from the former Soviet Union and many were highly educated. Of those over the age of 15, 58% had academic backgrounds comprising over 13 years of schooling and approximately 62% held scientific, academic, managerial, technical or other vocational degrees. This influx of highly skilled workers has contributed to the growth of the Israeli economy since 1990 (see “The Economy — Employment, Labor and Wages,” in the Annual Report for 2016).

Over the last decade, Israel, like many other developed countries, has experienced an influx of individuals entering its territory unlawfully. Israel has hundreds of kilometers of land borders and sea borders and, over the last decade, more than 60,000 migrants were found to have entered Israel illegally by means other than permitted entry into Israel at border entry points. Most of the illegal migrants entered Israel by crossing the Israeli-Egyptian border (not at an official border crossing) prior to the amendment to the “Prevention of Infiltration Law,” and the completion of a major portion of a border fence in 2012 – 2013. Since 2013, there has been a drastic decrease in the number of migrants entering Israel illegally. After entering Israel, over time some of the illegal migrants have elected to leave Israel voluntarily, many choosing to return to their country of origin.

The data about migrants residing in Israel collected by the Population and Immigration Authority reflects a population composed mostly of economic migrants. As of the end of 2017, there were approximately 37,288 illegal migrants in Israel (excluding births) who entered by crossing the Israeli-Egyptian border (not at an official border crossing), approximately 34,187 of whom originated from the countries of Eritrea and Sudan. For over a decade, Israel has refrained from returning citizens of Eritrea and Sudan to their home countries, and this policy is reviewed from time to time. On January 1, 2018, the Population and Immigration Authority announced a policy that illegal migrants from Sudan and Eritrea who meet certain criteria will be summoned to a hearing at which their case will be reviewed. After the illegal migrant’s review, the Population and Immigration Authority will determine if such migrant will be required to leave the country and relocated to a third country with which Israel collaborates for such individual’s relocation, and if so within what timeframe. Upon leaving Israel, illegal migrants would receive a grant of money and assistance to help them begin a new, respectable life in their new country. In March 2018, following a legal challenge, Israel’s Supreme Court issued a temporary ruling delaying the implementation of the enforcement of the decision to relocate illegal migrants from Eritrea and Sudan to a third country.

Israel respects its international obligations and follows strict procedures consistent with the criteria and standards of international law laid down by the 1951 Convention Relating to the Status of Refugees. Migrants, whether legal or illegal, who apply for asylum in Israel are interviewed by the Refugee Status Determination Unit to determine whether the migrant fulfills the criteria set by the Convention; those who are denied refugee status may appeal to the court system. In 2016 and 2017, Israel received approximately 30,000 requests for political asylum, some by Eritreans and Sudanese citizens. However, a majority of Eritreans and Sudanese citizens residing in Israel have not applied for political asylum.

D-4 Membership in International Organizations and International Economic 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 (“IMF”), the European Bank for Reconstruction and Development and the Inter-American Development Bank. Since September 2010, Israel has been a full member of the OECD.

Israel has been a signatory to the General Agreement on Tariffs and Trade of 1947 since 1962, and it is a founding member of the World Trade Organization. In addition, Israel actively participates in multilateral initiatives conducted under the framework of the World Trade Organization, such as the Government Procurement Agreement and the Information Technology Agreement.

Israel has an extensive network of free trade agreements with most of its trading partners; among these are the United States, EU, EFTA, Turkey, Canada, Mexico and the MERCOSUR trade bloc (Brazil, Argentina, Uruguay and Paraguay), and Israel is awaiting ratification of a free trade agreement signed with Colombia in September 2013. Approximately 60% of Israel’s foreign trade is conducted under its bilateral free trade agreements which provide duty-free access and other preferential treatment schemes. Israel is currently conducting free trade agreement negotiations with China, India, South Korea, Ukraine, Vietnam and the Euro Asian Customs Union (Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan). In 2016, a free trade agreement with Panama went into effect, and Israel completed discussions to update its free trade agreement with Canada.

In 1975, Israel signed a free trade agreement with the European Economic Community that provided for the gradual reduction and ultimate elimination of tariffs on manufactured goods and certain agricultural products. In July 1995, Israel signed an Association Agreement with the EU, which came into effect in June 2000. The 1995 agreement, which replaced the 1975 agreement, addresses issues relating to competition, government procurement, and cooperation in many areas, including research and development (“R&D”). It also expands the liberalization in agricultural products. Two additional agreements providing for further liberalization in agricultural trade were implemented, the most recent of which became effective as of January 1, 2010.

In 1985, Israel and the United States entered into a free trade agreement that resulted in the elimination of tariffs on all industrial products, taking effect at the beginning of 1995. The free trade agreement with the United States also resulted in the elimination of certain non-tariff barriers to trade between the two countries. In 2010, Israel and the United States concluded a work plan with the aim of upgrading their trade relations in areas such as agriculture and services. The two sides agreed to further enhance this cooperation.

In addition to these agreements, Israel entered into three mutual recognition agreements in the area of standardization. Two of them, with the United States and Canada, cover telecommunication equipment; the third, with the EU, covers goods manufacturing processes in the area of pharmaceuticals.

Israel, with the assistance of the United States, developed regional trade agreements that stimulate economic cooperation between Israel and its neighbors in the Middle East. Israel signed a Qualified Industrial Zones (“QIZ”) agreement with Jordan in 1997 and a separate QIZ agreement with Egypt in December 2004. These QIZ agreements allow Egypt and Jordan to export products to the United States, free of export duties if the products contain inputs from Israel (8% input from Israel in the Israeli-Jordanian QIZ agreement, 10.5% input from Israel in the Israeli-Egyptian QIZ agreement). This trade initiative aims to support prosperity and stability in the Middle East by encouraging regional economic integration. The QIZ Agreement with Jordan has not been active since Jordan signed a free trade agreement with the United States in 2010, which allows Jordanian-originated products to enter the United States duty-free.

At the end of 2004, Israel and the EU approved an Action Plan (within the framework of the European Neighborhood Policy) to address several issues including, but not limited to, services and dispute settlement for trade matters and standardization.

Since 1996, Israel has been an associated member in the EU Framework Programs for Research and Innovation, which allows Israeli firms, academic institutions and other organizations to participate in EU-based R&D projects. Israel was the first country outside of Europe to enjoy this special status, a status granted to Israel largely in recognition of its key role in technology and innovation in the global arena. The EU Framework Program is the biggest R&D platform in the world involving industrial and academic research and innovation.

D-5 Israel’s participation in the Framework programs is directed by the Israel-Europe R&I Directorate or “ISERD,” an inter-ministerial directorate established by the Israeli Ministry of Economy, the Ministry of Science, Technology and Space, the Planning and Budgeting Committee of the Council for Higher Education, the Ministry of Finance and the Ministry of Foreign Affairs. ISERD operates out of the Israel Innovation Authority, at the Ministry of Economy & Industry. The Chairman of the Innovation Authority (the Chief Scientist) also serves as the Chairman of ISERD’s steering committee.

The Seventh Framework Program (FP7 2007 − 2013) provided Israel with access to €50 billion in R&D funding from the EU. Overall, 8,984 Israeli participants were included in 6,109 submitted program proposals, resulting in 2,115 Israeli entities participating in 1,200 retained projects, with a total cost of €10.1 billion. The total grant value for Israeli entities amounted to €875.6 million.

On June 8, 2014, Israel signed an agreement to join Horizon 2020, the eighth European Framework Program for Research and Innovation (2014 − 2020). Retroactively joining the program officially as of January 1, 2014, Israel has access to €70 billion in total program funding. Horizon 2020 provides funding in a wide variety of areas including information and communication technologies, health, biotechnology, nanotechnology, materials and production processes, energy, climate, environment, raw materials, food security and bioeconomy, space, transport, future and emerging technologies, research infrastructures, innovation in small and medium sized enterprises, secure societies, researcher’s mobility, social sciences and humanities, and the European Research Council for groundbreaking academic research. Horizon 2020 promotes pioneering research and enables Israeli entities to cooperate on technological development with European industries, research institutions and universities, in addition to showcasing Israeli technological abilities. Through Horizon 2020, small and medium-sized enterprises that are EU-based or established in a country associated with Horizon 2020 can obtain funding and support for innovations that aid growth and expansion into countries in Europe and elsewhere.

During 2014 − 2016, Israel’s first three years of participation in Horizon 2020, 4,433 Israeli participants submitted 3,282 proposals to Horizon 2020, resulting in 463 retained projects, with a total cost of €2.3 billion. The total grant value for Israeli entities amounted to €390 million.

In 2016, Israel celebrated 20 years of participation in the EU Framework Programs which, over the last.

20 years, involved more than 21,300 Israeli researchers participating in 3,080 retained and funded projects, totaling €1.7 billion in funding.

Israel is an active participant in the EUREKA Network, Europe’s leading platform for R&D entrepreneurs and industries. EUREKA is an intergovernmental public network of over 40 member countries and three associated countries. EUREKA supports R&D-based businesses and institutions through funding and partner-matching services. On a yearly basis, EUREKA supports more than 300 collaborative projects in a variety of industries, totaling over €1.2 billion. Projects can be launched in virtually all industry fields and technological areas — information and communications technology, manufacturing, water technologies, communications, biotechnology and energy. In July 2010, Israel took the reins of the EUREKA Network as its year-long chair. The Israeli EUREKA chairmanship leveraged local technological best practices to focus on promoting a culture of innovation and to develop new sources of funding for start-up companies, small and medium sized enterprises and research institutions domestically and globally. Israel is among EUREKA’s most active participants; of EUREKA’s member and associated countries, Israeli companies have partnered in more than 10% of all EUREKA’s projects.

In 2014 − 2015, Israeli companies submitted 180 proposals for R&D cooperation projects as part of the bilateral programs of the European Division of the Office of the Chief Scientist; fifty such proposals received funding for cooperative projects with European partners — primarily Germany, Italy, Cyprus and Greece. In 2016 − 2017, Israeli companies submitted 150 proposals for R&D cooperation projects as part of the bilateral programs of the European Division of the Israel Innovation Authority; the countries with the most submissions were Greece and Italy.

D-6 Over the years, Israel has signed many bilateral agreements for collaboration on research, development and innovation with foreign federal and local governments, as well as with other foreign entities. In addition, Israel has five binational R&D foundations with the United States, Canada, India, Singapore and South Korea.

D-7 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 4 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2016 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO WHICH NAMES OF REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Chia Tiger Chief Legal Officer and Head of Israel Economic Mission – Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: DAVID MENCHEL, ESQ. Arnold & Porter Kaye Scholer LLP 250 West 55th Street New York, New York 10019

* The Registrant is filing this annual report on a voluntary basis.

1 THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 4 is to file with the Securities and Exchange Commission the Recent Developments in the State as of February 28, 2018, which is included as Exhibit D-4 hereto and which updates and amends the Current Description of the State previously filed as Exhibit D and the Summary Information and Recent Developments previously filed as Exhibits D-1, D-2 and D-3.

2 EXHIBIT INDEX

Exhibit Number

A: None.

B: None.

C-1: (P) Copy of the State Budget Proposal for Fiscal Years 2015–2016 (in Hebrew).**

C-2: (P) Copy of the State Budget Proposal for Fiscal Years 2017–2018 (in Hebrew).***

D: Current Description of the State of Israel.*

D-1: Recent Developments in the State as of September 6, 2017.*

D-2: Recent Developments in the State as of January 1, 2018.*

D-3: Recent Developments in the State as of January 10, 2018.*

D-4 Recent Developments in the State as of February 28, 2018.

E: Form of Fiscal Agency Agreement, dated as of March 13, 2000, between the Registrant and Citibank, N.A. as Fiscal Agent.****

F: Form of Amendment No. 1, dated as of February 24, 2004, to Fiscal Agency Agreement between the Registrant and Citibank, N.A., as Fiscal Agent.****

H: Opinion of the Legal Advisor to the Ministry of Finance of the State of Israel dated January 17, 2018.*

I: Opinion of Arnold & Porter Kaye Scholer LLP dated January 17, 2018.*

J: Underwriting Agreement dated January 10, 2018 by and among the State of Israel, Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Goldman Sachs & Co. LLC.*

3 SIGNATURE

STATE OF ISRAEL

By: /s/ Gil Cohen Gil Cohen Senior Deputy Accountant General Ministry of Finance

By: /s/ Lior David-Pur Lior David-Pur Head of Government Debt Management Ministry of Finance

4 Exhibit D-4

RECENT DEVELOPMENTS

Political Situation

D-2 The military buildup of Hezbollah with more sophisticated weapons that have greater accuracy and longer ranges is one of Israel’s main concerns. Iran, Hezbollah’s main sponsor, has increased its support to Hezbollah since signing the JCPOA, specifically by supplying weapons and parts, know-how, money and training.

In December 2017, the President of the United States recognized Jerusalem as the capital of the State of Israel and announced plans to relocate the U.S. embassy from Tel Aviv to Jerusalem. The full extent of the implications of the U.S. President’s announcements on Israel, the surrounding region and the international community is uncertain.

Population

x Vocational services – which include career guidance services for the Haredi population, covering areas such as cultural adaptation, employment workshops, mentoring, short courses in English and math, tutoring, professional training referrals and job placement support. x Vocational training – which provides a variety of professional courses, with varying levels of Government funding, for the benefit of the Haredi population. x Engineering courses – which include making available engineering courses for graduation diplomas from within the ultra-Orthodox women’s teacher seminaries , and subsidized engineering courses for men. x Entrepreneurship services – which are aimed at encouraging the opening of businesses by members of the Haredi population, including entrepreneurship courses, business mapping, financing channels and business centers. The activities are carried out through the Small and Medium- Sized Enterprises Agency, a division of the Ministry of Economy.

The total budget allocated for these four initiatives over the last three years was approximately NIS 200 million.

D-3 Immigration

Over the last decade, Israel, like many other developed countries, has experienced an influx of individuals entering its territory unlawfully. Israel has hundreds of kilometers of land borders and sea borders and, over the last decade, more than 60,000 migrants were found to have entered Israel illegally by means other than permitted entry into Israel at border entry points. Most of the illegal migrants entered Israel by crossing the Israeli-Egyptian border prior to the completion of a major portion of a border fence in 2013. Since 2013, there has been a drastic decrease in the number of migrants entering Israel illegally. After entering Israel, over time some of the illegal migrants have elected to leave Israel voluntarily, many choosing to return to their country of origin.

Israel respects its international obligations and follows strict procedures consistent with the criteria and standards of international law laid down by the 1951 Convention Relating to the Status of Refugees. Migrants, whether legal or illegal, who apply for asylum in Israel are interviewed by the Refugee Status Determination unit to determine whether the migrant fulfills the criteria set by the Convention; those who are denied refugee status may appeal to the court system. In 2016 and 2017, Israel received approximately 30,000 requests for political asylum, some by Eritreans and Sudanese citizens; however, a majority of Eritreans and Sudanese citizens residing in Israel have not applied for political asylum.

Membership in International Organizations and International Economic Agreements

D-4 Israel has an extensive network of free trade agreements with most of its trading partners; among these are the United States, EU, EFTA, Turkey, Canada, Mexico and the MERCOSUR trade bloc (Brazil, Argentina, Uruguay and Paraguay), and Israel is awaiting ratification of a free trade agreement signed with Colombia in September 2013. Approximately 60% of Israel’s foreign trade is conducted under its bilateral free trade agreements which provide duty-free access and other preferential treatment schemes. Israel is currently conducting free trade agreement negotiations with China, India, South Korea, Ukraine, Vietnam and the Euro Asian Customs Union (Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan). In 2016, a free trade agreement with Panama went into effect, and Israel completed discussions to update its free trade agreement with Canada.

Israel’s participation in the Framework programs is directed by the Israel-Europe R&I Directorate or “ISERD,” an inter-ministerial directorate established by the Israeli Ministry of Economy, the Ministry of Science, Technology and Space, the Planning and Budgeting Committee of the Council for Higher Education, the Ministry of Finance and the Ministry of Foreign Affairs. ISERD operates out of the Israel Innovation Authority, at the Ministry of Economy & Industry. The Chairman of the Innovation Authority (the Chief Scientist) also serves as the Chairman of ISERD’s steering committee.

D-5 The Seventh Framework Program (FP7 2007 − 2013) provided Israel with access to €50 billion in R&D funding from the EU. Overall, 8,984 Israeli participants were included in 6,109 submitted program proposals, resulting in 2,115 Israeli entities participating in 1,200 retained projects, with a total cost of €10.1 billion. The total grant value for Israeli entities amounted to €875.6 million.

In 2016, Israel celebrated 20 years of participation in the EU Framework Programs which, over the last.

20 years, involved more than 21,300 Israeli researchers participating in 3,080 retained and funded projects, totaling €1.7 billion in funding.

In 2014 − 2015, Israeli companies submitted 180 proposals for R&D cooperation projects as part of the bilateral programs of the European Division of the Office of the Chief Scientist; fifty such proposals received funding for cooperative projects with European partners — primarily Germany, Italy, Cyprus and Greece. In2016 − 2017 , Israeli companies submitted 150 proposals for R&D cooperation projects as part of the bilateral programs of the European Division of the Israel Innovation Authority; the countries with the most submissions were Greece and Italy.

Over the years, Israel has signed many bilateral agreements for collaboration on research, development and innovation with foreign federal and local governments, as well as with other foreign entities. In addition, Israel has five binational R&D foundations with the United States, Canada, India, Singapore and South Korea.

D-6 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 3 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2016 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO WHICH NAMES OF REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Chia Tiger Chief Legal Officer and Head of Israel Economic Mission – Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: DAVID MENCHEL, ESQ. Arnold & Porter Kaye Scholer LLP 250 West 55th Street New York, New York 10019

* The Registrant is filing this annual report on a voluntary basis.

1 THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 3 is to file with the Securities and Exchange Commission certain exhibits to Israel’s Annual Report on Form 18-K for the fiscal year ended December 31, 2016, as amended.

2 EXHIBIT INDEX

Exhibit Number

A: None.

B: None.

C-1: (P) Copy of the State Budget Proposal for Fiscal Years 2015–2016 (in Hebrew).**

C-2: (P) Copy of the State Budget Proposal for Fiscal Years 2017–2018 (in Hebrew).***

D: Current Description of the State of Israel.*

D-1: Recent Developments in the State as of September 6, 2017.*

D-2: Recent Developments in the State as of January 1, 2018.*

D-3: Recent Developments in the State as of January 10, 2018.

E: Form of Fiscal Agency Agreement, dated as of March 13, 2000, between the Registrant and Citibank, N.A. as Fiscal Agent.****

F: Form of Amendment No. 1, dated as of February 24, 2004, to Fiscal Agency Agreement between the Registrant and Citibank, N.A., as Fiscal Agent.****

H: Opinion of the Legal Advisor to the Ministry of Finance of the State of Israel dated January 17, 2018.

I: Opinion of Arnold & Porter Kaye Scholer LLP dated January 17, 2018.

J: Underwriting Agreement dated January 10, 2018 by and among the State of Israel, Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Goldman Sachs & Co. LLC.

3 SIGNATURE

STATE OF ISRAEL

By: /s/ Rony Hizkiyahu Rony Hizkiyahu Accountant General Ministry of Finance

By: /s/ Gil Cohen Gil Cohen Senior Deputy Accountant General Ministry of Finance

4 Exhibit D-3

SUMMARY INFORMATION AND RECENT DEVELOPMENTS

The information included in this section supplements the information about the State contained in the State’s Annual Report for 2016 on Form 18-K filed with the SEC on June 30, 2017, as amended from time to time (the “Annual Report for 2016”). To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2016, as amended from time to time, through the date hereof, the information in this section supersedes and replaces such information. Capitalized terms used but not defined in this section have the meanings ascribed to them in the Annual Report for 2016. This section is not complete and may not contain all the information that you should consider. You should read the entire Annual Report for 2016 and any supplement thereto carefully. Totals in certain tables may differ from the sum of the individual items in such tables due to rounding. Unless otherwise specified, amounts in NIS or US$ are presented in current prices without adjustment for inflation. Figures in this section are as of January 10, 2018, except as otherwise indicated.

Economic Developments

In August 2013, the Central Bureau of Statistics (“CBS”) adopted the United Nations System of National Accounts as revised in 2008 (“SNA 2008”) due to a number of major changes that affected the various data series with respect to values as well as percentages of change between periods. The data series beginning in 2006 was revised for the publication of the 2013 Statistical Abstract. The series from 1995 onwards was revised in August 2014. The revisions are in accordance with the changes to the SNA 2008, which has been accepted globally and includes changes in the measurement of the annual gross domestic product (“GDP”). Some of the main changes in the SNA 2008 applicable to Israel included: (i) recording research and development as fixed capital formation, (ii) measurement of income from financial intermediation, (iii) recording the Central Bank’s output, and (iv) recording products for further processing in the balance of payments. The process of fully implementing SNA 2008 in Israel will take several years and will be accompanied by additional adjustments to the Balance of Payments Manual 6 (“BPM6”) and the new international merchandise trade statistics guide. Further changes have been reflected in the classification of economic activities in Israel, as the classification is in accordance with the new International Standard Industrial Classification (“ISIC Rev4”). Moreover, there has been integration of the 2006 input-output tables that describe the relationships between various industries, as well as between the industries and the final uses (private consumption, general government consumption, fixed capital formation and exports).

These methodology changes resulted in a restatement of the growth rates for 1995 through 2012, as well as certain other indicators including the debt-to- GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable to the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the CBS.

The Israeli economy grew at a pace of 3.0% in 2017 according to the CBS preliminary estimates, a decrease compared to the growth rate of 4.0% in 2016, which was relatively high due to one-time factors in 2016, including a sharp increase in purchases of passenger cars at the end of 2016. The relatively high growth rate in 2016 followed growth rates of 2.6% in 2015 and 3.5% in 2014. The growth rates during 2014 and 2015 can be attributed to exogenous factors including the slowdown in economies around the world, which contributed to the slowdown in Israeli exports, the appreciation of the Israeli NIS during the first half of 2014, and Operation Protective Edge, which took place in July and August 2014 and weighed on the economy. In 2016, GDP increased by 4.5%, 5.4%, 4.2% and 4.7% in the first, second, third and fourth quarters, respectively, in each case compared to the previous quarter at an annualized rate. In the first quarter of 2017, the growth rate slowed to 0.9%, reflecting a sharp decrease in the number of passenger cars purchased in the first quarter of 2017 compared to the fourth quarter of 2016; in anticipation of a change in the tax on new cars that took effect in the beginning of 2017, there was an increase in car purchases in the second half of 2016. In the second quarter of 2017, the GDP growth rate increased to 2.6%, due in part to purchases of passenger cars returning to the purchase level that was recorded in the first quarter of 2016. The growth rate continued to increase in the third quarter of 2017 to 3.5%.

D-1 In 2016, the Government continued its debt-reduction policy, reducing Government debt as a percentage of GDP by 1.8% compared to 2015, to a level of 60.7% for 2016. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path, falling to a level of 62.4% at the end of 2016, a decline of 1.6% of GDP relative to 2015. After a deviation from the budget deficit target in 2012 (the actual budget deficit amounted to 3.9% of GDP during 2012 compared to a target of 2.0% of GDP), the actual budget deficit in 2013 was 3.1% of GDP, significantly below the deficit target of 4.3% of GDP. The downtrend of the deficit continued in 2014, as the deficit to GDP ratio amounted to 2.7%, which was below the 3.0% target. In 2015, tax revenues were higher than expected, and expenditures were lower than expected, leading to a 2.1% budget deficit for 2015. The budget deficit for 2016 was 2.1%, which was below the deficit target of 2.9% of GDP. The budget deficit for 2017 was 1.97% of GDP according to preliminary estimates, below the budget deficit target of 2.9% of GDP for 2017. As part of the budget and economic plan for fiscal year 2018, which was approved by the Knesset on December 22, 2016, the Government set the budget deficit target at 2.9% of GDP for 2018.

The inflation rate in 2016 was -0.2% at year-end, below the Bank of Israel’s target range of 1% to 3%. The consumer price index (“CPI”) increased between November 2016 and November 2017 by 0.3%. The NIS/USD exchange rate as of December 31, 2014 stood at 3.889, which represents a depreciation of 12.0% during 2014. The NIS/USD exchange rate as of December 31, 2015 was 3.902, a slight depreciation relative to December 31, 2014. The NIS/USD exchange rate as of December 30, 2016 was 3.845, an appreciation of 1.5% relative to December 31, 2015. The NIS/USD exchange rate as of December 29, 2017 stood at 3.467, representing a significant appreciation of approximately 9.8% relative to December 30, 2016.

During 2017, there was no change in Israel’s foreign currency credit rating from Standard & Poor’s (“S&P”), Fitch Ratings or Moody’s Investor Services. In August 2017, S&P updated Israel’s outlook from stable to positive.

Israel’s economy continues to be affected by current global economic conditions and the slow-growth climate in the global environment, particularly in Europe. Europe continues to face uncertainty as some “eurozone” countries face moderate to low growth and low inflation. The continued sluggish growth in the European Union (EU), which is one of Israel’s major trade partners, could have a material adverse impact on Israel’s balance of trade and thereby adversely affect Israel’s financial condition. Since late 2009, several “eurozone” governments, including Greece, Spain, Italy, Ireland, Portugal, France and Cyprus, have experienced rising national debt levels coupled with the downgrade of the credit ratings of their government debt. As a result of the sovereign debt crisis in Europe, there was significant price volatility in the secondary market for sovereign debt of European and other nations at the beginning of this decade. Additionally, speculation regarding the inability of Greece and other “eurozone” governments to pay their national debts remains uncertain, although these concerns have eased in recent years. Another global economic condition that has had a negative impact on the Israeli economy is the slowdown in key emerging economies, including China and Brazil, which has contributed to the slowdown in Israeli exports. The beginning of the retreat of the Board of Governors of the U.S. Federal Reserve System from its past accommodative monetary policy may also influence the Israeli economy.

Although Israel’s economy has sustained moderate rates of growth in recent years, there can be no assurance that Israel’s economy will continue to grow in a prolonged negative global economic climate.

Balance of Payments and Foreign Trade

Israel had a current account surplus of 3.8% of GDP in 2016. This current account surplus followed thirteen years of a positive surplus in the current account. The current account balance decreased steadily from the second half of 2010 through the first quarter of 2012. This decrease was partially attributable to the cessation of natural gas flowing from Egypt and the slowdown in the extraction of natural gas from Yam Tethis reservoir, the combined effect of which required Israel to import expensive alternative fuels during 2011 and 2012. The production of natural gas from the Tamar reservoir, which started in late March 2013, and the decline in fuel prices since the second half of 2012, contributed to an improvement in the current account balance since the second half of 2012 into 2013, 2014, 2015 and 2016. In the first half of 2014, the current account surplus was 4.8%. In the third quarter of 2014, a sharp decrease of the current account surplus was recorded, mainly due to the negative effects of Operation Protective Edge. In the fourth quarter of 2014, there was an improvement in the current account surplus, but the current account surplus remained lower than the levels recorded in the first half of 2014.

D-2 During the first three quarters of 2015, the upward trend in the current account surplus continued, as the current account surplus amounted to 3.6%, 5.1% and 6.1% of GDP in the first, second and third quarters, respectively. The third-quarter figure was the highest current account surplus recorded since 2007. In the fourth quarter of 2015, the current account surplus decreased to 4.9% of GDP, and a further decrease was recorded in the first quarter of 2016, reaching a level of 3.8%. In the second quarter of 2016, a slight improvement was recorded in the current account surplus, which increased to 4.0% of GDP, but in the third quarter the current account surplus decreased, amounting to 2.3% of GDP. In the fourth quarter of 2016, an improvement was recorded, as the current account surplus increased to 4.1% of GDP. For the year 2016, the current account surplus amounted to 3.8% of GDP, a decrease relative to 5.2% in 2015. In the first and second quarters of 2017, the current account surplus declined to 2.9% of GDP and 3.0% of GDP, respectively, and this downward trend continued in the third quarter of 2017, as the current account surplus declined to 2.4% of GDP.

After decreases in exports and imports of goods and services in 2015, exports and imports increased in 2016. As a result, Israeli net exports decreased from the high surplus of $9.0 billion in 2015 to a surplus of $6.6 billion in 2016. Compared to 2015, exports in real NIS terms recorded a growth rate of 2.5% in 2016, while imports increased by 9.4% in 2016. The decrease in Israeli exports of goods during 2016 (in U.S. dollars at current prices) was reflected in a decrease in exports to the United States (-2.9%), the EU (-1.9%), Asia (-11.8%) and other destinations (-4.7%). In 2016, the share of exports to the EU increased by 1.0% (from 25.1% in 2015 to 26.0% in 2016), the share of exports to the United States increased by 0.8% (from 28.3% in 2015 to 29.0% in 2016), and the share of exports to other destinations (excluding Asia) increased by 0.2% (from 19.0% in 2015 to 19.2% in 2016). On the other hand, in 2016 the share of exports to Asia decreased by 1.9% (from 27.6% in 2015 to 25.8% in 2016).

Following the downward trend recorded in exports and imports of goods in the first three quarters of 2015, from the fourth quarter of 2015 to the fourth quarter of 2016, imports and exports were on an upward trend. Following a decrease of 0.3% in the first quarter of 2016, in the second, third and fourth quarters of 2016, exports of goods (in U.S. dollars at current prices) grew by 1.8%, 0.8% and 1.7%, respectively. This upward trend stopped in the first quarter of 2017, as exports of goods were almost unchanged compared to the level of exports of goods in the fourth quarter of 2016. In the second and third quarters of 2017, exports of goods declined by 0.2% and 2.4%, respectively. Imports of goods (in U.S. dollars at current prices) increased by 1.1%, 4.5%, 0.8% and 1.9% in the first, second, third and fourth quarters of 2016, respectively, but decreased by 0.7% and 0.4% in the first and second quarters of 2017, respectively. In the third quarter of 2017, the imports of goods (in U.S. dollars at current prices) increased by 4.1%.

The growth of imports since 2013 has been limited due to the local production of natural gas, which has offset the imports of certain energy-related products, and the decline in the commodities’ prices, in particular, energy prices.

On March 30, 2013, natural gas production at the Tamar reservoir began. The gas flowing from Tamar is being used mainly for domestic electricity production and has led to a significant decrease in energy-related imports. Following the beginning of gas production from Tamar, there were appreciation pressures on the NIS, leading the Bank of Israel to intervene in the foreign exchange market for the first time since 2011. Since the intervention, the Bank of Israel has purchased a total of $11.54 billion in foreign currency within the framework of the gas plan, including $3.5 billion during 2014, $3.1 billion during 2015, $1.8 billion during 2016, and $1.5 billion in the first eleven months of 2017. In November 2017, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2018 would be $1.5 billion, and the Bank of Israel announced that it would purchase foreign currency during 2018 accordingly. The Bank of Israel intends to continue such purchases of foreign currency until Israel’s sovereign wealth fund becomes operational, which is anticipated in 2020 (subject to legislative review by the Knesset).

D-3 Israel is a party to free trade agreements with its major trading partners, and it is one of the few nations that has signed free trade agreements with both the United States and the EU.

Fiscal Policy

The budget deficit amounted to 2.1% of GDP in each of 2015 and 2016, below the budget deficit target of 2.9% of GDP for these years. The budget deficit amounted to 1.97% of GDP in 2017 according to preliminary estimates, below the budget deficit target of 2.9% of GDP for 2017. Since 2009, the budget deficit has been on a declining path, with the exception of 2012. In 2009, the budget deficit amounted to 4.8% of GDP, due to a decrease in tax revenues resulting from the global financial crisis (the 2009 budget deficit target was set at 6%); 3.5% of GDP in 2010 (the 2010 budget deficit target was set at 5.5%); 3.1% in 2011 (the 2011 budget deficit target was set at 3.0%); 3.9% in 2012 (the 2012 budget deficit target was set at 2.0%); 3.1% in 2013 (the 2013 budget deficit target was set at 4.3%); 2.7% in 2014 (the 2014 budget deficit target was set at 3.0%); 2.1% in each of 2015 and 2016 (the 2015 and 2016 budget deficit targets were set at 2.9%); and 1.97% in 2017 according to preliminary estimates (the 2017 budget deficit target was set at 2.9%). Pursuant to legislation in December 2016, the budget deficit target is set at 2.9% of GDP for 2018.

In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined in “Public Finance — Fiscal Framework,” in the Annual Report for 2016). The revision modified the formula used to calculate the annual budget, beginning with the 2015 – 2016 budget. Under the modified formula, the expenditure ceiling is calculated based on the average population growth rate in the three years prior to the submission of the Expenditure Law, plus the ratio of the medium-term debt target (50%) to the current debt-to-GDP ratio. The modified formula is based on the three-year average population growth rate in order to ensure a consistent increase in expenditure per capita.

Inflation and Monetary Policy

The inflation rate over the last decade (2006 – 2016) was near the middle of the Government’s target range (1% – 3%) and stood at approximately 1.8% annually on average. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. Measured at year-end, the CPI rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013. In 2014, the CPI decreased by 0.2%. Since June 2014, the inflation rate has been below the lower end of the Government’s target range and from September 2014 to December 2016, the inflation rate was negative. In 2015, the CPI decreased by 1.0%. In 2016, the CPI decreased by 0.2%. Since the beginning of 2017, the inflation rate has mostly been positive but still below the lower bound of the target range. The CPI increased by 0.3% during the twelve-month period ending November 30, 2017.

In recent years, Israel has been active in the global sovereign debt markets. In March 2009, Israel issued in the global markets an aggregate $1.5 billion principal amount of 5.125% bonds due 2019. In March 2010, Israel issued in the Euro market an aggregate €1.5 billion ($2.07 billion) principal amount of 4.625% bonds due 2020. In January 2012, Israel issued in the global markets an aggregate $1.5 billion principal amount of 4% bonds due 2022. In January 2013, Israel completed a dual-tranche issuance in the global markets, issuing an aggregate $1 billion principal amount of 3.15% bonds due 2023 and an aggregate $1 billion principal amount of 4.50% bonds due 2043. In January 2014, Israel issued in the Euro market an aggregate €1.5 billion ($2.05 billion) principal amount of 2.875% bonds due 2024. In March 2016, the Government issued $1.5 billion in the global markets, consisting of an aggregate of $1 billion principal amount of 2.875% bonds due March 2026 and $500 million principal amount of 4.50% bonds due January 2043; the 2043 bonds were a further issuance of the 4.50% bonds due 2043, which were issued on January 31, 2013. In October 2016, Israel issued $200 million in the global markets, consisting of 4.50% bonds due 2043; the bonds were a further issuance of the 4.50% bonds due 2043, which were issued on January 31, 2013 and reissued in March 2016. In January 2017, Israel completed a dual-tranche issuance in the Euro market, issuing an aggregate €1.5 billion principal amount of 1.5% bonds due 2027 and an aggregate €750 million principal amount of 2.375% bonds due 2037.

D-4 The NIS/USD exchange rate saw an appreciation of the NIS between the second half of 2012 and the end of July 2014, averaging 3.61 for 2013 and 3.48 for the first half of 2014 (compared to 3.86 in 2012). On July 31, 2012, December 31, 2012, July 31, 2013 and December 31, 2013, the NIS/USD exchange rate stood at 3.997, 3.733, 3.566 and 3.471, respectively. On July 24, 2014, the NIS/USD exchange rate stood at its lowest rate since July 2011, slightly above 3.4. In light of this appreciation, the Bank of Israel made two interest rate cuts in August and September 2014, as discussed above. In the second half of 2014, the NIS/USD exchange rate saw a depreciation of the NIS, as the rate increased from slightly above 3.4 on July 24, 2014 to slightly below 4.0 as of December 31, 2014. The depreciation trend of the NIS relative to the USD continued into the first months of 2015; in March and April 2015, the exchange rate was occasionally higher than 4.0. Between May 2015 and July 2015, the NIS appreciated relative to the USD, and the exchange rate stood at 3.783 as of July 31, 2015. Between July 31, 2015 and December, 31 2015, the NIS gradually depreciated relative to the USD, reaching 3.902 at the end of 2015 and 3.983 on January 20, 2016. Since then, the NIS appreciated to 3.746 on May 2, 2016 but depreciated again to 3.90 on June 27, 2016. The NIS appreciated again during the third quarter of 2016, standing at 3.746 on September 27, 2016 but, in the fourth quarter of 2016, the NIS depreciated again reaching 3.876 and 3.867 on November 24, 2016 and December 19, 2016, respectively. At 2016 year-end, the NIS/USD exchange rate was 3.845. During the first six months of 2017, the NIS gradually appreciated relative to the USD, reaching 3.496 on June 30, 2017. During July and August of 2017, the NIS slightly depreciated relative to the USD, reaching 3.628 as of August 16, 2017. Since then, the NIS has appreciated relative to the USD, reaching 3.467 NIS per USD as of December 29, 2017, the lowest level since August 2014. From the beginning of 2015 to the end of November 2015, the NIS appreciated relative to the Euro, mainly due to the Quantitative Easing in the “eurozone”. The Euro/NIS exchange rate reached its lowest level since 2002 at the beginning of March 2017; in the second and third quarters of 2017, the Euro appreciated relative to NIS, and at the end of August 2017 reached its highest level since the middle of 2016. Since September 2017 and during the fourth quarter of 2017, the Euro depreciated relative to NIS, reaching 4.153 NIS per EUR as of December 29, 2017.

In response to a sharp appreciation of the NIS that began in 2008 and continued until mid-2011, the Bank of Israel initiated a two-year policy of daily purchases of foreign currency. In August 2009, the Bank of Israel announced that it would terminate its daily purchasing of foreign currency but planned to continue purchasing such currency when it deems advisable. Between August 2011 and April 2013, the Bank of Israel did not make substantial foreign currency purchases. In May 2013, the Bank of Israel announced its plan to resume purchasing foreign currency to counteract the adverse effects of natural gas production from the Tamar reservoir, which began operating in late March 2013, on the balance of payments. Appreciation pressures on the NIS began following the commencement of production from the Tamar reservoir. The Bank of Israel’s intervention in the foreign exchange market, for the first time since 2011, was intended to offset the appreciation pressure on the NIS resulting from the increased domestic production of natural gas, in order to avoid the phenomenon known as “Dutch disease”, which could negatively impact the Israeli economy. The Bank of Israel purchased $2.1 billion by the end of 2013 and another $3.5 billion in planned purchases during 2014. The Bank of Israel also purchased $3.5 billion in unplanned purchases during 2014. During 2015, the Bank of Israel purchased $3.1 billion in planned purchases, as it announced in December 2014, and purchased another $5.7 billion in unplanned purchases. During 2016, the Bank of Israel purchased $1.8 billion in planned purchases, as it announced in November 2015, as well as another $4.2 billion in unplanned purchases. In the first eleven months of 2017, the Bank of Israel purchased $6.5 billion in foreign currency, including $1.5 billion in the context of the gas plan. Since the Bank of Israel’s intervention in the foreign exchange market, the Bank of Israel has purchased a total of $12.0 billion in foreign currency within the framework of the gas plan. In November 2017, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2018 would be $1.5 billion and announced that it would purchase foreign currency during 2018 accordingly.

D-5 At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.1 billion as of the end of 2014 and $90.6 billion as of the end of 2015. The official reserves increased further, amounting to $98.4 billion as of the end of 2016. As of the end of November 2017, the official reserves stood at $112.08 billion.

Labor Market

The rate of unemployment dropped to 4.8% in 2016, compared to 5.3% in 2015, reflecting a significant decrease compared to 5.9% in 2014, 6.2% in 2013 and 6.9% in 2012. The unemployment rate continued its downward trend in the first eleven months of 2017, reaching 4.3% in November 2017. The participation rate increased from 62.6% at the beginning of 2012 to 64.2% in the fourth quarter of 2014. In 2015 and 2016, the participation rate was stable at 64.1%, slightly lower than the 2014 rate. As of November 2017, the participation rate decreased slightly to 63.8%. Due to the high participation rate, low unemployment rate and the incremental rise in minimum wages, the growth rate of wages has significantly accelerated since the beginning of 2015.

Capital Markets

The Tel-Aviv Stock Exchange (the “TASE”) is Israel’s sole stock exchange, and the Tel-Aviv 125 (“TA-125”) (formerly the TA-100) and Tel-Aviv 35 (“TA-35”) (formerly the TA-25) are its main indices and primary indicators of the stock price performance of Israel’s public companies. The TA-100 and TA- 25 measured the 100 and 25 companies, respectively, with the highest market capitalization listed on the TASE. The TASE is highly correlated with major stock markets in developed countries. The global financial crisis and overall weakening in global growth starting in 2008 have affected Israel’s public companies. The TA-100 fell by 51.1% in 2008 but recovered in 2009 and 2010, rising by 88.8% and 14.9%, respectively. In 2011, the TA-100 fell by 20.1% and the TA-25 fell by 18.2%. The TASE partially recovered in 2012, with the TA-100 and TA-25 rising by 7.2% and 9.2%, respectively. This recovery continued into 2013 as the TA-100 and TA-25 increased by 15.1% and 12.1%, respectively. During 2014, the TA-100 and TA-25 increased by 6.7% and 10.2%, respectively, and in 2015 the TASE continued its upward trend, as the TA-100 and TA-25 rose by 2.0% and 4.4%, respectively. During 2016, the TA- 100 and TA-25 decreased by 2.5% and 3.8%, respectively. In February 2017, the TASE introduced changes to the TA-100 and TA-25 indices, which were renamed the TA-125 and TA-35, respectively, and now measure the 125 and 35 companies, respectively, with the highest market capitalization listed on the TASE. During 2017, the TA-125 and TA-35 trended upward, mainly in the second half of 2017, as those indices increased by 6.4% and 2.7% in 2017, respectively.

In light of the 9.8% appreciation of the NIS against the USD during 2017, the TA-35 increased by 13.8% in USD terms and 2.7% in nominal terms over the course of 2017. The value of the public portfolio of financial assets (a weighted average of the public’s holdings of financial assets and deposits, in Israel and abroad) increased by 8.9% and 6.9% during 2013 and 2014, respectively. In 2015 and 2016, the value of the public portfolio of financial assets increased further by 4.3% and 3.6%, respectively. According to the Bank of Israel’s estimate, the value of the public portfolio of financial assets increased 2.4% in the first ten months of 2017. In provident funds in 2013, there was a net inflow of assets under management of NIS 2.757 billion. In 2014, there was a net inflow of NIS 5.370 billion. In 2015, there was a net inflow of NIS 8.242 billion. In 2016, there was a net inflow of NIS 11.181 billion. For the first ten months of 2017, there was an additional net inflow of NIS 16.113 billion.

The Bank of Israel, together with governmental authorities and regulators, monitors Israeli banks and financial institutions on an ongoing basis, supervising the banking system’s conditions and operations as a whole. In addition, the Bank of Israel cooperates with the Ministry of Finance and the Israel Securities Authority to achieve comprehensive regulation and supervision of Israel’s financial markets, to ensure coordination among the various entities in the financial sector and to set policies and measures that will be implemented and enforced with respect to such entities.

D-6 The Bank of Israel and the Ministry of Finance took several measures in 2011, and again in 2017, to assist in facilitating the achievement of monetary and foreign exchange policy goals, which include increasing transparency and investor confidence, improving analytical abilities with respect to transactions in the foreign exchange market, and reducing short-term investments by foreign investors (see “Foreign Exchange Controls and International Reserves” in the Annual Report for 2016).

Political Situation

In September 2011, the Palestinian Authority filed an application for membership with the United Nations. In November 2012, the General Assembly upgraded the Palestinian Authority’s status in the United Nations from a “non-member observer entity” to a “non-member observer state.”

D-7 In December 2017, the President of the United States recognized Jerusalem as the capital of the State of Israel and announced plans to relocate the U.S. embassy from Tel Aviv to Jerusalem. The full extent of the implications of the U.S. President’s announcements on Israel, the surrounding region and the international community is uncertain.

Since January 2011, there has been political instability and civil unrest in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. This unrest has resulted in the removal of long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. The delicate relations between Israel and its neighbors could become even more fragile with the domestic turmoil and change in regimes. Instability in the Middle East and North Africa region have not so far materially affected Israel’s financial or political situation, and countries who have signed peace agreements with Israel have remained committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not thereby be affected. This uncertainty is highlighted by the growing military presence of Iran and Hezbollah in Syria.

Israel monitors very closely the situation in Syria, in which many dangerous forces operate. The direct threat to Israel from the Syrian military has diminished. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and the possibility that the ongoing civil war will devolve into a state of anarchy.

Privatization

Historically, the Government has been involved in nearly all sectors of the Israeli economy. In the past several decades, privatization has been an essential element of the broader market reforms initiated by the Government, which aim to promote the growth of the private sector, mainly by enhancing competition. Israel has made substantial progress in recent years, resulting in the privatization of many enterprises owned by the State and the reduction of State subsidization of business enterprises. In total, between 1986 and 2016, 100 Government Companies (as defined in “Role of the State in the Economy,” in the Annual Report for 2016) became partially or fully private. The proceeds stemming from these privatizations totaled $14.4 billion. In 2010, privatization proceeds amounted to NIS 4.5 billion (approximately $1.2 billion), partly as a result of the privatization of the State’s interest in two of the five major banks in Israel — Israel’s entire remaining stake in Israel Discount Bank Ltd. and 5% of the outstanding equity securities of Bank Leumi Le-Israel Ltd. On June 9, 2014, the Finance Committee of the Knesset approved the Government’s request to sell its remaining stake in Bank Leumi over the following year. The Government did not exercise its right to sell its remaining stake in Bank Leumi, and the Knesset’s approval expired on June 9, 2015. Currently, the Government holds approximately 6.03% of Bank Leumi’s outstanding equity securities. The Government plans to continue with the process of privatizing its interests in financial institutions, as well as State-owned land, seaports, the Postal Authority, energy and transportation utilities and parts of the defense industry (see “The Economy — Role of the State in the Economy,” in the Annual Report for 2016).

D-8 Loan Guarantee Program

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 influx of immigrants over this period. Israel completed its financings under this program in January 1998. In April 2003, the United States approved up to $9 billion in additional loan guarantees for Israel to be issued during U.S. government fiscal years 2003 through 2005, with an option to extend the program by an additional year. In 2005, the United States approved Israel’s request to extend the $9 billion program for two more years; in 2006, this program was extended again through U.S. fiscal year 2011 (with an option to carry forward unused guarantee amounts for an additional year); and in 2012, the program was extended again through 2016. On October 24, 2012, the United States and Israel entered into an agreement establishing a new framework for administering the extended program. A further extension of the program was signed into law by the President of the United States on December 18, 2015. The new law extends the program until September 30, 2019 (with an option to carry forward unused guarantee amounts for an additional year) and allows the United States to provide access to up to $3.8 billion in future loan guarantees as part of the $9 billion commitment made in 2003.

The amount of guarantees that may be issued to Israel under the loan guarantee program may be reduced by an amount equal to the amount extended or estimated to have been extended by Israel for activities that the President of the United States determines are inconsistent with the objectives and understandings reached between the United States and Israel regarding the implementation of the loan guarantee program. Under the program, the United States issues guarantees with respect to all payments of principal and interest on certain bonds issued by Israel. The proceeds of the guaranteed loans may be used to refinance existing debt. Under the $9 billion loan guarantee program, between September 2003 and November 2004 Israel issued guaranteed notes totaling $4.1 billion face value. Israel has not issued any notes under the loan guarantee program since November 2004, and up to $3.8 billion of U.S. loan guarantees (subject to the reductions described above) remains available.

D-9 Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2012 2013 2014 2015 2016 Main Indicators GDP (at constant 2015 prices) 1,050.5 1,094.7 1,132.8 1,162.5 1,208.6 Real GDP growth 2.2% 4.2% 3.5% 2.6% 4.0% GDP per capita (at constant 2015 prices) 132,857 135,885 137,938 138,775 141,464 GDP per capita, percentage change 0.3% 2.3% 1.5% 0.6% 1.9% Inflation (change in CPI – annual average) 1.7% 1.5% 0.5% -0.6% -0.5% Industrial production 4.0% 0.5% 1.2% 2.2% 1.7% Business sector product (at constant 2015 prices) 774.4 811.4 840.0 862.4 899.1 Permanent average population (thousands) 7,907 8,056 8,212 8,377 8,543 Unemployment rate(1) 6.9% 6.2% 5.9% 5.3% 4.8% Foreign direct investment (net inflows, in billions of dollars) 9.0 11.8 6.0 11.3 11.9

Trade Data Exports (F.O.B) of goods and services (NIS, at constant 2015 prices) 354.9 366.6 373.5 363.5 372.8 Imports (F.O.B) of goods and services (NIS, at constant 2015 prices) 317.4 316.8 329.5 328.5 359.4

Government Debt(2) Total gross government debt (at end-of-year current prices)(3) 666.8 696.3 715.8 726.7 740.8 Total gross government debt as percentage of GDP 67.1% 65.7% 64.9% 62.5% 60.7%

External Debt External debt liabilities (in millions of dollars, at year end) 100,497 99,988 94,176 85,917 87,734 Net external debt (in millions of dollars, at year end) -70,273 -84,105 -103,093 -122,161 -133,746

Revenues and Expenditures (net) Revenues and grants 238.7 260.6 273.7 289.8 301.4 Expenditures 377.0 389.5 402.6 381.7 424.7 Expenditures other than capital expenditures 262.8 278.6 287.0 293.3 312.6 Development expenditures (including repayments of debt) 114.2 110.9 115.6 88.3 112.2 Repayments of debt 98.0 94.4 99.1 66.7 88.1

(1) Reflects changes in the Central Bureau of Statistics’ labor survey methodology, resulting in higher values in the unemployment rate line items.

(2) Government debt excluding local authorities’ debt.

(3) Risk Management Dept., Debt Unit, Ministry of Finance.

Sources: Central Bureau of Statistics, Bank of Israel and Ministry of Finance.

D-10 Exhibit H

STATE OF ISRAEL MINISTRY OF FINANCE

OFFICE OF THE LEGAL ADVISOR

State of Israel Ministry of Finance Jerusalem, Israel

January 17, 2018

Re: Registration Statement of the State of Israel on Schedule B Registration Statement No. 333-184134

Ladies and Gentlemen:

I, the Legal Advisor to the Ministry of Finance of the State of Israel (“Israel”), have reviewed the above-referenced Registration Statement (the “Registration Statement”), the Prospectus dated January 6, 2016 (the “Prospectus”), the Prospectus Supplement dated January 10, 2018 (the “Prospectus Supplement”), the Fiscal Agency Agreement dated as of March 13, 2000, as amended by Amendment No. 1 to the Fiscal Agency Agreement dated as of February 24, 2004 and as amended by Amendment No. 2 to the Fiscal Agency Agreement dated as of January 5, 2016 (as so amended, the “Fiscal Agency Agreement”), between Israel and Citibank, N.A., as the fiscal agent, and the Underwriting Agreement dated January 10, 2018 (the “Underwriting Agreement” and, together with the Fiscal Agency Agreement, the “Agreements”) by and among Israel and Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Goldman Sachs & Co. LLC (collectively, the “Underwriters”), pursuant to which Israel has issued and offered for sale U.S.$1,000,000,000 aggregate principal amount of Israel’s 3.250% bonds due 2028 (the “2028 Bonds”) and U.S.$1,000,000,000 aggregate principal amount of Israel’s 4.125% bonds due 2048 (the “2048 Bonds” and, together with the 2028 Bonds, the “Offered Securities”). Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Underwriting Agreement.

The issuance of the Offered Securities has been authorized pursuant to the State Property Law of Israel.

It is my opinion that when the Offered Securities have been duly authorized, executed and delivered by Israel, authenticated in accordance with the Agreements and delivered to and paid for by the Underwriters as contemplated by the Registration Statement and the Agreements, the Offered Securities will constitute valid and legally binding direct and unconditional obligations of Israel under and with respect to the present laws of Israel. It is also my opinion that the principal anticipated Israeli tax consequences of the purchase, ownership and disposition of the Offered Securities are as set forth in that section of the Prospectus Supplement entitled “Taxation – Israeli Taxation”.

I consent to the filing of this opinion as an exhibit to Amendment No. 3 to the Annual Report of the State of Israel on Form 18-K for the fiscal year ended December 31, 2016, and to the use of my name and title under the headings “Validity of the Bonds” in the Prospectus Supplement and “Validity of the Debt Securities” in the Prospectus. In giving the foregoing consent, I do not thereby admit that I am in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission (the “SEC”) thereunder. I also consent to the reliance on this opinion by Arnold & Porter Kaye Scholer LLP as to any matter relating to the laws of Israel, in connection with any opinion required to be filed with or delivered to the SEC.

Very truly yours,

/s/ Asi Messing

Asi Messing The Legal Advisor Ministry of Finance Exhibit I

January 17, 2018

Ministry of Finance Government of Israel 1 Kaplan Street Hakirya, Jerusalem 91008 ISRAEL

Ladies and Gentlemen:

We have acted as special United States counsel for the Government of Israel (“Israel”) in connection with the issuance and offering for sale of U.S.$1,000,000,000 aggregate principal amount of its 3.250% bonds due 2028 (the “2028 Bonds”) and U.S.$1,000,000,000 aggregate principal amount of its 4.125% bonds due 2048 (the “2048 Bonds” and, together with the 2028 Bonds, the “Bonds”) in the form of a takedown from Israel’s Registration Statement No. 333-184134 under Schedule B (the “Registration Statement”). The issuance and offering for sale of the Bonds are collectively referred to herein as the “Offering”. In connection with the Offering we have reviewed the Registration Statement, the Prospectus dated January 6, 2016 (the “Prospectus”), the Prospectus Supplement dated January 10, 2018 (the “Prospectus Supplement”), the Fiscal Agency Agreement dated as of March 13, 2000, as amended by Amendment No. 1 to Fiscal Agency Agreement dated as of February 24, 2004 and as amended by Amendment No. 2 to Fiscal Agency Agreement dated as of January 5, 2016 (as so amended, the “Fiscal Agency Agreement”) between Israel and Citibank, N.A., as the fiscal agent, and the Underwriting Agreement dated January 10, 2018 (the “Underwriting Agreement”) by and among Israel and Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and Goldman Sachs & Co. LLC (collectively, the “Underwriters”). We have also reviewed Amendment No. 3 to Israel’s Annual Report on Form 18-K/A for the fiscal year ended December 31, 2016 (the “Amendment”) filed with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended. The Underwriting Agreement and the Fiscal Agency Agreement are collectively defined herein as the “Agreements”.

In rendering the opinion expressed below, we have examined such certificates of public officials, government documents and records and other certificates and instruments furnished to us, and have made such other investigations, as we have deemed necessary in connection with the opinion set forth herein. Furthermore, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the authority of Israel to enter into the Agreements and cause the issuance of the Bonds, and the conformity to authentic originals of all documents submitted to us as copies. As to any document originally prepared in any language other than English and submitted to us in translation, we have assumed the accuracy of the English translation. Ministry of Finance Government of Israel January 17, 2018 Page 2

This opinion is limited to the federal laws of the United States and the laws of the State of New York, and we do not express any opinion herein concerning the laws of any other jurisdiction. Insofar as the opinion set forth herein relates to matters of the laws of Israel, we have relied upon the opinion of the Legal Advisor to the Ministry of Finance of the State of Israel, a copy of which is being filed as an exhibit to the Amendment, and our opinion herein is subject to any and all exceptions and reservations set forth therein.

Based upon and subject to the foregoing and assuming the due authorization of the Bonds by Israel, we are of the opinion that when the Bonds have been duly authorized, issued, and executed by Israel and authenticated, delivered, and paid for as contemplated by the Agreements, the Prospectus and any amendment and supplement thereto, the Bonds will constitute valid and legally binding direct and unconditional obligations of Israel under the laws of the State of New York, subject to bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, receivership and similar laws relating to or affecting creditors’ rights generally and to equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law).

We are also of the opinion that the material anticipated U.S. federal income tax consequences of the purchase, ownership, and disposition of the Bonds are as set forth in that section of the Prospectus Supplement entitled “Taxation – United States”.

We hereby consent to the filing of this opinion as an exhibit to the Amendment and to the reference to this firm under the heading “Validity of the Bonds” in the Prospectus Supplement and under the heading “Validity of the Debt Securities” in the Prospectus. In giving the foregoing consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission thereunder.

Very truly yours,

/s/ Arnold & Porter Kaye Scholer LLP Exhibit J

STATE OF ISRAEL

Underwriting Agreement

New York, New York January 10, 2018

Citigroup Global Markets Inc. Deutsche Bank Securities Inc. Goldman Sachs & Co. LLC

c/o Deutsche Bank Securities Inc. 60 Wall Street New York, New York 10005

Ladies and Gentlemen:

The Government of Israel on behalf of the State of Israel (“Israel”) proposes to sell to you (the “Underwriters”) $1,000,000,000 principal amount of its 3.250% Bonds due 2028 (the “2028 Bonds”) and $1,000,000,000 principal amount of its 4.125% Bonds due 2048 (the “2048 Bonds” and, together with the 2028 Bonds, the “Offered Securities”) pursuant to the provisions of a Fiscal Agency Agreement dated as of March 13, 2000, as amended by Amendment No. 1 to Fiscal Agency Agreement dated as of February 24, 2004 and Amendment No. 2 to Fiscal Agency Agreement dated as of January 5, 2016 (as so amended, the “Fiscal Agency Agreement”), in each case between Israel and Citibank, N.A., as fiscal agent (the “Fiscal Agent”).

The terms that follow, when used in this Agreement, shall have the meanings indicated:

“Act” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.

“Basic Prospectus” means the prospectus included in the Registration Statement in the form filed with the Commission, which prospectus, pursuant to Rule 429 of the Act, relates to the Registration Statement, as such prospectus is amended or supplemented to the date of this Agreement, but excluding any amendments or supplements related solely to an offering of a series of debt securities other than the Offered Securities.

“Commission” means the Securities and Exchange Commission. “Effective Date” shall mean each date that the Registration Statement and any post-effective amendment or amendments or deemed amendment or amendments thereto became or becomes effective.

“Execution Time” shall mean 12:45 p.m. Eastern time on the date of this Agreement.

“free writing prospectus” has the meaning set forth in Rule 405.

“issuer free writing prospectus” has the meaning set forth in Rule 433.

“preliminary prospectus” means any preliminary form of the Prospectus used in connection with the offering of the Offered Securities that omits Rule 430A Information, including, without limitation, the Basic Prospectus and any preliminary prospectus supplement.

“Prospectus” means the Basic Prospectus together with the prospectus supplement.

“prospectus supplement” means the final prospectus supplement filed with the Commission pursuant to Rule 424, specifically relating to the Offered Securities.

“Registration Statement” means the registration statement filed on Schedule B with the Commission on September 27, 2012 (Registration Statement File No. 333-184134), which Registration Statement was declared effective by the Commission on November 30, 2012. To the extent any post-effective amendment or deemed amendment to the Registration Statement has (or, prior to the Closing Date (as defined below), does) become effective, the term “Registration Statement” shall also mean such registration statement as so amended or deemed amended. The term “Registration Statement” shall also include any Rule 430A Information deemed to be included in the Registration Statement at the Effective Date as provided by Rule 430A.

“Release” means Release No. 33-6424 under the Act relating to delayed offerings by foreign governments or political subdivisions thereof.

“Rule 164”, “Rule 405”, “Rule 415”, “Rule 424”, “Rule 430A” and “Rule 433” refer to such rules under the Act as applicable to registration statements subject to Schedule B under the Act in accordance with the Release and, to the extent any such rule is not directly applicable, mean the provisions thereunder as made applicable by the Release.

“Rule 430A Information” means information with respect to the Offered Securities and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A.

2 “Time of Sale Prospectus” means the preliminary prospectus and the free writing prospectuses, if any, and other information, in each case identified in Schedule II hereto.

As used herein, the terms “Registration Statement”, “Basic Prospectus”, “Prospectus”, “preliminary prospectus” and “Time of Sale Prospectus” shall include in each case the material, if any, incorporated by reference therein.

1. Representations and Warranties. Israel represents and warrants to, and agrees with, each Underwriter as set forth in this Section 1.

(a) Israel meets the requirements for use of Schedule B under the Act, is a “seasoned foreign government” within the meaning of the Release and has filed with the Commission the Registration Statement, including a form of Basic Prospectus, for registration under the Act of the offering and sale of the Offered Securities. Israel may have filed with the Commission one or more amendments to the Registration Statement and may have used a preliminary prospectus, each of which has previously been furnished to the Underwriters. Such Registration Statement, as so amended, has become effective. Although the Basic Prospectus may not include all the information with respect to the Offered Securities and the offering thereof required by the Act and the rules thereunder to be included in the Prospectus, the Basic Prospectus included all such information required by the Act and the rules thereunder as applicable pursuant to the Release to be included therein as of each Effective Date. Israel will hereafter file with the Commission pursuant to the Release and Rules 415 and 424(b) (2) or (5) either (x) a prospectus supplement to the Basic Prospectus or (y) an amendment to such Registration Statement, including such prospectus supplement. In the case of clause (x), Israel has included in such Registration Statement, as amended as of the latest Effective Date, the information required for such procedure pursuant to the Release. As filed, such prospectus supplement or such amendment and prospectus supplement shall include all such required information with respect to the Offered Securities and the offering thereof and, except to the extent the Underwriters shall agree in writing to any modification thereof, shall be in all substantive respects in the form furnished to the Underwriters prior to the Execution Time or, to the extent not completed at the Execution Time, shall be in such form with only such specific additional information and other changes (beyond those contained in the Basic Prospectus and any preliminary prospectus) as Israel has advised the Underwriters, prior to the Execution Time, will be included or made therein and to which the Underwriters shall have agreed.

3 (b) (i) On the Effective Date of any part of the Registration Statement, such part of the Registration Statement did or will, (ii) on the date filed, each preliminary prospectus did or will, and (iii) when the Prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date, the Prospectus (as supplemented in the case of the Closing Date) will, in each case, comply in all material respects with the applicable requirements of the Act, the rules thereunder and the Release; on the Effective Date of any part of the Registration Statement, such part of the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; the Registration Statement as of the date hereof does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; the Time of Sale Prospectus does not, and at the time of each sale of the Offered Securities in connection with the offering and at the Closing Date, the Time of Sale Prospectus, as then amended or supplemented by Israel, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; the Prospectus does not contain and, as amended or supplemented, if applicable, at the Closing Date will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that Israel makes no representations or warranties as to the information contained in or omitted from the Registration Statement, the Time of Sale Prospectus or the Prospectus (or any supplement thereto) in reliance upon and in conformity with information furnished in writing to Israel by or on behalf of any Underwriter specifically for inclusion in the Registration Statement, the Time of Sale Prospectus or the Prospectus (or any supplement thereto), it being understood and agreed that the only such information is that described as such in the last sentence of Section 9(b) hereof.

(c) Israel is not an “ineligible issuer” in connection with the offering pursuant to Rules 164, 405 and 433. Any free writing prospectus that Israel is required to file pursuant to Rule 433(d) has been, or will be, filed with the Commission in accordance with the requirements of the Act. Each free writing prospectus that Israel has filed, or is required to file, pursuant to Rule 433(d) or that was prepared by or on behalf of or used or referred to by Israel complies or will comply in all material respects with the requirements of the Act. Except for (i) the free writing prospectuses, if any, identified in Schedule II hereto, and (ii) the electronic roadshow (the “Roadshow”), in each case, furnished to the Underwriters before first use, Israel has not prepared, used or referred to, and will not, without the prior consent of the Underwriters, prepare, use or refer to, any free writing prospectus. The Roadshow, when taken together with the Time of Sale Prospectus at the time of each sale of the Offered Securities in connection with the offering, does not, and at the Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that Israel makes no representations or warranties as to the information contained in or omitted from the Time of Sale Prospectus in reliance upon and in conformity with information furnished in writing to Israel by or on behalf of any Underwriter specifically for inclusion therein, it being understood and agreed that the only such information is that described as such in the last sentence of Section 9(b) hereof.

4 (d) The issuance and sale of the Offered Securities have been duly authorized, and, when duly executed, authenticated, issued and delivered as provided in the Fiscal Agency Agreement and paid for in accordance with the terms hereof, will be duly and validly issued and outstanding, and will constitute valid and binding obligations of Israel for the payment and performance of which the full faith and credit of Israel will be pledged; the Offered Securities will rank without preference among themselves and equally with all other unsecured and unsubordinated “external indebtedness” (as defined in the Offered Securities) of Israel (it being understood that Israel will not be required to make payments under the Offered Securities ratably with payments being made under any other “external indebtedness” (as defined in the Offered Securities) of Israel); and the Offered Securities, when issued and delivered, will conform to the description thereof contained in the Prospectus.

(e) Israel is a member of the International Monetary Fund and the International Bank for Reconstruction and Development.

(f) Israel is not a party to any agreement with the United States of America relating in any way to the immunity of Israel from jurisdiction of courts, suit, execution upon a judgment, attachment prior to judgment or in aid of execution upon a judgment or any other legal process. Israel is, under the law of Israel, subject to civil and commercial law with respect to its obligations under this Agreement, the Fiscal Agency Agreement and the Offered Securities and has agreed not to assert the defense of immunity, on the grounds of sovereignty or otherwise, in respect of any suit, action or proceeding arising out of or relating to claims under this Agreement, the Fiscal Agency Agreement or the Offered Securities, except any such suit, action or proceeding instituted by a holder of the Offered Securities (other than an Underwriter instituting such suit, action or proceeding in its capacity as an Underwriter under this Agreement) arising out of or based on United States Federal or state securities laws.

5 (g) None of Israel nor, to the best of Israel’s knowledge, any minister, official, agent, employee or affiliate of Israel, is currently a target of any economic sanctions or trade embargoes administered by the Office of Foreign Assets Control of the United States Department of Treasury (“OFAC”), any other United States, European Union, United Nations, United Kingdom or other relevant economic sanctions or trade embargoes that are applicable to Israel (collectively, “Sanctions” and each such target, a “Sanctions Target”) and will not directly or indirectly lend, invest, contribute or otherwise make available the proceeds of the offering of the Offered Securities to or for the benefit of any then-current Sanctions Target, or for any purpose or any activity that would cause any person participating in the offering of the Offered Securities to be in violation of any Sanctions.

(h) (1) Neither Israel nor, to the best of Israel’s knowledge, any minister, official, agent, employee, affiliate of or person acting on behalf of Israel, has engaged in any activity or conduct or taken any action, directly or indirectly, that would result in a violation by such persons of any applicable provision of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), the UK Bribery Act 2010 or any other applicable anti-bribery or anti-corruption law or regulation, which would be material in the context of the issue of the Offered Securities and (2) Israel has instituted, maintains and will continue to maintain and enforce policies and procedures designed to prevent violation of such laws, regulations and rules by Israel and by persons associated with Israel.

(i) The operations of Israel have been conducted at all times in compliance with applicable financial record keeping and reporting requirements and money laundering statutes, rules and regulations to which Israel is subject (collectively, “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving Israel with respect to Money Laundering Laws is pending and, to the best of Israel’s knowledge, no such actions, suits or proceedings are threatened or contemplated.

2. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, Israel agrees to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from Israel, at a purchase price of 99.166% of the principal amount thereof with respect to the 2028 Bonds and at a purchase price of 98.848% of the principal amount thereof with respect to the 2048 Bonds, plus accrued interest on the Offered Securities from January 17, 2018 to the Closing Date, the principal amount of the Offered Securities set forth opposite such Underwriter’s name in Schedule I hereto.

6 3. Delivery and Payment. Delivery of and payment for the Offered Securities shall be made at 10:00 a.m., New York City time, on January 17, 2018, which date and time may be postponed by agreement between the Underwriters and Israel or as provided in Section 10 hereof (such date and time of delivery and payment for the Offered Securities being herein called the “Closing Date”). Delivery of the Offered Securities shall be made to the Underwriters through the facilities of The Depository Trust Company for the respective accounts of the several Underwriters against payment by the several Underwriters of the purchase price thereof to or upon the order of Israel by certified or official bank check or checks drawn on or by a New York Clearing House bank and payable in next day funds. Delivery of the Offered Securities shall be made at such location as the Underwriters shall reasonably designate at least one business day in advance of the Closing Date, and payment for the Offered Securities shall be made at the offices of Cravath, Swaine & Moore LLP, Worldwide Plaza, 825 Eighth Avenue, New York, New York, 10019. Certificates for the Offered Securities shall be registered in such names and in such denominations as the Underwriters may request not less than two full business days in advance of the Closing Date.

Israel agrees to have the Offered Securities available for inspection, checking and packaging by the Underwriters in New York, New York, not later than 1:00 p.m. on the business day prior to the Closing Date.

4. Offering by Underwriters. Each Underwriter, severally and not jointly, represents, warrants and agrees that (a) it will only communicate or cause to communicate an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (“FSMA”) received by it in connection with the issue or sale of any Offered Securities in circumstances in which Section 21 (1) of FSMA does not apply to Israel and (b) it has complied and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the Offered Securities in, from or otherwise involving the United Kingdom. Each Underwriter severally covenants with Israel not to take any action that would, but for the action of such Underwriter, result in Israel being required to file with the Commission under Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that otherwise would not be required to be filed by Israel.

5. Agreements. Israel agrees with the several Underwriters that:

(a) Israel will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereto, to become effective as soon as reasonably practicable thereafter. Prior to the termination of the offering of the Offered Securities, Israel will not file any amendment of the Registration Statement or supplement (including the Prospectus or any preliminary prospectus) to the Basic Prospectus or the Time of Sale Prospectus unless Israel has furnished the Underwriters a copy for their review prior to filing and will not file any such proposed amendment or supplement to which the Underwriters reasonably object, unless Israel is otherwise advised by its U.S. counsel that such filing is required under the Act. Subject to the foregoing sentence, Israel will cause the Prospectus, properly completed, and any supplement thereto to be filed with the Commission pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed by such Rule and will promptly provide evidence satisfactory to the Underwriters of such timely filing. Israel will promptly advise the Underwriters (i) when the Registration Statement, if not effective at the Execution Time, and any amendment thereto, shall have become effective, (ii) when the Prospectus, and any supplement thereto, shall have been filed with the Commission pursuant to Rule 424(b), (iii) when, prior to termination of the offering of the Offered Securities, any amendment to the Registration Statement shall have been filed or become effective, (iv) of any request by the Commission for any amendment of the Registration Statement or supplement to the Prospectus or for any additional information, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (vi) of the receipt by Israel of any notification with respect to the suspension of the qualification of the Offered Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. Israel will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued or suspended, to obtain as soon as possible the withdrawal thereof.

7 (b) Israel will furnish to the Underwriters a copy of each proposed free writing prospectus related to the Offered Securities to be prepared by or on behalf of, used by, or referred to by Israel and will not use or refer to any proposed free writing prospectus to which the Underwriters reasonably object.

(c) Israel will not take any action that would result in an Underwriter or Israel being required to file with the Commission pursuant to Rule 433(d) a free writing prospectus prepared by or on behalf of such Underwriter that such Underwriter otherwise would not have been required to file thereunder.

(d) If the Time of Sale Prospectus is being used to solicit offers to buy the Offered Securities at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, Israel shall forthwith prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.

8 (e) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act or the respective rules thereunder, Israel promptly will (i) prepare and file with the Commission, subject to the second sentence of paragraph (a) of this Section 5, an amendment or supplement that will correct such statement or omission or effect such compliance and (ii) supply any supplemented Prospectus to the Underwriters in such quantities as they may reasonably request.

(f) Subject to Section 6, Israel will endeavor to qualify the Offered Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Underwriters shall reasonably request and to pay all expenses (including reasonable fees and disbursements of counsel) in connection with such qualification and in connection with the determination of the eligibility of the Offered Securities for investment under the laws of such jurisdictions as the Underwriters may reasonably designate; provided, however, that Israel shall not be obligated to file any general or unlimited consent to service of process in any jurisdiction.

(g) Israel will make generally available to holders of the Offered Securities, as soon as practicable, a statement in the English language of revenues and expenditures of Israel covering the first full fiscal year of Israel beginning after the date of this Agreement that will satisfy the provisions of Section 11(a) of the Act; it is understood that this undertaking shall be deemed satisfied if Israel has filed its Annual Report on Form 18-K for the year ended December 31, 2019.

(h) So long as any of the Offered Securities are outstanding, Israel will furnish to the Underwriters copies of all reports and financial and statistical data filed with the Commission in connection with the Offered Securities.

(i) Until the business day following the Closing Date, Israel will not, without the consent of the Underwriters, offer, or sell in the United States, or announce the offering in the United States of, any securities other than (i) the Offered Securities and (ii) normal course offers of State of Israel Bonds sold through the Development Corporation for Israel.

9 (j) Israel will furnish to the Underwriters and counsel for the Underwriters, without charge, copies of the Registration Statement (including exhibits thereto) and, so long as delivery of a prospectus by an Underwriter or dealer relating to the Offered Securities may be required by the Act, as many copies of any preliminary prospectus, the Time of Sale Prospectus and the Prospectus and any supplement thereto as the Underwriters may reasonably request.

(k) Israel will use its best efforts to cause the Offered Securities to be listed on the Luxembourg Stock Exchange.

6. Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, except as set forth in the next sentence and as provided in Section 8 hereof, the Underwriters will pay all costs and expenses incident to the performance of the obligations of Israel hereunder, including, without limiting the generality of the foregoing, (i) all of the Underwriters’ costs and expenses related to the Roadshow, (ii) all costs and expenses incident to the printing and distributing of any preliminary prospectus, the Time of Sale Prospectus, the Prospectus and any amendments thereof or supplements thereto, (iii) any costs and expenses, including fees of listing agents, in connection with the listing of the Offered Securities on the Luxembourg Stock Exchange, (iv) all costs and expenses (including reasonable fees of counsel to the Underwriters and their disbursements) incurred in connection with “Blue Sky” qualifications, (v) any fees of the Fiscal Agent and (vi) all costs and expenses of the Underwriters’ Israeli, United States and any other outside counsel. Whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, Israel will pay (i) all costs and expenses incident to the filing with the Commission of the Registration Statement (including all exhibits thereto), any preliminary prospectus, the Prospectus and any amendments thereof or supplements thereto (including any issuer free writing prospectus), (ii) any fees charged by securities rating services for rating the Offered Securities, (iii) all of Israel’s costs and expenses related to the Roadshow, (iv) all costs and expenses related to the eligibility and acceptance of the Offered Securities for deposit with The Depository Trust Company and (v) all costs and expenses of Israel’s Israeli, United States and any other outside counsel.

7. Conditions to the Obligations of the Underwriters. The obligations of the Underwriters to purchase the Offered Securities shall be subject to the accuracy in all material respects of the representations and warranties on the part of Israel contained herein as of the time of the execution of this Agreement and the Closing Date, to the accuracy in all material respects of the statements of Israel made in any certificates delivered pursuant to the provisions hereof, to the performance by Israel of its obligations hereunder and to the following additional conditions:

(a) If filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b), the Prospectus, and any such supplement, shall have been filed in the manner and within the time period required by Rule 424(b) and in accordance with Section 5(a) of this Agreement; no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened; and any request of the Commission for additional information shall have been complied with to the satisfaction of the Underwriters.

10 (b) Israel shall have furnished to the Underwriters the written opinion, satisfactory to the Underwriters, of the Legal Advisor to the Ministry of Finance of the State of Israel (the “Legal Advisor”) dated the Closing Date, to the effect that:

(i) the Offered Securities have been duly and validly authorized and executed in accordance with the laws of Israel and, when duly authenticated in accordance with the terms of the Fiscal Agency Agreement and delivered and paid for in accordance with the terms of this Agreement, will be valid and binding obligations of Israel entitled to the benefits of the Fiscal Agency Agreement;

(ii) the obligations of Israel under the Fiscal Agency Agreement, this Agreement and the Offered Securities are and will be direct, general, unconditional, unsecured and unsubordinated “external indebtedness” (as such term is defined in the Offered Securities) of Israel, and are, under the laws of Israel, subject to civil and commercial substantive and procedural law and to the procedural requirements relating to enforcement and recognition of foreign judgments. The Offered Securities will rank without preference among themselves and equally with all other unsecured and unsubordinated “external indebtedness” (as such term is defined in the Offered Securities) of Israel (it being understood that Israel will not be required to make payments under the Offered Securities ratably with payments being made under any other “external indebtedness” (as defined in the Offered Securities) of Israel); the full faith and credit of Israel has been pledged for the due and punctual payment of the principal of and interest on the Offered Securities and for the performance of the obligations of Israel with respect thereto;

(iii) Israel has the power and authority required for the execution and delivery of this Agreement, the issuance of the Offered Securities and the performance by Israel of its obligations thereunder and hereunder and under the Fiscal Agency Agreement; and none of the execution or delivery by Israel of this Agreement or the Offered Securities, the performance of its obligations hereunder or thereunder or under the Fiscal Agency Agreement, or the fulfillment by Israel of the terms hereof or thereof or under the Fiscal Agency Agreement requires, under Israeli law, any publication, waiver, consent, filing, registration, authorization or approval;

11 (iv) the Fiscal Agency Agreement has been duly authorized, executed and delivered by Israel in accordance with the laws of Israel and is a valid and binding agreement of Israel;

(v) this Agreement has been duly authorized, executed and delivered by Israel in accordance with the laws of Israel;

(vi) all statements in the Registration Statement, the Time of Sale Prospectus and the Prospectus with respect to or involving laws, statutes and regulations of or pertaining to Israel are accurate in all material respects and fairly present the information purported to be shown;

(vii) the provisions of this Agreement and the Offered Securities wherein Israel consents to the jurisdiction of certain courts in the United States and agrees not to assert the defense of immunity, on the grounds of sovereignty or otherwise, are valid and binding; final judgment against Israel in any such suit, action or proceeding brought, in accordance with such provisions, in the courts of Israel or Federal or state courts in the City of New York would be conclusive and binding upon Israel and may be enforced in the courts of Israel, without retrial or reexamination but subject to the procedural requirements relating to enforcement and recognition of foreign judgments;

(viii) under Israeli law in effect as of the date of such opinion, payments made under the Offered Securities to holders who are not residents of Israel will be exempt from Israeli taxation; and for the aforementioned holders there are no transfer, stamp or similar taxes or duties or other charges under the laws of Israel payable in connection with the issuance, transfer and sale of the Offered Securities or the execution and delivery of this Agreement;

(ix) the choice of New York law to govern the validity, construction and performance of this Agreement, the Offered Securities and the Fiscal Agency Agreement would be upheld by an Israeli court as a valid and effective choice of law under the laws of Israel;

(x) none of the execution or delivery by Israel of this Agreement or the Offered Securities, the performance by Israel of its obligations hereunder or thereunder or under the Fiscal Agency Agreement, or the fulfillment by Israel of the respective terms hereof or thereof or of the Fiscal Agency Agreement, will violate any constitutional or treaty provision, convention, statute, law, regulation, decree, court order or similar authority binding upon Israel or, to the best knowledge of the Legal Advisor after due inquiry, violate any order, rule or regulations of any Israeli court, regulatory body, or administrative body or governmental body;

12 (xi) none of the execution or delivery by Israel of this Agreement or the Offered Securities, the performance by Israel of its obligations hereunder or thereunder or under the Fiscal Agency Agreement, or the fulfillment of the respective terms hereof or thereof or of the Fiscal Agency Agreement by Israel, will, to the best knowledge of the Legal Advisor after due inquiry, violate, or result in a breach of, the terms of, or cause a default under, any note, note agreement, bank loan or any other agreement or instrument for money borrowed to which Israel is a party;

(xii) there is no action, suit or proceeding pending, or to the best knowledge of the Legal Advisor after due inquiry, threatened against or affecting Israel, before any court or administrative agency in Israel challenging the validity or enforceability of this Agreement, the Fiscal Agency Agreement or the Offered Securities or the transactions contemplated hereby or thereby;

(xiii) the Registration Statement, as amended, any preliminary prospectus supplement, and the Prospectus, and their filing with the Commission have been duly authorized by and on behalf of Israel, and the Registration Statement has been duly executed on behalf of Israel; and

(xiv) the appointment of the Authorized Agent in Section 13 below and any waiver in that section by Israel with respect thereto are legal, valid and binding in accordance with their respective terms under the laws of Israel.

The Legal Advisor shall further confirm that appropriate officials in the Ministry of Finance have been apprised of the disclosure standards applicable to the offering described in this Agreement and have reviewed the Registration Statement, Time of Sale Prospectus and the Prospectus. Based on such review, the results of which have been discussed with the Legal Advisor, the Legal Advisor shall confirm that, although the Legal Advisor shall not have made an independent investigation or verification of the correctness and completeness of the information included in the Registration Statement, Time of Sale Prospectus or the Prospectus, nothing has come to the Legal Advisor’s attention that would lead the Legal Advisor to believe that (except as to the financial and statistical data contained therein, as to which the Legal Advisor need not express any belief) (a) the Registration Statement, as of the Effective Date and as of the date of this Agreement, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make statements therein not misleading, (b) the Time of Sale Prospectus, as of the Execution Time, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (c) the Prospectus, as amended or supplemented, as applicable, as of its date and as of the Closing Date, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

13 In rendering such opinion, the Legal Advisor may rely without independent investigation on the opinion pursuant to paragraph (c) below as to matters of New York State and United States Federal law, and such opinion shall be subject to any limitations and exceptions contained in the opinion so relied upon. References to the Prospectus in this paragraph (b) include any supplements thereto at the Closing Date.

(c) The Underwriters shall have received on and as of the Closing Date an opinion, satisfactory to the Underwriters, of Arnold & Porter Kaye Scholer LLP, special United States counsel to Israel, to the effect that:

(i) the Offered Securities, when duly authorized, executed, authenticated and issued in accordance with the terms of the Fiscal Agency Agreement and delivered and paid for in accordance with the terms of this Agreement, will be valid and binding obligations of Israel entitled to the benefits of the Fiscal Agency Agreement;

(ii) the Fiscal Agency Agreement constitutes a valid and legally binding agreement of Israel, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors’ rights and to general equity principles;

(iii) no consent, approval, authorization, order, registration, clearance, qualification or filing (each, a “Governmental Authorization”) of or with any United States Federal or New York state government, administrative agency, commission or other body is required for the issue and sale of the Offered Securities or the consummation by Israel of the transactions contemplated by this Agreement or the Fiscal Agency Agreement, except such as have been obtained under the Act and such Governmental Authorizations as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Offered Securities by the Underwriters;

(iv) the statements in the Registration Statement, the Time of Sale Prospectus and the Prospectus under the captions “Debt Securities” and “Description of the Bonds”, insofar as they purport to constitute a summary of certain provisions of the Offered Securities and the Fiscal Agency Agreement, provide a fair summary of such provisions;

14 (v) the statements in the Registration Statement, the Time of Sale Prospectus and the Prospectus under the caption “Taxation – United States”, insofar as they purport to constitute a summary of the material United States Federal income and estate tax consequences of the purchase, ownership and disposition of the Offered Securities, provide a fair summary of such consequences;

(vi) Israel has validly submitted, under the laws of the State of New York and the Federal laws of the United States, to the jurisdiction of the State and Federal courts in the Borough of Manhattan in the City of New York, in any suit, action or proceeding arising out of or based on this Agreement, the Fiscal Agency Agreement or the Offered Securities, except any such suit, action or proceeding arising out of or based on United States Federal or state securities laws (other than any legal action or proceeding instituted by an Underwriter in its capacity as an Underwriter under this Agreement);

(vii) the documents expressly incorporated by reference in the Time of Sale Prospectus and the Prospectus as amended or supplemented (other than the financial and statistical data contained therein, as to which such counsel need express no opinion), when they became effective or were filed with the Commission, as the case may be, appear on their face to comply as to form in all material respects with, and be appropriately responsive to, the requirements of the Act or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as applicable, and the rules and regulations of the Commission thereunder;

(viii) the agreement of Israel contained in this Agreement, the Offered Securities and the Fiscal Agency Agreement that each will be governed and construed in accordance with the laws of the State of New York, except with respect to its authorization and execution by and on behalf of Israel, is valid and binding on Israel;

(ix) the Offered Securities are exempt from the provisions of the Trust Indenture Act of 1939, as amended, under Section 304(a)(6) of said Act, and no indenture in respect of the Offered Securities need be qualified under said Act; and

(x) the Registration Statement has become effective under the Act as of the date and time specified in such opinion, and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or threatened by the Commission.

15 In giving such opinion, Arnold & Porter Kaye Scholer LLP may (i) assume that the Fiscal Agency Agreement, the Offered Securities and this Agreement have been duly authorized, executed and delivered by the appropriate party or parties thereto and that each such party has adequate power and authority to enter therein and (ii) rely without independent investigation on the opinion delivered pursuant to paragraph (b) above as to matters governed by the laws of Israel, and such opinion shall be subject to any limitations and exceptions contained in the opinion delivered pursuant to paragraph (b) above.

In addition, Arnold & Porter Kaye Scholer LLP shall have furnished the Underwriters with a letter, dated the Closing Date, confirming that as United States counsel to Israel, such counsel reviewed the Registration Statement, the Time of Sale Prospectus and the Prospectus as then amended or supplemented, participated in discussions with representatives of the Underwriters and their counsel and those of Israel and its Israeli counsel, and advised Israel as to the requirements of the Act and the applicable rules and regulations thereunder; on the basis of the information that such counsel gained in the course of the performance of such services, considered in the light of their understanding of the applicable law and the experience they have gained through their practice under the Act, such counsel will confirm to the Underwriters that, in their opinion, the Registration Statement and the Prospectus as then amended or supplemented, as of the Effective Date and as of the date of this Agreement, appeared on their face to be appropriately responsive in all material respects to the requirements of the Act and the applicable rules and regulations of the Commission thereunder; nothing that came to such counsel’s attention in the course of the limited procedures described in such letter has caused such counsel to believe that the Registration Statement, as of the Effective Date and as of the date of this Agreement, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; nothing that has come to such counsel’s attention in the course of the limited procedures described in such letter has caused such counsel to believe that the Time of Sale Prospectus as of the Execution Time contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and nothing that has come to such counsel’s attention in the course of the limited procedures described in such letter has caused such counsel to believe that the Prospectus (as then amended or supplemented) as of its date and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel may state that the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process are such that they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the Time of Sale Prospectus or the Prospectus except for those made under the captions “Debt Securities”, “Description of the Bonds” and “Taxation” in the Time of Sale Prospectus or the Prospectus as then amended and supplemented insofar as they purport to summarize certain provisions of documents therein described; that such counsel do not express any opinion or belief as to the financial and statistical data contained in the Registration Statement or the Prospectus as then amended or supplemented, or as to matters of the laws of Israel; and that their letter is furnished as United States counsel for Israel to the Underwriters and is solely for their benefit.

16 (d) The Underwriters shall have received from (i) Cravath, Swaine & Moore LLP, counsel for the Underwriters, such opinion and letter, dated the Closing Date, with respect to the issuance and sale of the Offered Securities, the Fiscal Agency Agreement, the Registration Statement, the Time of Sale Prospectus, the Prospectus (together with any supplement thereto) and other related matters as the Underwriters may reasonably require and (ii) Meitar Liquornik Geva Leshem Tal, special counsel for the Underwriters, such opinion, dated the Closing Date, with respect to the issuance and sale of the Offered Securities, the Fiscal Agency Agreement and other related matters as the Underwriters may reasonably require; and, in each case, Israel shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. In giving the opinion referred to in clause (i) of the preceding sentence, Cravath, Swaine & Moore LLP may rely without independent investigation on the opinion delivered pursuant to paragraph 7(b) above as to the matters governed by the laws of Israel and such opinion shall be subject to any limitations and exceptions contained in the opinion delivered pursuant to paragraph 7(b) above.

(e) Israel shall have furnished to the Underwriters a certificate of Israel, signed by the Accountant General and the Senior Deputy Accountant General of the Ministry of Finance, dated the Closing Date, to the effect that the signer of such certificate has carefully examined the Registration Statement, the Time of Sale Prospectus, the Prospectus, any supplement to the Prospectus and this Agreement and that:

(i) the representations and warranties of Israel in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date and Israel has complied in all material respects with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date;

17 (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to Israel’s knowledge, threatened; and

(iii) there has been no material adverse change or any development involving a prospective material adverse change in the condition (financial, economic or political) of Israel from that set forth in the Time of Sale Prospectus and the Prospectus (exclusive of any supplement thereto dated after the Execution Time) that was not disclosed to the Underwriters prior to the Execution Time.

(f) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof dated after the Execution Time), the Time of Sale Prospectus and the Prospectus (exclusive of any supplement thereto dated after the Execution Time), there shall not have been any change or any development involving a prospective change in the condition (financial, economic or political) of Israel from that set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus (in each case exclusive of any amendment thereof or supplement thereto dated after the Execution Time) that, in the judgment of the Underwriters, is material and adverse and makes it impractical or inadvisable to proceed with the offering or delivery of the Offered Securities as contemplated by the Registration Statement, the Time of Sale Prospectus and the Prospectus (in each case exclusive of any amendment thereof or supplement thereto dated after the Execution Time).

(g) Subsequent to the Execution Time, there shall not have been any decrease in the rating of any of Israel’s debt securities by the rating agencies listed on Schedule III hereto (or any successor to the rating agency business thereof) hereto or any written notice given of any intended or potential change in any such rating that is not an upward change.

(h) Subsequent to the Execution Time, no proceeding shall be pending or threatened to restrain or enjoin the issuance, sale or delivery of the Offered Securities or in any manner to question the laws, proceedings, directives, resolutions, approvals, consents or orders under which the Offered Securities are to be issued or to question the validity of the Offered Securities, and none of such laws, proceedings, directives, resolutions, approvals, consents or orders shall have been repealed, revoked or rescinded in whole or in part.

18 (i) Subsequent to the Execution Time, Israel shall not have ceased to be a member of the International Monetary Fund and the International Bank for Reconstruction and Development.

(j) Prior to the Closing Date, Israel shall have made an application for the Offered Securities to be listed on the Luxembourg Stock Exchange.

(k) Prior to the Closing Date, Israel shall have furnished to the Underwriters such further information, certificates, opinions and other documents as the Underwriters may reasonably request.

If any of the conditions specified in this Section 7 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Underwriters and to counsel for the Underwriters, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, the Closing Date by the Underwriters. Notice of such cancellation shall be given to Israel in writing or by telephone or facsimile confirmed in writing.

The documents required to be delivered by this Section 7 shall be delivered at the office of Cravath, Swaine & Moore LLP, counsel for the Underwriters, at Worldwide Plaza, 825 Eighth Avenue, New York, New York, 10019, at the Closing Date.

8. Reimbursement of Underwriters’ Expenses. If the sale of the Offered Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 hereof is not satisfied, because of any termination pursuant to Section 11 hereof or because of any refusal, inability or failure on the part of Israel to perform any agreement herein or comply with any provision hereof other than by reason of a default by any of the Underwriters, Israel will reimburse the Underwriters severally upon demand for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Offered Securities.

19 9. Indemnification and Contribution.

(a) Israel agrees to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person who controls any Underwriter within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Time of Sale Prospectus, the Roadshow, any issuer free writing prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Israel will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to Israel by or on behalf of any Underwriter specifically for inclusion therein, it being understood and agreed that the only such information is that described as such in the last sentence of Section 9(b) hereof. This indemnity agreement will be in addition to any liability which Israel may otherwise have to any Underwriter. Israel further agrees to indemnify and hold harmless each Underwriter against any requirement under the laws of Israel to pay any stamp or similar taxes in connection with the issuance of the Offered Securities to such Underwriter by Israel.

(b) Each Underwriter severally agrees to indemnify and hold harmless Israel, to the same extent as the foregoing indemnity from Israel to each Underwriter, but only with reference to written information relating to such Underwriter furnished in writing to Israel by or on behalf of such Underwriter specifically for inclusion in the documents referred to in such foregoing indemnity. This indemnity agreement will be in addition to any liability which any Underwriter may otherwise have to Israel. Israel acknowledges that, for all purposes of this Agreement, each Underwriter’s name, solely with respect to such Underwriter, on the cover page of the prospectus supplement and each Underwriter’s name and principal amount of bonds purchased, solely with respect to such Underwriter, the third, fourth and fifth sentences of the second paragraph and the fifth and sixth paragraphs under the heading “Underwriting” in the prospectus supplement constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in the documents referred to in such foregoing indemnity, and the Underwriters confirm that such statements are correct.

20 (c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 9, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve the indemnifying party from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party’s choice at the indemnifying party’s expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party’s election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel, if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party, and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. It is understood and agreed that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to local counsel) for all such indemnified parties and that such fees and expenses shall be reimbursed as they are incurred. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.

21 (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 9 is unavailable or insufficient (unless such indemnity is unavailable or insufficient by operation of the provisos set forth therein) to hold harmless an indemnified party for any reason, Israel and the Underwriters agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively, “Losses”) to which Israel and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by Israel and by the Underwriters from the offering of the Offered Securities; provided, however, that in no case shall any Underwriter (except as may be provided in any agreement among the Underwriters relating to the offering of the Offered Securities) be responsible for any amount in excess of the underwriting discount or commission applicable to the Offered Securities purchased by such Underwriter hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, Israel and the Underwriters shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of Israel and of the Underwriters in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by Israel shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by the Underwriters shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by Israel or the Underwriters. Israel and the Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 9, each person who controls an Underwriter within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of an Underwriter shall have the same rights to contribution as such Underwriter, and each official of Israel who shall have signed the Registration Statement shall have the same rights to contribution as Israel, subject in each case to the applicable terms and conditions of this paragraph (d).

22 10. Default by an Underwriter. If any one or more Underwriters shall fail to purchase and pay for any of the Offered Securities agreed to be purchased by such Underwriter or Underwriters hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Underwriters shall be obligated severally to take up and pay for (in the respective proportions that the principal amount of Offered Securities set forth opposite their names in Schedule I hereto bears to the aggregate principal amount of Offered Securities set forth opposite the names of any remaining non-defaulting Underwriters) the Offered Securities that the defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that (i) the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Offered Securities if the aggregate principal amount of Offered Securities that the defaulting Underwriter or Underwriters agreed but failed to purchase exceeds 9.09% of the aggregate principal amount of Offered Securities set forth in Schedule I hereto and (ii) any remaining non-defaulting Underwriter shall not be obligated to purchase more than 110% of the aggregate principal amount of Offered Securities set forth opposite its name in Schedule I hereto. If the foregoing maximums are exceeded, the remaining Underwriters shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Offered Securities, and if such non-defaulting Underwriters do not purchase all the Offered Securities, this Agreement will terminate without liability to any non-defaulting Underwriter or Israel. In the event of a default by any Underwriter as set forth in this Section 10, the Closing Date shall be postponed for such period, not exceeding seven days, as the Underwriters shall determine in order that the required changes in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. As used in this Agreement, the term “Underwriter” includes, for all purposes of this Agreement unless the context requires otherwise, any underwriter, other than the Underwriters, who purchases Offered Securities which a defaulting Underwriter agreed but failed to purchase. Nothing contained in this Agreement shall relieve any defaulting Underwriter of its liability, if any, to Israel and any non-defaulting Underwriter for damages occasioned by its default hereunder.

11. Termination. This Agreement shall be subject to termination in the absolute discretion of the Underwriters, by notice given to Israel prior to delivery of and payment for the Offered Securities, if prior to such time (i) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such exchange or settlement of securities trading generally shall have been materially disrupted, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or Israeli authorities or (iii) there shall have occurred (x) any outbreak or escalation of hostilities in which the United States or Israel is involved or declaration by the United States or Israel of a national emergency or war or other calamity or crisis or (y) a material adverse change in the general economic, political or financial conditions in Israel or the United States the effect of which on financial markets is such as to make it, in the judgment of the Underwriters, impracticable or inadvisable to proceed with the offering or delivery of the Offered Securities as contemplated by this Agreement and the Prospectus.

23 12. Representations and Indemnities To Survive. The respective agreements, representations, warranties, indemnities and other statements of Israel and of the Underwriters set forth in or made in writing pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or Israel or any of the officers, directors or controlling persons referred to in Section 9 hereof, and will survive delivery of and payment for the Offered Securities. The provisions of Sections 8 and 9 hereof shall survive the termination or cancellation of this Agreement.

13. Submission to Jurisdiction; Agent for Service of Process. Israel and the Underwriters agree that the Federal courts of the United States sitting in the Southern District of New York, the courts of the State of New York sitting in the City of New York and the courts of Israel shall have exclusive jurisdiction in respect of any legal action or proceeding brought against Israel and arising out of or relating to this Agreement. In respect of any such proceeding which may be brought hereunder, Israel irrevocably submits to the jurisdiction of the Federal courts of the United States in the Southern District of New York, the courts of the State of New York sitting in the City of New York and the courts of Israel and waives any right of objection to the laying of venue in any such court, including, without limitation, any objection on the basis of inconvenient forum. Israel irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Agreement from which no appeal has been taken or is available.

Israel hereby appoints the Chief Legal Officer and Head of Israel Economic Mission – Western Hemisphere of the Ministry of Finance of the Government of Israel, whose office address is presently at 800 Second Avenue, 17th Floor, New York, NY 10017, as its authorized agent (“Authorized Agent”) to receive on its behalf service of process in any proceeding that may be brought under the immediately preceding paragraph of this Section 13 in a Federal court of the United States in the Southern District of New York or in a New York State court in the City of New York. Israel may nominate a substitute or replacement for its Authorized Agent in the State of New York by giving notice thereof to the Underwriters, but such appointment shall not be effective until the successor to the Authorized Agent accepts appointment as such. Israel agrees that it will at all times maintain an Authorized Agent to receive such service, as above provided. The failure of the Authorized Agent to give Israel notice of the service of any process shall not affect the validity of any proceeding based on that process or any judgment obtained pursuant to it. Israel will take any and all action, including the filing of any and all documents and instruments, that may be necessary to continue such appointment or appointments in full force and effect as aforesaid. Service of process upon the Authorized Agent at the address indicated in this Section 13, or at such other address in the Borough of Manhattan in the City of New York, as may be the office of the Authorized Agent at the time of such service, and written notice of such service to Israel (mailed or delivered to Israel at the address set forth in Section 14) hereof shall be deemed, in every respect, effective service of process upon Israel.

24 In respect of any proceeding which may be brought under this Agreement, Israel irrevocably agrees not to assert the defense of immunity, on the grounds of sovereignty or otherwise, from jurisdiction, execution or attachment in aid of execution, personally and in respect of any of its property.

Neither the submission to jurisdiction, the appointment of the Authorized Agent or the agreements with respect to immunity in this Section 13 shall be interpreted to include actions brought under the United States Federal securities laws or any State securities laws (other than any legal action or proceeding instituted by an Underwriter in its capacity as an Underwriter under this Agreement).

14. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Underwriters, will be mailed or delivered to Deutsche Bank Securities Inc., 60 Wall Street, New York, New York 10005, Attention: Debt Capital Markets Syndicate, with a copy to General Counsel, Fax: (646) 374-1071; or, if sent to Israel, will be mailed or delivered to it at:

Government of Israel Ministry of Finance 800 Second Avenue 17th Floor New York, NY 10017 Attn: Chief Legal Officer and Head of Israel Economic Mission –Western Hemisphere

with a copy to:

Government of Israel Ministry of Finance 1 Kaplan Street Hakiria, Jerusalem 91008 ISRAEL Attn: Accountant General

15. English Documents. All documents to be delivered under this Agreement by Israel shall be in the English language or accompanied by a certified English translation.

16. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 9 hereof, and no other person will have any right or obligation hereunder. No purchaser of any Offered Securities from any Underwriter shall be deemed to be a successor or assign merely by reason of such purchase.

17. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law principles of such State, except with respect to its authorization and execution by and on behalf of Israel, which shall be governed by the law of Israel.

25 18. Counterparts. This Agreement may be signed in two or more counterparts, which together shall constitute one and the same instrument.

19. No Fiduciary Duty. Israel acknowledges that in connection with the offering of the Offered Securities: (i) the Underwriters have acted at arm’s length, are not agents of, and owe no fiduciary duties to, Israel or any other person, (ii) the Underwriters owe Israel only those duties and obligations set forth in this Agreement or in any prior written agreement between the Underwriters and Israel entered into in connection with the offering of the Offered Securities (to the extent not superseded by this Agreement), if any, and (iii) the Underwriters may have interests that differ from those of Israel. Israel waives to the full extent permitted by applicable law any claims it may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the Offered Securities.

26 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among Israel and the Underwriters.

Very truly yours,

THE GOVERNMENT OF ISRAEL, ON BEHALF OF STATE OF ISRAEL

By: /s/ Rony Hizkiyahu Name: Rony Hizkiyahu Title: Accountant General, Ministry of Finance

By: /s/ Gil Cohen Name: Gil Cohen Title: Senior Deputy Accountant General, Ministry of Finance The foregoing Agreement is hereby confirmed and accepted as of the date first above written.

By: CITIGROUP GLOBAL MARKETS INC.

By: /s/ Adam D. Bordner Name: Adam D. Bordner Title: Vice President

By: DEUTSCHE BANK SECURITIES INC.

By: /s/ Dennis Eisele Name: Dennis Eisele Title: Managing Director Deutsche Bank Securities Inc.

By: /s/ Thomas Short Name: Thomas Short Title: Director/Debt Syndicate Deutsche Bank Securities Inc.

By: GOLDMAN SACHS & CO. LLC

By: /s/ Adam Greene Name: Adam Greene Title: Managing Director SCHEDULE I

Principal Amount of Principal Amount of 2028 Bonds 2048 Bonds Underwriters to be Purchased to be Purchased Citigroup Global Markets Inc. $ 333,334,000 $ 333,334,000 Deutsche Bank Securities Inc. 333,333,000 333,333,000 Goldman Sachs & Co. LLC 333,333,000 333,333,000 Total: $ 1,000,000,000 $ 1,000,000,000 SCHEDULE II

1. Prospectus, dated January 6, 2016.

2. Preliminary Prospectus Supplement, dated January 4, 2018 relating to the Offered Securities.

3. Final Term Sheet, dated January 10, 2018, a copy of which is included as Annex A hereto. ANNEX A to SCHEDULE II

FINAL TERM SHEET ATTACHED STATE OF ISRAEL

3.250% BONDS DUE 2028 4.125% BONDS DUE 2048

Issuer: State of Israel

Securities Offered: 3.250% Bonds due 2028 (the “2028 Bonds”)

4.125% Bonds due 2048 (the “2048 Bonds”)

Principal Amount: US$1,000,000,000 of the 2028 Bonds

US$1,000,000,000 of the 2048 Bonds

Maturity Date: January 17, 2028 for the 2028

Bonds January 17, 2048 for the 2048 Bonds

Trade Date: January 10, 2018

Original Issue Date (Settlement): Expected January 17, 2018 (T+4)1 through the book-entry facility of The Depository Trust Company

Issue Price (Price to Public): 99.291% for the 2028 Bonds

99.098% for the 2048 Bonds

Net Proceeds to Issuer (before expenses): US$991,660,000 (99.166%) for the 2028 Bonds

US$988,480,000 (98.848%) for the 2048 Bonds

Coupon: 3.250% for the 2028 Bonds

4.125% for the 2048 Bonds

Yield to Maturity: 3.334% for 2028 Bonds

4.178% for 2048 Bonds

Spread to Benchmark Treasury: +75 basis points (0.750%) for the 2028 Bonds +125 basis points (1.250%) for the 2048 Bonds Benchmark Treasury: 2.250% due November 15, 2027, for the 2028 Bonds

2.750% due August 15, 2047, for the 2048 Bonds

Benchmark Treasury Price and Yield: 97-03+; 2.584% for the 2028 Bonds

96-15+; 2.928% for the 2048 Bonds

Interest Payment Period: Semi-annually

Interest Payment Dates: Each January 17 and July 17, commencing July 17, 2018 for the 2028 Bonds

Each January 17 and July 17, commencing July 17, 2018 for the 2048 Bonds

Denominations: US$200,000 and multiples of US$1,000 above that amount

Business Day: New York

CUSIP: 46513Y JH2 for the 2028 Bonds

46513Y JJ8 for the 2048 Bonds

ISIN: US46513YJH27 for the 2028 Bonds

US46513YJJ82 for the 2048 Bonds

1 1 Joint Bookrunners: Citigroup Global Markets Inc. (33 /3%); Deutsche Bank Securities Inc. (33 /3%); 1 Goldman Sachs & Co. LLC (33 /3%) Please note the following supplemental disclosures, which supplement the Preliminary Prospectus Supplement, dated January 4, 2018 (the “Preliminary Prospectus Supplement”), and supersede the information in the Preliminary Prospectus Supplement to the extent the disclosures are inconsistent with the information contained therein.

RECENT DEVELOPMENTS

The information set forth below does not purport to be complete and supplements, and is qualified in its entirety by, the more detailed information contained in Israel’s Annual Report on Form 18-K for the fiscal year ended December 31, 2016, as amended, and the other documents incorporated by reference in the basic prospectus. See “Where You Can Find More Information” in the prospectus supplement.

Set forth below is certain economic information reported by the Ministry of Finance of the State of Israel for the fiscal year ended December 31, 2017. For such year, the Ministry of Finance reported the following economic data:

x 2017 budget deficit (according to first estimate) equal to 1.97% of GDP (compared to target of 2.9%).

The preliminary prospectus supplement relating to the bonds is available under the following link: http://www.sec.gov/Archives/edgar/data/52749/000114420418000696/0001144204-18-000696-index.htm

1 Under Rule 15c6-1 of the Securities Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade bonds on the date of pricing or the next succeeding business day will be required, by virtue of the fact that the bonds initially will settle in T+4, to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of bonds who wish to trade bonds on the date of pricing or the next succeeding business day should consult their own advisor.

The issuer has filed a registration statement (including a prospectus) with the U.S. Securities and Exchange Commission (“SEC”) for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in the offering will arrange to send you the prospectus, any prospectus supplement or free writing prospectus for this offering if you request it by calling Citigroup Global Markets Inc. toll-free at 1-800-831-9146, Deutsche Bank Securities Inc. toll-free at 1-800-503-4611 or Goldman Sachs & Co. LLC toll-free at 1-866-471-2526.

Manufacturer target market (MIFID II product governance) is eligible counterparties, professional clients and retail clients (all distribution channels). SCHEDULE III

Rating Agencies referred to in Section 7(g):

Fitch Ratings, Inc.

Moody’s Investors Service, Inc.

Standard & Poor’s Ratings Services LLC, a subsidiary of McGraw Hill Financial, Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 2 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2016 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO NAMES OF WHICH REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Chia Tiger Chief Legal Officer and Head of Israel Economic Mission – Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: DAVID MENCHEL, ESQ. Arnold & Porter Kaye Scholer LLP 250 West 55th Street New York, New York 10019

* The Registrant is filing this annual report on a voluntary basis.

1 THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 2 is to file with the Securities and Exchange Commission the Summary Information and Recent Developments in the State as of January 1, 2018, which is included as Exhibit D-2 hereto and which updates and amends the Current Description of the State previously filed as Exhibit D and the Summary Information and Recent Developments previously filed as Exhibit D-1.

2 EXHIBIT INDEX

Exhibit Number

A: None. B: None. C-1: (P) Copy of the State Budget for Fiscal Years 2015 − 2016 (in Hebrew).** C-2: (P) Copy of the State Budget for Fiscal Years 2017 − 2018 (in Hebrew).*** D: Current Description of the State of Israel.* D-1: Summary Information and Recent Developments in the State as of September 6, 2017. * D-2: Summary Information and Recent Developments in the State as of January 1, 2018.

* Previously filed. ** Filed by paper filing under cover of Form SE on January 6, 2016, pursuant to Rules 306(c) and 311 of Regulation S-T. *** Filed by paper filing under cover of Form SE on June 30, 2017, pursuant to Rules 306(c) and 311 of Regulation S-T.

3 SIGNATURE

STATE OF ISRAEL

By: /s/ Rony Hizkiyahu Rony Hizkiyahu Accountant General Ministry of Finance

By: /s/ Gil Cohen Gil Cohen Senior Deputy Accountant General Ministry of Finance

4 Exhibit D-2

SUMMARY INFORMATION AND RECENT DEVELOPMENTS

The information included in this section supplements the information about the State contained in the State’s Annual Report for 2016 on Form 18-K filed with the SEC on June 30, 2017, as amended from time to time (the “Annual Report for 2016”). To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2016, as amended from time to time, through the date hereof, the information in this section supersedes and replaces such information. Capitalized terms used but not defined in this section have the meanings ascribed to them in the Annual Report for 2016. This section is not complete and may not contain all the information that you should consider. You should read the entire Annual Report for 2016 and any supplement thereto carefully. Totals in certain tables may differ from the sum of the individual items in such tables due to rounding. Unless otherwise specified, amounts in NIS or US$ are presented in current prices without adjustment for inflation. Figures in this section are as of January 1, 2018, except as otherwise indicated.

Economic Developments

These methodology changes resulted in a restatement of the growth rates for 1995 through 2012, as well as certain other indicators including the debt-to-GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable to the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the CBS.

D-1 In 2016, the Government continued its debt-reduction policy, reducing Government debt as a percentage of GDP by 1.8% compared to 2015, to a level of 60.7% for 2016. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path, falling to a level of 62.4% at the end of 2016, a decline of 1.6% of GDP relative to 2015. After a deviation from the budget deficit target in 2012 (the actual budget deficit amounted to 3.9% of GDP during 2012 compared to a target of 2.0% of GDP), the actual budget deficit in 2013 was 3.1% of GDP, significantly below the deficit target of 4.3% of GDP. The downtrend of the deficit continued in 2014, as the deficit to GDP ratio amounted to 2.7%, which was below the 3.0% target. In 2015, tax revenues were higher than expected, and expenditures were lower than expected, leading to a 2.1% budget deficit for 2015. The budget deficit for 2016 was 2.1%, which was below the deficit target of 2.9% of GDP. As part of the budget and economic plan for fiscal years 2017 and 2018, which was approved by the Knesset on December 22, 2016, the Government set the budget deficit target at 2.9% of GDP for each year.

Balance of Payments and Foreign Trade

The growth of imports since 2013 has been limited due to the local production of natural gas, which has offset the imports of certain energy- related products, and the decline in the commodities’ prices, in particular, energy prices.

Israel is a party to free trade agreements with its major trading partners, and it is one of the few nations that has signed free trade agreements with both the United States and the EU.

D-3 Fiscal Policy

The budget deficit amounted to 2.1% of GDP in each of 2015 and 2016, below the budget deficit target of 2.9% of GDP for these years. Since 2009, the budget deficit has been on a declining path, with the exception of 2012. In 2009, the budget deficit amounted to 4.8% of GDP, due to a decrease in tax revenues resulting from the global financial crisis (the 2009 budget deficit target was set at 6%); 3.5% of GDP in 2010 (the 2010 budget deficit target was set at 5.5%); 3.1% in 2011 (the 2011 budget deficit target was set at 3.0%); 3.9% in 2012 (the 2012 budget deficit target was set at 2.0%); 3.1% in 2013 (the 2013 budget deficit target was set at 4.3%); 2.7% in 2014 (the 2014 budget deficit target was set at 3.0%); and 2.1% in each of 2015 and 2016 (the 2015 and 2016 budget deficit targets were set at 2.9%). Pursuant to recent legislation, the budget deficit target is set at 2.9% of GDP for 2017 and 2018.

In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined in “Public Finance — Fiscal Framework,” in the Annual Report for 2016). The revision modified the formula used to calculate the annual budget, beginning with the 2015 − 2016 budget. Under the modified formula, the expenditure ceiling is calculated based on the average population growth rate in the three years prior to the submission of the Expenditure Law, plus the ratio of the medium-term debt target (50%) to the current debt-to-GDP ratio. The modified formula is based on the three-year average population growth rate in order to ensure a consistent increase in expenditure per capita.

Inflation and Monetary Policy

The inflation rate over the last decade (2006 − 2016) was near the middle of the Government’s target range (1% − 3%) and stood at approximately 1.8% annually on average. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. Measured at year-end, the CPI rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013. In 2014, the CPI decreased by 0.2%. Since June 2014, the inflation rate has been below the lower end of the Government’s target range and from September 2014 to December 2016, the inflation rate was negative. In 2015, the CPI decreased by 1.0%. In 2016, the CPI decreased by 0.2%. Since the beginning of 2017, the inflation rate has mostly been positive but still below the lower bound of the target range. The CPI increased by 0.3% during the twelve-month period ending November 30, 2017.

D-4 The NIS/USD exchange rate saw an appreciation of the NIS between the second half of 2012 and the end of July 2014, averaging 3.61 for 2013 and 3.48 for the first half of 2014 (compared to 3.86 in 2012). On July 31, 2012, December 31, 2012, July 31, 2013 and December 31, 2013, the NIS/USD exchange rate stood at 3.997, 3.733, 3.566 and 3.471, respectively. On July 24, 2014, the NIS/USD exchange rate stood at its lowest rate since July 2011, slightly above 3.4. In light of this appreciation, the Bank of Israel made two interest rate cuts in August and September 2014, as discussed above. In the second half of 2014, the NIS/USD exchange rate saw a depreciation of the NIS, as the rate increased from slightly above 3.4 on July 24, 2014 to slightly below 4.0 as of December 31, 2014. The depreciation trend of the NIS relative to the USD continued into the first months of 2015; in March and April 2015, the exchange rate was occasionally higher than 4.0. Between May 2015 and July 2015, the NIS appreciated relative to the USD, and the exchange rate stood at 3.783 as of July 31, 2015. Between July 31, 2015 and December, 31 2015, the NIS gradually depreciated relative to the USD, reaching 3.902 at the end of 2015 and 3.983 on January 20, 2016. Since then, the NIS has appreciated to 3.746 on May 2, 2016 but depreciated again to 3.90 on June 27, 2016. The NIS appreciated again during the third quarter of 2016, standing at 3.746 on September 27, 2016 but, in the fourth quarter of 2016, the NIS depreciated again reaching 3.876 and 3.867 on November 24, 2016 and December 19, 2016, respectively. At 2016 year-end, the NIS/USD exchange rate was 3.845. During the first six months of 2017, the NIS gradually appreciated relative to the USD, reaching 3.496 on June 30, 2017. During July and August of 2017, the NIS slightly depreciated relative to the USD, reaching 3.628 as of August 16, 2017. Since then, the NIS has appreciated relative to the USD, reaching 3.467 NIS per USD as of December 29, 2017, the lowest level since August 2014. From the beginning of 2015 to the end of November 2015, the NIS appreciated relative to the Euro, mainly due to the Quantitative Easing in the “eurozone”. The Euro/NIS exchange rate reached its lowest level since 2002 at the beginning of March 2017; in the second and third quarters of 2017, the Euro appreciated relative to NIS, and at the end of August 2017 reached its highest level since the middle of 2016. Since September 2017 and during the fourth quarter of 2017, the Euro depreciated relative to NIS, reaching 4.153 NIS per EUR as of December 29, 2017.

At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.1 billion as of the end of 2014 and $90.6 billion as of the end of 2015. The official reserves increased further, amounting to $98.4 billion as of the end of 2016. As of the end of November 2017, the official reserves stood at $112.08 billion.

D-5 Labor Market

Capital Markets

The Tel-Aviv Stock Exchange (the “TASE”) is Israel’s sole stock exchange, and the Tel-Aviv 125 (“TA-125”) (formerly the TA-100) and Tel- Aviv 35 (“TA-35”) (formerly the T-25) are its main indices and primary indicators of the stock price performance of Israel’s public companies. The TA-100 and TA-25 measured the 100 and 25 companies, respectively, with the highest market capitalization listed on the TASE. The TASE is highly correlated with major stock markets in developed countries. The global financial crisis and overall weakening in global growth starting in 2008 have affected Israel’s public companies. The TA-100 fell by 51.1% in 2008 but recovered in 2009 and 2010, rising by 88.8% and 14.9%, respectively. In 2011, the TA-100 fell by 20.1% and the TA-25 fell by 18.2%. The TASE partially recovered in 2012, with the TA-100 and TA-25 rising by 7.2% and 9.2%, respectively. This recovery continued into 2013 as the TA-100 and TA-25 increased by 15.1% and 12.1%, respectively. During 2014, the TA-100 and TA-25 increased by 6.7% and 10.2%, respectively, and in 2015 the TASE continued its upward trend, as the TA-100 and TA-25 rose by 2.0% and 4.4%, respectively. During 2016, the TA-100 and TA-25 decreased by 2.5% and 3.8%, respectively. In February 2017, the TASE introduced changes to the TA-100 and TA-25 indices, which were renamed the TA-125 and TA-35, respectively, and now measure the 125 and 35 companies, respectively, with the highest market capitalization listed on the TASE. During 2017, the TA-125 and TA-35 trended upward, mainly in the second half of 2017, as those indices increased by 6.4% and 2.7% in 2017, respectively.

The Bank of Israel and the Ministry of Finance took several measures in 2011, and again in 2017, to assist in facilitating the achievement of monetary and foreign exchange policy goals, which include increasing transparency and investor confidence, improving analytical abilities with respect to transactions in the foreign exchange market, and reducing short-term investments by foreign investors (see “Foreign Exchange Controls and International Reserves” in the Annual Report for 2016).

D-6 Political Situation

D-7 Since January 2011, there has been political instability and civil unrest in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. This unrest has resulted in the removal of long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. The delicate relations between Israel and its neighbors could become even more fragile with the domestic turmoil and change in regimes. Instability in the Middle East and North Africa region have not so far materially affected Israel’s financial or political situation, and countries who have signed peace agreements with Israel have remained committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not thereby be affected. This uncertainty is highlighted by the growing military presence of Iran and Hezbollah in Syria.

Privatization

Historically, the Government has been involved in nearly all sectors of the Israeli economy. In the past several decades, privatization has been an essential element of the broader market reforms initiated by the Government, which aim to promote the growth of the private sector, mainly by enhancing competition. Israel has made substantial progress in recent years, resulting in the privatization of many enterprises owned by the State and the reduction of State subsidization of business enterprises. In total, between 1986 and 2016, 100 Government Companies (as defined in “Role of the State in the Economy,” in the Annual Report for 2016) became partially or fully private. The proceeds stemming from these privatizations totaled $14.4 billion. In 2010, privatization proceeds amounted to NIS 4.5 billion (approximately $1.2 billion), partly as a result of the privatization of the State’s interest in two of the five major banks in Israel — Israel’s entire remaining stake in Israel Discount Bank Ltd. and 5% of the outstanding equity securities of Bank Leumi Le-Israel Ltd. On June 9, 2014, the Finance Committee of the Knesset approved the Government’s request to sell its remaining stake in Bank Leumi over the following year. The Government did not exercise its right to sell its remaining stake in Bank Leumi, and the Knesset’s approval expired on June 9, 2015. Currently, the Government holds approximately 6.03% of Bank Leumi’s outstanding equity securities. The Government plans to continue with the process of privatizing its interests in financial institutions, as well as State- owned land, seaports, the Postal Authority, energy and transportation utilities and parts of the defense industry (see “The Economy — Role of the State in the Economy,” in the Annual Report for 2016).

D-8 Loan Guarantee Program

D-9 Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2012 2013 2014 2015 2016 Main Indicators GDP (at constant 2015 prices) 1,050.5 1,094.7 1,132.8 1,162.5 1,208.6 Real GDP growth 2.2% 4.2% 3.5% 2.6% 4.0% GDP per capita (at constant 2015 prices) 132,857 135,885 137,938 138,775 141,464 GDP per capita, percentage change 0.3% 2.3% 1.5% 0.6% 1.9% Inflation (change in CPI − annual average) 1.7% 1.5% 0.5% -0.6% -0.5% Industrial production 4.0% 0.5% 1.2% 2.2% 1.7% Business sector product (at constant 2015 prices) 774.4 811.4 840.0 862.4 899.1 Permanent average population (thousands) 7,907 8,056 8,212 8,377 8,543 Unemployment rate(1) 6.9% 6.2% 5.9% 5.3% 4.8% Foreign direct investment (net inflows, in billions of dollars) 9.0 11.8 6.0 11.3 11.9

Government Debt(2) Total gross government debt (at end-of-year current prices)(3) 666.8 696.3 715.8 726.7 740.8 Total gross government debt as percentage of GDP 67.1% 65.7% 64.9% 62.5% 60.7%

(1) Reflects changes in the Central Bureau of Statistics’ labor survey methodology, resulting in higher values in the unemployment rate line items.

(2) Government debt excluding local authorities’ debt.

(3) Risk Management Dept., Debt Unit, Ministry of Finance.

Sources: Central Bureau of Statistics, Bank of Israel and Ministry of Finance.

D-10 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 1 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2016 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO NAMES OF WHICH REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Chia Tiger General Counsel Economic Mission – Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: STEVEN G. TEPPER, ESQ. Arnold & Porter Kaye Scholer LLP 250 West 55th Street New York, New York 10019

* The Registrant is filing this annual report on a voluntary basis.

1 THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 1 is to file with the Securities and Exchange Commission the Summary Information and Recent Developments in the State as of September 6, 2017, which is included as Exhibit D-1 hereto and which updates and amends the Current Description of the State previously filed as Exhibit D.

2 EXHIBIT INDEX

Exhibit Number A: None. B: None. C-1: (P) Copy of the State Budget for Fiscal Years 2015 − 2016 (in Hebrew).** C-2: (P) Copy of the State Budget for Fiscal Years 2017 − 2018 (in Hebrew).*** D: Current Description of the State of Israel.* D-1: Recent Developments in the State as of September 6, 2017.

3 SIGNATURE

STATE OF ISRAEL

By: /s/ Rony Hizkiyahu Rony Hizkiyahu Accountant General Ministry of Finance

By: /s/ Gil Cohen Gil Cohen Senior Deputy Accountant General Ministry of Finance

4 Exhibit D-1 SUMMARY INFORMATION AND RECENT DEVELOPMENTS

The information included in this section supplements the information about the State contained in the State’s Annual Report for 2016 on Form 18-K filed with the SEC on June 30, 2017, as amended from time to time. To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2016, as amended from time to time, through the date hereof, the information in this section supersedes and replaces such information. Capitalized terms not defined in this section have the meanings ascribed to them in the Annual Report for 2016. This section is not complete and may not contain all the information that you should consider. You should read the entire Annual Report and any supplement carefully. Totals in certain tables may differ from the sum of the individual items in such tables due to rounding. Unless otherwise specified, amounts in NIS or US$ are given in current prices without adjustment for inflation. Figures in this section are as of September 6, 2017, except as otherwise indicated.

Economic Developments

In August 2013, the Central Bureau of Statistics (“CBS”) adopted the United Nations System of National Accounts as revised in 2008 (“SNA 2008”) due to a number of major changes that affected the various data series with respect to values as well as percentages of change between periods. The data series beginning in 2006 was revised for the publication of the 2013 Statistical Abstract. The series from 1995 onwards was revised in August 2014. The revisions are in accordance with the changes to the SNA 2008 which has been accepted globally and includes changes in the measurement of the annual gross domestic product (“GDP”). Some of the main changes in the SNA 2008 applicable to Israel included: (i) recording research and development as fixed capital formation, (ii) measurement of income from financial intermediation, (iii) recording the Central Bank’s output, and (iv) recording of products for further processing in the balance of payments. The process of fully implementing SNA 2008 in Israel will take several years and will be accompanied by additional adjustments to the Balance of Payments Manual 6 (“BPM6”) and the new international merchandise trade statistics guide. Further changes have been reflected in the classification of economic activities in Israel, as the classification is in accordance with the new International Standard Industrial Classification (“ISIC Rev4”). Moreover, there has been integration of the 2006 input-output tables that describe the relationships between various industries, as well as between the industries and the final uses (private consumption, general government consumption, fixed capital formation and exports).

These methodology changes resulted in a restatement of the growth rates for 1995 through 2012, as well as certain other indicators including the debt-to-GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable to the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the CBS.

The Israeli economy grew at a pace of 4.0% in 2016, an acceleration compared to the growth rates of 2.6% in 2015 and 3.5% in 2014. The slowdown in growth during 2014 and 2015 can be attributed to exogenous factors including the slowdown in economies around the world, which contributed to the slowdown in Israeli exports, the appreciation of the Israeli NIS during the first half of 2014, and Operation Protective Edge which took place in July and August 2014 and weighed on the economy. In 2016, GDP increased by 4.5%, 5.5%, 4.2% and 4.4% in the first, second, third and fourth quarters, respectively, in each case compared to the previous quarter at an annualized rate. In the first quarter of 2017, the growth rate slowed to 0.6%, reflecting a sharp decrease in the number of passenger cars purchased in 2017 compared to 2016; in anticipation of a change in tax on new cars that took effect in the beginning of 2017, there was an increase in car purchases in the second half of 2016. In the second quarter of 2017, the GDP growth rate accelerated to 2.7%, due to the car purchase level returning to the level that was recorded in the first quarter of 2016.

D-1 The budget and economic plan for the fiscal years of 2017 and 2018 was approved by the Knesset on December 22, 2016, and the deficit target for both years was set at 2.9% of GDP. In the 2015 − 2016 budget, the deficit target for both years was set at 2.9% of GDP, but the actual deficit for both years was 2.1% of GDP.

In 2016, the Government continued its debt-reduction policy, reducing Government debt as a percentage of GDP by 1.8% compared to 2015, to a level of 60.7% for 2016. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path, falling to a level of 62.4% at the end of 2016, a decline of 1.6% relative to 2015. After a deviation from the budget deficit target in 2012 (the actual budget deficit amounted to 3.9% of GDP during 2012 compared to a target of 2.0% of GDP), the actual budget deficit in 2013 was reduced to 3.1% of GDP, significantly below the deficit target of 4.3% of GDP. The downtrend of the deficit continued in 2014, as the deficit to GDP ratio amounted to 2.7%, below the 3.0% target. In 2015, tax revenues were higher than expected, and expenditures were lower than expected, leading to a 2.1% budget deficit for 2015. The budget deficit for 2016 was 2.1%, below the deficit target of 2.9% of GDP. As part of the budget and economic plan for fiscal years 2017 and 2018, the Government set the budget deficit target at 2.9% of GDP for each year.

The inflation rate in 2016 was -0.2% at year-end, below the Bank of Israel’s target range of 1% to 3%. The consumer price index (“CPI”) decreased between July 2016 and July 2017 by 0.7%. The NIS/USD exchange rate as of December 31, 2014 stood at 3.889, which represents a depreciation of 12.0% during 2014. The NIS/USD exchange rate as of December 31, 2015 was 3.902, a slight depreciation relative to December 31, 2014. The NIS/USD exchange rate as of December 30, 2016 was 3.845, an appreciation of 1.5% relative to December 31, 2015. The NIS/USD exchange rate as of August 31, 2017 stood at 3.596, representing a significant appreciation of approximately 6.5% relative to December 30, 2016.

In November 2016, Fitch Ratings upgraded Israel’s foreign currency credit rating. During 2016, there was no change in Israel’s foreign currency credit rating from Standard & Poor’s (“S&P”) and Moody’s Investor Services, both of which continued their stable outlook. In August 2017, S&P updated Israel's outlook from stable to positive.

Israel’s economy continues to be affected by current global economic conditions and the slow-growth climate in the global environment, particularly in Europe. Europe continues to face uncertainty as some “eurozone” countries face moderate to low growth and low inflation. The continued sluggish growth in the European Union (EU), which is one of Israel’s major trade partners, could have a material adverse impact on Israel’s balance of trade and thereby adversely affect Israel’s financial condition. Since late 2009, several “eurozone” governments, including Greece, Spain, Italy, Ireland, Portugal, France and Cyprus, have experienced rising national debt levels coupled with the downgrade of the credit ratings of their government debt. As a result of the sovereign debt crisis in Europe, there was significant price volatility in the secondary market for sovereign debt of European and other nations in the beginning of the decade. Additionally, speculation regarding the inability of Greece and other “eurozone” governments to pay their national debts remains uncertain, although these concerns have eased in recent years. Another global economic condition that has had a negative impact on the Israeli economy is the slowdown in key emerging economies, including China and Brazil, which has contributed to the slowdown in Israeli exports. The beginning of the retreat of the Board of Governors of the U.S. Federal Reserve System from its past accommodative monetary policy may also influence the Israeli economy.

Balance of Payments and Foreign Trade

Israel had a current account surplus of 3.9% of GDP in 2016. This surplus follows thirteen years of a positive surplus in the current account. The current account balance decreased steadily from the second half of 2010 through the first quarter of 2012. This decrease was partially attributable to the cessation of natural gas flowing from Egypt and the slowdown in the extraction of natural gas from Yam Tethis reservoir, the combined effect of which required Israel to import expensive alternative fuels during 2011 and 2012. The production of natural gas from the Tamar reservoir, which started in late March 2013, and the decline in fuel prices since the second half of 2012, contributed to an improvement in the current account balance since the second half of 2012 into 2013, 2014, 2015 and 2016. In the first half of 2014, the current account surplus was 4.8%. In the third quarter of 2014, a sharp decrease of the surplus was recorded, mainly due to the negative effects of Operation Protective Edge. In the fourth quarter of 2014, there was an improvement in the current account surplus, but the surplus remained lower than the levels recorded in the first half of 2014.

D-2 During the first three quarters of 2015, the upward trend in the current account surplus continued, as the surplus amounted to 3.7%, 4.8% and 6.1% of GDP in the first, second and third quarters, respectively. The third quarter figure was the highest surplus recorded since 2007. In the fourth quarter of 2015, the current account surplus decreased to 4.6% of GDP, and a further decrease was recorded in the first quarter of 2016, reaching a level of 3.9%. In the second quarter of 2016, an improvement was recorded in the current account surplus, which increased to 4.2% of GDP, but in the third quarter the current account surplus decreased, amounting to 2.4% of GDP. In the fourth quarter of 2016, an improvement was recorded, as the surplus increased to 4.0% of GDP. For the year 2016, the surplus amounted to 3.9% of GDP, a decrease relative to 5.1% in 2015. In the first quarter of 2017, the current account surplus declined to 3.0% of GDP.

After decreases in exports and imports of goods and services in 2015, exports and imports increased in 2016. As a result, Israeli net exports decreased from the high surplus of $8.9 billion in 2015 to a surplus of $6.6 billion in 2016. Compared to 2015, exports in real NIS terms recorded a growth rate of 2.5% in 2016, while imports increased by 9.4% in 2016. The decrease of the Israeli exports of goods during 2016 (in U.S. dollars at current prices) was reflected in a decrease of exports to the United States (-2.9%), the EU (-1.9%), Asia (-11.8%) and other destinations (excluding Asia, -4.7%). Accordingly, in 2016 the share of exports to the EU increased by 1.0% (from 25.1% in 2015 to 26.0% in 2016), the share of exports to the United States increased by 0.8% (from 28.3% in 2015 to 29.0% in 2016), and the share of exports to other destinations (excluding Asia) increased by 0.2% (from 19.0% in 2015 to 19.2% in 2016). On the other hand, in 2016 the share of exports to Asia decreased by 1.9% (from 27.6% in 2015 to 25.8% in 2016).

Following the downward trend recorded in exports and imports of goods in the first three quarters of 2015, since the fourth quarter of 2015, imports and exports have been on an upward trend. Following a decrease of 0.2% in the first quarter of 2016, in the second, third and fourth quarters of 2016, exports of goods (in U.S. dollars at current prices) grew by 1.6%, 0.4% and 2.1%, respectively. This upward trend continued in the first quarter of 2017 with an increase of 1.5%. Imports of goods increased by 0.5%, 4.5%, 0.8% and 2.2% in the first, second, third and fourth quarters of 2016, and imports of goods decreased by 0.3% in the first quarter of 2017.

The growth of imports in 2015 and 2016 was limited due to the local production of natural gas, which offset the imports of certain energy- related products, and the decline in the commodities’ prices, in particular, energy prices.

During 2014, the Bank of Israel had unplanned purchases of $3.5 billion in foreign currency. During 2015, the Bank of Israel had unplanned purchases of $5.7 billion, bringing foreign currency purchases to $8.8 billion in 2015. During 2016, the Bank of Israel had unplanned purchases of $4.2 billion, bringing foreign currency purchases to $6.0 billion in 2016. In November 2016, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2017 would be $1.5 billion, and the Bank announced that it would purchase foreign currency during 2017 accordingly. The Bank of Israel intends to continue such purchases of foreign currency until Israel’s sovereign wealth fund becomes operational, which is anticipated in 2020 (subject to legislative review by the Knesset). In the first seven months of 2017, the Bank of Israel had unplanned purchases of $5.0 billion.

Israel is a party to free trade agreements with its major trading partners, and it is one of the few nations that have signed free trade agreements with both the United States and the EU.

D-3 Fiscal Policy

In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined in “Public Finance — Fiscal Framework,” in the Annual Report for 2016). The revision modified the formula used to calculate the annual budget, beginning with the 2015 − 2016 budget. Under the modified formula, the expenditure ceiling is calculated based on the average population growth rate in the three years prior to the submission of the Expenditure Law, plus the ratio of the medium-term debt target (50%) to the current debt-to-GDP ratio. The modified formula is based on the three-year average population growth rate in order to ensure a consistent increase in expenditure per capita.

Inflation and Monetary Policy

The inflation rate over the last decade (2006 − 2016) was near the middle of the Government’s target range (1% − 3%) and stood at approximately 1.8% annually on average. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. Measured at year-end, the CPI rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013. In 2014, the CPI decreased by 0.2%. Since June 2014, the inflation rate has been below the lower end of the Government’s target range and, since September 2014, the inflation rate has been negative. In 2015, the CPI decreased by 1.0%. In 2016, the CPI decreased by 0.2%. Since the beginning of 2017, the inflation rate has returned to positive territory but is still below the lower bound of the target range. The CPI decreased by 0.7% during the twelve-month period ending July 31, 2017.

In recent years, Israel has been active in the global sovereign debt markets. In March 2009, Israel issued in the global markets an aggregate $1.5 billion principal amount of 5.125% bonds due 2019. In March 2010, Israel issued in the Euro market an aggregate €1.5 billion ($2.07 billion) principal amount of 4.625% bonds due 2020. In January 2012, Israel issued in the global markets an aggregate $1.5 billion principal amount of 4% bonds due 2022. In January 2013, Israel completed a dual-tranche issuance in the global markets, issuing an aggregate $1 billion principal amount of 3.15% bonds due 2023 and an aggregate $1 billion principal amount of 4.5% bonds due 2043. In January 2014, Israel issued in the Euro market an aggregate €1.5 billion ($2.05 billion) principal amount of 2.875% bonds due 2024. In March 2016, the Government issued $1.5 billion in the global markets, consisting of an aggregate of $1 billion principal amount of 2.875% bonds due March 2026 and $500 million principal amount of 4.50% bonds due January 2043; the 2043 bonds were a further issuance of the 4.50% bonds due 2043, which were issued on January 31, 2013. In October 2016, Israel issued $200 million in the global markets, consisting of 4.50% bonds due 2043; the bonds were a further issuance of the 4.5% bonds due 2043, which were issued on January 31, 2013 and reissued in March 2016. In January 2017, Israel completed a dual-tranche issuance in the Euro market, issuing an aggregate €1.5 billion principal amount of 1.5% bonds due 2027 and an aggregate €750 million principal amount of 2.375% bonds due 2037.

D-4 The NIS/USD exchange rate saw an appreciation of the NIS between the second half of 2012 and the end of July 2014, averaging NIS 3.61 for 2013 and NIS 3.48 for the first half of 2014 (compared to NIS 3.86 in 2012). On July 31, 2012, December 31, 2012, July 31, 2013 and December 31, 2013, the NIS/USD exchange rate stood at NIS 3.997, NIS 3.733, NIS 3.566 and NIS 3.471, respectively. On July 24, 2014, the NIS/USD exchange rate stood at its lowest rate since July 2011, slightly above NIS 3.4. In view of this appreciation, the Bank of Israel made two interest rate cuts, as discussed above. In the second half of 2014, the NIS/USD exchange rate saw a depreciation of the NIS, as the rate increased from slightly above NIS 3.4 on July 24, 2014 to slightly below NIS 4.0 as of December 31, 2014. The depreciation trend of the NIS relative to the USD continued into the first months of 2015; in March and April 2015, the exchange rate was occasionally higher than NIS 4.0. Between May 2015 and July 2015, the exchange rate recorded an appreciation of NIS relative to the USD, standing at NIS 3.783 as of July 31, 2015. Between July 31, 2015 and December, 31 2015, the NIS gradually depreciated relative to the USD, reaching NIS 3.902 at the end of 2015 and NIS 3.983 on January 20, 2016. Since then, the NIS appreciated to NIS 3.746 on May 2, 2016 but depreciated again, to NIS 3.90 on June 27, 2016. The NIS appreciated again during the third quarter, standing at 3.746 on September 27, 2016 but, in the fourth quarter of 2016, the NIS depreciated again reaching 3.876 and 3.867 on November 24, 2016 and December 19, 2016. At 2016 year-end, the NIS/USD exchange rate was 3.845. During the first eight months of 2017, the NIS gradually appreciated, reaching 3.596 on August 31, 2017. Since the beginning of 2015 and until the end of November 2015, the NIS recorded an appreciation relative to the Euro, mainly due to the Quantitative Easing in the “eurozone”. The Euro/NIS exchange rate reached its lowest level at the beginning of March 2017 since 2002; since then, however, the NIS has depreciated relative to the Euro.

In response to a sharp appreciation of the NIS that began in 2008 and continued until mid-2011, the Bank of Israel initiated a two-year policy of daily purchases of foreign currency. In August 2009, the Bank of Israel announced that it would terminate its daily purchasing of foreign currency but planned to continue purchasing such currency when it deems advisable. Between August 2011 and April 2013, the Bank of Israel did not make substantial foreign currency purchases. In May 2013, the Bank of Israel announced its plan to resume purchasing foreign currency to counteract the adverse effects of natural gas production from the Tamar reservoir, which began operating in late March 2013, on the balance of payments. Appreciation pressures on the NIS began following the commencement of production from the Tamar reservoir. The Bank of Israel’s intervention in the foreign exchange market, for the first time since 2011, was intended to offset the appreciation pressure on the NIS resulting from the increased domestic production of natural gas, in order to avoid the phenomenon known as “Dutch disease”, which could negatively impact the Israeli economy. The Bank of Israel purchased $2.1 billion by the end of 2013 and another $3.5 billion in planned purchases during 2014. The Bank of Israel also purchased $3.5 billion in unplanned purchases during 2014. During 2015, the Bank of Israel purchased $3.1 billion in planned purchases, as it announced in December 2014, and purchased another $5.7 billion in unplanned purchases. During 2016, the Bank of Israel purchased $1.8 billion in planned purchases, as it announced in November 2015, as well as another $4.2 billion in unplanned purchases. In November 2016, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2017 would be $1.5 billion and announced that it would purchase foreign currency during 2017 accordingly. In the first seven months of 2017, the Bank of Israel purchased $6.04 billion in foreign currency, including $1.04 billion in the context of the aforementioned plan. Since the Bank of Israel’s intervention in the foreign exchange market, the Bank of Israel has purchased a total of $11.54 billion in foreign currency within the framework of the gas plan.

At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.1 billion as of the end of 2014 and $90.6 billion as of the end of 2015. The official reserves increased further, amounting to $98.4 billion as of the end of 2016. As of the end of July 2017, the official reserves stood at $110.1 billion.

Labor Market

The rate of unemployment dropped to 4.8% in 2016, compared to 5.3% in 2015, reflecting a significant decrease compared to 5.9% in 2014, 6.2% in 2013 and 6.9% in 2012. The unemployment rate continued the downward trend in the first seven months of 2017, reaching 4.1% in July 2017. The participation rate increased from 62.6% at the beginning of 2012 to 64.2% in the fourth quarter of 2014. In 2015 and 2016, the participation rate was stable at 64.1%, slightly lower than the 2014 rate. As of July 2017, the participation rate stood at 64.1%. Despite the high participation rate and low unemployment rate, there are no major signs of pressure to increase wages, although the growth rate of wages has significantly accelerated since the beginning of 2015.

D-5 Capital Markets

The Tel-Aviv Stock Exchange (the “TASE”) is Israel’s sole stock exchange and the Tel-Aviv 100 (“TA-100”) and Tel-Aviv 25 (“TA-25”) are its main indices and primary indicators of the stock price performance of Israel’s public companies. The TA-100 and TA-25 measure the 100 and 25 companies, respectively, with the highest market capitalization listed on the TASE. The TASE is highly correlated with major stock markets in developed countries. The global financial crisis and overall weakening in global growth starting in 2008 have affected Israel’s public companies. The TA-100 fell by 51.1% in 2008 but recovered in 2009 and 2010, rising by 88.8% and 14.9%, respectively. In 2011, the TA-100 fell by 20.1% and the TA-25 fell by 18.2%. The TASE partially recovered in 2012, with the TA-100 and TA-25 rising by 7.2% and 9.2%, respectively. This recovery continued into 2013 as the TA-100 and TA-25 increased by 15.1% and 12.1%, respectively. During 2014, the TA-100 and TA-25 increased by 6.7% and 10.2%, respectively, and in 2015 the TASE continued its upward trend, as the TA-100 and TA-25 rose by 2.0% and 4.4%, respectively. During 2016, the TA-100 and TA-25 decreased by 2.5% and 3.8%, respectively. In February 2017, the TASE introduced changes to the TA-100 and TA-25 indices, which have been renamed the TA-125 and TA-35, respectively, and now measure the 125 and 35 companies, respectively, with the highest market capitalization listed on the TASE. During the first eight months of 2017, the TA-125 and TA-35 continued their declining trends from 2016, decreasing by 0.9% and 4.7%, respectively.

In light of the 1.5% appreciation of the NIS against the USD during 2016, the TA-35 decreased by 2.4% in USD terms and 3.8% in nominal terms over the course of the year. The value of the public portfolio of financial assets (a weighted average of the public’s holdings of financial assets and deposits, in Israel and abroad) increased by 8.9% and 6.9% during 2013 and 2014, respectively. In 2015 and 2016, the value of the public portfolio of financial assets increased further by 4.3% and 3.7%, respectively. According to the Bank of Israel estimate, the value of the public portfolio of financial assets shows an increase of 1.9% in the first half of 2017. In provident funds in 2013, there was a net inflow of assets under management of NIS 2.757 billion. In 2014, there was a net inflow of NIS 5.370 billion. In 2015, there was a net inflow of NIS 8.242 billion. In 2016, there was a net inflow of NIS 11.181 billion. For the first seven months of 2017, there was an additional net inflow of NIS 10.297 billion.

Political Situation

D-6 Israel signed peace treaties with Egypt in 1979 and with Jordan in 1994, but past efforts to achieve peace with Syria, Lebanon and the Palestinians have yet to bear fruit. Relations between Israel and the Palestinian Authority continue to be based on existing agreements.

In the summer of 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. In June 2007, Hamas, a terror organization, assumed control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 into 2011. Operation Cast Lead did not materially affect the Israeli economy. From 2011 into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel launched Operation Pillar of Defense, a military campaign against terrorist targets in Gaza. Operation Pillar of Defense lasted eight days. In response to Hamas firing rockets from Gaza into Israel in the summer of 2014, in July 2014, Israel took defensive military action and commenced Operation Protective Edge with the goal of suppressing the rocket fire, some of which reached Israel cities and towns almost 100 kilometers away from Gaza. The operation ended in August 2014.

D-7 Since the signing of the Camp David Accords in 1979, peace with Egypt has been important to Israel’s national security. Following the ousting of Egyptian President Hosni Mubarak in 2011, the relationship between Egypt and Israel has been strained, but the election of President Al-Sisi has been accompanied by reassuring statements regarding common interests. Israel does not perceive a material change in the strategic stance of Egypt, and the peace treaty between the two states remains in force.

Moreover, Israel monitors very closely the situation in Syria, in which many dangerous forces operate. The direct threat to Israel from the Syrian military has diminished. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and the possibility that the ongoing civil war will devolve into a state of anarchy.

Privatization

Loan Guarantee Program

D-8 The amount of guarantees that may be issued to Israel under the loan guarantee program may be reduced by an amount equal to the amount extended or estimated to have been extended by Israel for activities that the President of the United States determines are inconsistent with the objectives and understandings reached between the United States and Israel regarding the implementation of the loan guarantee program. Under the program, the United States issues guarantees with respect to all payments of principal and interest on certain bonds issued by Israel. The proceeds of the guaranteed loans may be used to refinance existing debt. Under the $9 billion loan guarantee program, between September 2003 and November 2004 Israel issued guaranteed notes totaling $4.1 billion face value. Israel has not issued any notes under the loan guarantee program since November 2004, and up to $3.8 billion of U.S. loan guarantees (subject to the reductions described above) remains available.

D-9 Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2012 2013 2014 2015 2016 Main Indicators GDP (at constant 2015 prices) 1,050.5 1,094.7 1,132.8 1,162.5 1,208.6 Real GDP growth 2.2% 4.2% 3.5% 2.6% 4.0% GDP per capita (at constant 2015 prices) 132,857 135,885 137,938 138,775 141,464 GDP per capita, percentage change 0.3% 2.3% 1.5% 0.6% 1.9% Inflation (change in CPI - annual average) 1.7% 1.5% 0.5% -0.6% -0.5% Industrial production 4.0% 0.5% 1.2% 2.2% 1.7% Business sector product (at constant 2015 prices) 774.4 811.4 840.0 862.4 899.1 Permanent average population (thousands) 7,907 8,056 8,212 8,377 8,544 Unemployment rate(1) 6.9% 6.2% 5.9% 5.3% 4.8% Foreign direct investment (net inflows, in billions of dollars) 9.0 11.8 6.0 11.3 11.9 Trade Data Exports (F.O.B) of goods and services (NIS, at constant 2015 prices) 354.9 366.6 373.5 363.5 372.8 Imports (F.O.B) of goods and services (NIS, at constant 2015 prices) 317.4 316.8 329.5 328.5 359.4

Government Debt(2) Total gross government debt (at end-of-year current prices)(3) 666.8 696.3 715.8 726.7 740.8 Total gross government debt as percentage of GDP 67.1% 65.7% 64.9% 62.5% 60.7% External Debt External debt liabilities (in millions of dollars, at year end) 100,497 99,988 94,176 85,917 87,734 Net external debt (in millions of dollars, at year end) -70,273 -84,105 -103,093 -122,161 -133,746

(1) Reflects changes in the Central Bureau of Statistics’ labor survey methodology, resulting in higher values in the unemployment rate line items. (2) Government debt excluding local authorities’ debt. (3) Risk Management Dept., Debt Unit, Ministry of Finance. Sources: Central Bureau of Statistics, Bank of Israel and Ministry of Finance.

D-10 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 3 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2015 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO WHICH NAMES OF REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Avi Braf Chief Fiscal Officer for the Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: STEVEN G. TEPPER, ESQ. Arnold & Porter Kaye Scholer LLP 399 Park Avenue New York, New York 10022

* The Registrant is filing this annual report on a voluntary basis.

1 THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 3 is to file with the Securities and Exchange Commission the Summary Information and Recent Developments in the State as of January 2, 2017, which is included as Exhibit D-2 hereto and which updates and amends the Current Description of the State previously filed as Exhibit D and the Recent Developments previously filed as Exhibit D-1.

2 EXHIBIT INDEX

Exhibit Number

A: None.

B: None.

C: (P) Copy of the State Budget for Fiscal Years 2015-2016 (in Hebrew).*

D: Current Description of the State of Israel.*

D-1: Recent Developments in the State as of September 23, 2016.*

D-2: Recent Developments in the State as of January 2, 2017.

E: Opinion of the Legal Advisor to the Ministry of Finance of the State of Israel dated October 6, 2016.*

F: Opinion of Arnold & Porter LLP dated October 6, 2016.*

G: Underwriting Agreement dated September 29, 2016 by and among the State of Israel and Barclays Capital Inc.*

* Previously filed.

3 SIGNATURE

STATE OF ISRAEL

By: /s/ Yali Rothenberg Yali Rothenberg Senior Deputy Accountant General Ministry of Finance

By: /s/ Gil Cohen Gil Cohen Managing Director Government Debt Management Ministry of Finance

4 Exhibit D-2

SUMMARY INFORMATION AND RECENT DEVELOPMENTS

The information included in this section supplements the information about the State contained in the State’s Annual Report for 2015 on Form 18-K filed with the SEC on June 30, 2016, as amended from time to time. To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2015, as amended from time to time, through the date hereof, the information in this section supersedes and replaces such information. Capitalized terms not defined in this section have the meanings ascribed to them in the Annual Report for 2015. This section is not complete and may not contain all the information that you should consider. You should read the entire Annual Report and any supplement carefully. Totals in certain tables may differ from the sum of the individual items in such tables due to rounding. Unless otherwise specified, amounts in NIS or US$ are given in current prices without adjustment for inflation. Figures in this section are as of January 2, 2017, except as otherwise indicated.

Economic Developments In August 2013, the Central Bureau of Statistics (“CBS”) adopted the United Nations System of National Accounts as revised in 2008 (“SNA 2008”) due to a number of major changes that affected the various data series with respect to values as well as percentages of change between periods. The data series beginning in 2006 was revised for the publication of the 2013 Statistical Abstract. The series from 1995 onwards was revised in August 2014. The revisions are in accordance with the changes to the SNA 2008 which has been accepted globally and includes changes in the measurement of the annual gross domestic product (“GDP”). Some of the main changes in the SNA 2008 applicable to Israel included: (i) recording research and development as fixed capital formation, (ii) measurement of income from financial intermediation, (iii) recording the Central Bank’s output, and (iv) recording of products for further processing in the balance of payments. The process of fully implementing SNA 2008 in Israel will take several years and will be accompanied by additional adjustments to the Balance of Payments Manual 6 (“BPM6”) and the new international merchandise trade statistics guide. Further changes have been reflected in the classification of economic activities in Israel, as the classification is in accordance with the new International Standard Industrial Classification (“ISIC Rev4”). Moreover, there has been integration of the 2006 input-output tables that describe the relationships between various industries, as well as between the industries and the final uses (private consumption, general government consumption, fixed capital formation and exports). These methodology changes resulted in a restatement of the growth rates for 1995 through 2012, as well as certain other indicators including the debt-to-GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable to the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the Central Bureau of Statistics. The Israeli economy grew, according to the CBS preliminary estimates, at a pace of 3.8% in 2016, following a growth rate of 2.5% in 2015 and 3.2% in 2014. The acceleration in growth in 2016 can be attributed primarily to domestic factors, including a high growth rate in private consumption (mainly durable goods including cars) on the background of low interest rates, and a sharp increase in fixed capital formation, which grew by 11.0% in 2016. The slowdown in the growth during 2014 and 2015 can be attributed to exogenous factors including the slowdown in economies around the world, which contributed to the slowdown in Israeli exports, the appreciation of the Israeli NIS during the first half of 2014 and Operation Protective Edge which took place in July and August 2014 and weighed on the economy. In 2015, GDP increased by 2.4% in the first quarter, decreased by 0.2% in the second quarter and grew by 2.0% and 4.1% in the third and fourth quarters, respectively, in each case compared to the previous quarter at an annualized rate. During the first quarter of 2016, GDP grew at an annual rate of 3.2%, a decrease compared to the fourth quarter of 2015. During the second quarter of 2016, GDP grew at an annual rate of 4.9%. During the third quarter of 2016, GDP grew at an annual rate of 3.4%. The budget and economic plan for the fiscal years of 2017 and 2018 was approved by the Knesset on December 21, 2016. In the approved budget, the deficit target was set to 2.9% of GDP for 2017 and 2018.

D-1 In 2015, the Government continued its debt-reduction policy, reducing Government debt as a percentage of GDP to a level of 62.4%, reflecting a reduction of 2.4% from 2014 levels and a cumulative reduction of 9% since 2007, before the global financial crisis. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path, falling to a level of 63.9% in the end of 2015, a decline of 2.1% relative to 2014 and a cumulative decline of 9.2% since 2007. After a deviation from the budget deficit target in 2012 (the actual budget deficit amounted to 3.9% of GDP during 2012 compared to a target of 2.0% of GDP), the actual budget deficit in 2013 was reduced to 3.2% of GDP, significantly below the 4.3% of GDP deficit target. The downtrend of the deficit continued in 2014, as the deficit to GDP ratio amounted to 2.8%, below the 3.0% target. In 2015, tax revenues were higher than expected, and expenditures were lower-than-expected. This led to a 2.2% budget deficit for 2015. As part of the budget and economic plan for fiscal years 2017 and 2018, the Government set the budget deficit target at 2.9% of GDP for each year, identical to the budget deficit target for 2016. The inflation rate in 2015 was -1.0% at year end, below the Bank of Israel’s target range of 1% to 3%. The consumer price index (“CPI”) decreased between November 2015 and November 2016 by 0.3%. The NIS/USD exchange rate as of December 31, 2014 stood at 3.889, which represents a depreciation of 12.0% during 2014. The NIS/USD exchange rate as of December 31, 2015 was 3.902, a slight depreciation relative to December 31, 2014. The NIS/USD exchange rate as of December 31, 2016 stood at 3.845, representing an appreciation of approximately 1.5% relative to December 31, 2015. In November 2016, Fitch Ratings upgraded Israel’s foreign currency credit rating to A+ (Stable) from A (Positive), reflecting confidence in the strong current account position and in the continued reduction in the debt to GDP ratio. This followed April 2016, when Fitch Ratings revised the Outlook on Israel’s Long- Term Foreign-Currency IDR to Positive from Stable. Standard & Poor’s (“S&P”) (A+ (Stable)) and Moody’s Investor Services (A1 (Stable)) ratings remained unchanged in 2016. Israel’s economy continues to be affected by current global economic conditions and the slow-growth climate in the global environment, particularly in Europe, and most recently the British referendum to leave the European Union. Europe continues to face uncertainty as many “eurozone” countries face moderate to low growth and inflation close to zero. The continued sluggish growth in the European Union (EU), which is one of Israel’s major trade partners, could have a material adverse impact on Israel’s balance of trade and thereby adversely affect Israel’s financial condition. Since late 2009, several “eurozone” governments, including Greece, Spain, Italy, Ireland, Portugal, France and Cyprus, have experienced rising national debt levels coupled with the downgrade of the credit ratings of their government debt. As a result, there has been significant price volatility in the secondary market for sovereign debt of European and other nations. Additionally, speculation regarding the inability of Greece and other “eurozone” governments to pay their national debts remains uncertain, although these concerns have eased in recent years. Another global economic condition that has had a negative impact on the Israeli economy is the slowdown in key emerging economies, including China, Russia and Brazil, which has contributed to the slowdown in Israeli exports. Although Israel’s economy has sustained moderate rates of growth in recent years, there can be no assurance that Israel’s economy will continue to grow in a prolonged negative global economic climate.

Balance of Payments and Foreign Trade Israel had a high current account surplus of 4.6% of GDP in 2015. This surplus follows twelve years of a positive surplus in the current account. The current account balance decreased steadily from the second half of 2010 through the first quarter of 2012. This decrease was partially attributable to the cessation of natural gas flowing from Egypt and the slowdown in the extraction of natural gas from Yam Tethis reservoir, the combined effect of which required Israel to import expensive alternative fuels during 2011 and 2012. The production of natural gas from the Tamar reservoir, which started in late March 2013, and the decline in fuel prices since the second half of 2012, contributed to an improvement in the current account balance since the second half of 2012 and into 2013, 2014 and 2015. In the first half of 2014, the current account surplus was 4.6%. In the third quarter of 2014, a sharp decrease of the surplus was recorded, mainly due to the negative effects of Operation Protective Edge. In the fourth quarter of 2014, there was an improvement in the current account surplus, but the surplus remained lower than the levels recorded in the first half of 2014. During the first two quarters of 2015, the upward trend in the current account surplus continued, as the surplus amounted to 3.9% and 5.0% of GDP in the first and second quarters, respectively. The second quarter figure was the highest surplus recorded since 2010. In the third quarter of 2015, the current account surplus slightly decreased to 4.8% of GDP, and a further decrease was recorded in the fourth quarter of 2015, reaching a surplus of 3.7% of GDP. In the first quarter of 2016, the current account surplus increased to 4.2% of GDP, and in the second quarter a further improvement was recorded as the surplus increased to 4.5% of GDP. In the third quarter of 2016, the surplus in the current account decreased to 3.4% of GDP, the lowest level since the third quarter of 2014.

D-2 Exports of goods and services decreased during 2015, relative to 2014 and 2013. A decline was also recorded in the imports of goods and services in 2015, mainly due to the decrease in oil prices. Thus, in 2015, Israel recorded a net-export surplus of $9.0 billion, significantly higher than the 2013 and 2014 surplus of $6.6 billion and $5.6 billion, respectively. Compared to 2015, exports in real NIS terms recorded a growth rate of 3.0% in 2016, and imports increased by 9.2%. The decrease of the Israeli exports of goods during 2015 (4.1% in current dollar terms, excluding diamonds) was reflected in a decrease of exports to the EU (- 12.0%) and to other destinations (-16.5%, excluding Asia). Exports to the United States and Asia increased by 4.6% and 15.0%, respectively, in 2015. The share of exports to Asia increased by 4.0% (from 20.3% in 2014 to 24.4% in 2015), and the share of exports to the United States increased by 2.0% (from 21.8% in 2014 to 23.8% in 2015). On the other hand, the share of exports to the EU decreased by 2.6% (from 31.6% in 2014 to 29.0% in 2014), and the share of exports to other destinations decreased by 3.4% (from 26.3% in 2014 to 22.9% in 2015). During the first, second, third and fourth quarters of 2015, exports of goods in current USD terms decreased by 5.8%, 5.3%, 1.7% and 0.7%, respectively, in each case compared to the previous quarter. In the first, second and third quarters of 2016, the negative trend was halted as the exports of goods increased by 1.0%, 1.4% and 0.4%, respectively. At the same time, imports of goods also recorded a downward trend, as imports decreased by 7.6%, 5.7%, and 3.2% in the first, second and third quarters of 2015, respectively, in each case compared to the previous quarter. In the fourth quarter of 2015, the imports of goods increased by 6.4%, but returned to the downward trend in the first quarter of 2016, as imports of goods decreased by 0.4%. In the second and third quarters of 2016, the imports of goods recorded increases of 4.3% and 1.2%, respectively. The growth of imports in 2015 was limited due to the local production of natural gas which offset the imports of certain energy-related products and the decline in the commodities’ prices, and in particular energy prices. On March 30, 2013, natural gas production at the Tamar reservoir began. The gas flowing from Tamar is being used mainly for domestic electricity production and has led to a significant decrease in energy-related imports. Following the beginning of gas production from Tamar, there were appreciation pressures on the NIS, leading the Bank of Israel to intervene in the foreign exchange market for the first time since 2011. Since the intervention, the Bank of Israel has purchased a total of $10.2 billion in foreign currency within the framework of the gas plan, including $3.5 billion during 2014, $3.1 billion during 2015 and $1.5 billion in the first eleven months of 2016. During 2014, the Bank of Israel had unplanned purchases of $3.5 billion in foreign currency. During 2015, the Bank of Israel had unplanned purchases of $5.7 billion. In the first eleven months of 2016, the Bank of Israel had unplanned purchases of $3.4 billion. In November 2016, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2017 would be $1.5 billion, and the Bank announced that it would purchase foreign currency during 2017 accordingly. The Bank of Israel intends to continue such purchases of foreign currency until Israel’s sovereign wealth fund becomes operational, which is anticipated in 2018 (subject to legislative review by the Knesset). Israel is a party to free trade agreements with its major trading partners and it is one of the few nations that has signed free trade agreements with both the United States and the EU.

Fiscal Policy The budget deficit amounted to 2.2% of GDP in 2015, below the budget deficit target of 2.9% of GDP for that year. Since 2009, the budget deficit has been on a declining path, with the exception of 2012. In 2009, the budget deficit amounted to 4.9%, due to a decrease in tax revenues resulting from the global financial crisis (the 2009 budget deficit target was set at 6%); 3.4% of GDP in 2010 (the 2010 budget deficit target was set at 5.5%); 3.1% in 2011 (the 2011 budget deficit target was set at 3.0%); 3.9% in 2012 (the 2012 budget deficit target was set at 2.0%); 3.2% in 2013 (the 2013 budget deficit target was set at 4.3%); and 2.8% in 2014 (the 2014 budget deficit target was set at 3.0%). Pursuant to recent legislation, the budget deficit target is set at 2.9% of GDP for 2016, 2017 and 2018. In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined in “Public Finance — Fiscal Framework” in the Annual Report for 2015). The revision modified the formula used to calculate the annual budget, beginning with the 2015 budget. Under the modified formula, the expenditure ceiling is calculated based on the average population growth rate in the three years prior to the submission of the Expenditure Law, plus the ratio of the medium-term debt target (50%) to the current debt-to-GDP ratio. The modified formula is based on the three-year average population growth rate in order to ensure a consistent increase in expenditure per capita.

D-3 Inflation and Monetary Policy The inflation rate over the last decade (2005 – 2015) was near the middle of the Government’s target range (1% – 3%) and stood at approximately 2% on average. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. Measured at year-end, the CPI rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013 and decreased by 0.2% in 2014 and 1.0% in 2015. The CPI decreased by 0.3% during the twelve-month period ending November 30, 2016. Because of the slowdown in the Israeli and global economies, the Bank of Israel lowered its key interest rate to 0.5% in the middle of 2009. As Israel’s economy recovered and continued to grow, the Bank of Israel began to gradually increase its key interest rate until it peaked at 3.25% in June 2011. The Bank of Israel then repeatedly reduced its key interest rate by 0.25%, beginning in September 2011. In May 2013, the Bank of Israel announced that it would further reduce the interest rate by 0.5%, to 1.25%. In March 2014, the Bank of Israel reduced its key interest rate to 0.75%. In August and September 2014, the Bank of Israel reduced its key interest rate twice, each time by 0.25%, to 0.25%. In March 2015, the Bank made another interest rate cut, lowering its key interest rate to 0.1%. The last interest rate cuts were made primarily because of the appreciation of the NIS. The real interest rate averaged -0.1% in 2016, following three years of negative interest rates, when real interest rates averaged -0.2%, -0.6% and -0.5% in 2013, 2014 and 2015, respectively, after two years of positive real interest rates of 0.4% and 0.3% in 2011 and 2012, respectively. In 2009 and 2010, the real interest rate was negative (-0.7% and -0.9%, respectively). As of December 2016, the real interest rate, less inflation expectations, was -0.4%. In recent years, Israel has been active in the global sovereign debt markets. In March 2009, Israel issued in the global markets an aggregate $1.5 billion principal amount of 5.125% bonds due 2019. In March 2010, Israel issued in the Euro market an aggregate €1.5 billion ($2.07 billion) principal amount of 4.625% bonds due 2020. In January 2012, Israel issued in the global markets an aggregate $1.5 billion principal amount of 4% bonds due 2022. In January 2013, Israel completed a dual-tranche issuance in the global markets, issuing an aggregate $1 billion principal amount of 3.15% bonds due 2023 and an aggregate $1 billion principal amount of 4.5% bonds due 2043. In January 2014, Israel issued in the Euro market an aggregate €1.5 billion ($2.05 billion) principal amount of 2.875% bonds due 2024. In March 2016, Israel issued $1.5 billion in the global markets, consisting of an aggregate of $1 billion 2.875% bonds due March 2026 and $500 million 4.5% bonds due January 2043; the 2043 bonds were a further issuance of the 4.5% bonds due 2043, which were issued on January 31, 2013. In September 2016, Israel issued $200 million in the global markets, consisting of 4.5% bonds due 2043; the bonds were a further issuance of the 4.5% bonds due 2043, which were issued on January 31, 2013 and reissued in March 2016. The NIS/USD exchange rate saw an appreciation of the NIS between the second half of 2012 and the end of July 2014, averaging NIS 3.61 for 2013 and NIS 3.48 for the first half of 2014 (compared to NIS 3.86 in 2012). On July 31, 2012, December 31, 2012, July 31, 2013 and December 31, 2013, the NIS/USD exchange rate stood at NIS 3.997, NIS 3.733, NIS 3.566 and NIS 3.471, respectively. On July 24, 2014, the NIS/USD exchange rate stood at its lowest rate since July 2011, slightly above NIS 3.4. In view of this appreciation, the Bank of Israel made two interest rate cuts, as discussed above. In the second half of 2014, the NIS/USD exchange rate saw a depreciation of the NIS, as the rate increased from slightly above NIS 3.4 on July 24, 2014 to slightly below NIS 4.0 as of December 3, 2014. The depreciation trend of the NIS relative to the USD continued into the first months of 2015; in March and April 2015, the exchange rate was occasionally higher than NIS 4.0. Between May 2015 and July 2015, the exchange rate recorded an appreciation of NIS relative to the USD, standing at NIS 3.783 as of July 31, 2015. Between July 31, 2015 and December, 31 2015, the NIS gradually depreciated relative to the USD, reaching NIS 3.902 at the end of 2015 and NIS 3.983 at January 20, 2016. Since then the NIS appreciated to NIS 3.746 at May 2, 2016, depreciated again to NIS 3.9 at June 27, 2016, and appreciated again to 3.845 as of December 31, 2016. Since the beginning of 2015 and until the end of November 2015 the NIS recorded an appreciation relative to the Euro, mainly due to the Quantitative Easing in the “eurozone”; however, since the beginning of December 2015, the NIS has depreciated relative to the Euro, a trend which continued in the first half of 2016. In the second half of 2016, the NIS has appreciated relative to the Euro.

D-4 In response to a sharp appreciation of the NIS that began in 2008 and continued until mid-2011, the Bank of Israel initiated a two-year policy of daily purchases of foreign currency. In August 2009, the Bank of Israel announced that it would terminate its daily purchasing of foreign currency but that it planned to continue purchasing such currency when it deems advisable. Between August 2011 and April 2013, the Bank of Israel did not make substantial foreign currency purchases. In May 2013, the Bank of Israel announced its plan to resume purchasing foreign currency to counteract the adverse effects of natural gas production from the Tamar reservoir, which began operating in late March 2013, on the balance of payments. Appreciation pressures on the NIS began following the commencement of production from the Tamar reservoir. The Bank of Israel’s intervention in the foreign exchange market, for the first time since 2011, is intended to offset the appreciation pressure on the NIS resulting from the increased domestic production of natural gas in order to avoid the phenomenon known as “Dutch disease”, which could negatively impact the Israeli economy. The Bank of Israel purchased $2.1 billion by the end of 2013, and another $3.5 billion in planned purchases during 2014. The Bank of Israel also purchased $3.5 billion in unplanned purchases during 2014. During 2015, the Bank of Israel purchased $3.1 billion in planned purchases, as it announced in December 2014, and purchased another $5.7 billion in unplanned purchases. In the first eleven months of 2016, the Bank of Israel purchased $4.9 billion in foreign currency, including $1.5 billion in the context of the aforementioned plan. Since the Bank of Israel’s intervention in the foreign exchange market, the Bank of Israel has purchased a total of $10.2 billion in foreign currency within the framework of the gas plan. In November 2016, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2017 would be $1.5 billion, and the Bank announced that it would purchase foreign currency during 2017 accordingly. At the end of 2010 and 2011, official reserves stood at $70.9 billion and $74.9 billion, respectively. At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.1 billion as of the end of 2014 and $90.6 billion as of the end of 2015. As of the end of November 2016, the official reserves stood at $97.1 billion.

Labor Market The rate of unemployment dropped to 5.3% in 2015, compared to 5.9% in 2014, reflecting a significant decrease compared to 6.2% in 2013, 6.9% in 2012 and 7.0% in 2011. The unemployment rate continued the downward trend in 2016, reaching 4.6% in November 2016. The participation rate increased from 62.8% at the beginning of 2012 to 64.2% in the fourth quarter of 2014. In 2015, the participation rate was stable at 64.1%, slightly lower than the 2014 rate. As of November 2016, the participation rate stood at 64.2%, representing an average of 64.2% in the first eleven months of 2016. In accordance with the high participation rate and low unemployment rate, the growth rate of wages has accelerated significantly since the beginning of 2015.

Capital Markets The Tel-Aviv Stock Exchange (the “TASE”) is Israel’s sole stock exchange and the Tel-Aviv 100 (“TA-100”) and Tel-Aviv 25 (“TA-25”) are its main indices and primary indicators of the stock price performance of Israel’s public companies. The TA-100 and TA-25 measure the 100 and 25 companies, respectively, with the highest market capitalization listed on the TASE. The TASE is highly correlated with major stock markets in developed countries, and the global financial crisis and overall weakening in global growth starting in 2008 have affected Israel’s public companies. The TA-100 fell by 51.1% in 2008 but recovered in 2009 and 2010, rising by 88.8% and 14.9%, respectively. In 2011, the TA-100 fell by 20.1% and the TA-25 fell by 18.2%. The TASE partially recovered in 2012, with the TA-100 and TA-25 rising by 7.2% and 9.2%, respectively. This recovery continued into 2013 as the TA-100 and TA-25 increased by 15.1% and 12.1%, respectively. During 2014, the TA-100 and TA-25 increased by 6.7% and 10.2%, respectively, and in 2015 the TASE continued its upward trend, as the TA-100 and TA-25 rose by 2.0% and 4.4%, respectively. During 2016 through December 31, 2016, the TA-100 and TA-25 declined by 2.5% and 3.8%, respectively. In light of the 1.5% appreciation of the NIS against the USD during 2016, the TA-25 decreased by 2.5% in USD terms and 3.8% in nominal terms over the course of the year. The value of the public portfolio of financial assets (a weighted average of the public’s holdings of financial assets and deposits, in Israel and abroad) increased by 8.9% and 6.8% during 2013 and 2014, respectively. In 2015, the value of the public portfolio of financial assets increased further by 4.5%. According to the Bank of Israel estimate, the value of the public portfolio of financial assets shows an increase of 1.9% in the first ten months of 2016. In provident funds in 2013, there was a net inflow of assets under management of NIS 2.757 billion. In 2014, there was a net inflow of NIS 5.370 billion. In 2015 there was a net inflow of NIS 8.242 billion. For the first eleven months of 2016, there was an additional net inflow of NIS 8.401 billion. The Bank of Israel, together with governmental authorities and regulators, monitors Israeli banks and financial institutions on an ongoing basis, supervising the banking system’s conditions and operations as a whole. In addition, the Bank of Israel cooperates with the Ministry of Finance and the Israel Securities Authority to achieve comprehensive regulation and supervision of Israel’s financial markets, to ensure coordination among the various entities in the financial sector and to set policies and measures that will be implemented and enforced with respect to such entities.

D-5 In 2011, the Bank of Israel and the Ministry of Finance took a number of steps to reduce short-term investments by foreign investors. These included, starting in January 2011, requiring banking corporations in Israel to meet a 10% reserve requirement for foreign exchange swap transactions and shekel-based forward contracts entered into by non-residents (which was subsequently canceled at the end of October 2014). In addition, the Ministry of Finance cancelled a tax exemption previously granted to foreign investors on capital gains from non-indexed zero-coupon securities of up to one-year maturity issued by the Bank of Israel (“Makam”) and short-term government bonds. To improve its ability to analyze transactions in the foreign exchange market and to increase transparency and investor confidence, the Bank of Israel imposed reporting obligations on Israeli residents and non-residents undertaking transactions in foreign exchange swaps and forwards exceeding $10 million per day, and non-residents undertaking transactions in Makam and short-term government bonds exceeding NIS 10 million per day.

Political Situation 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 but rather a number of basic laws that were granted special status, enabling judicial review by the Israeli Supreme Court. Israel’s constitutional jurisprudence is also grounded in judicial decisions and in the State’s Declaration of Independence. The President of Israel is the Head of State. The presidency is largely an apolitical, figurehead role, with the real executive power in the hands of the Prime Minister. The legislative power of the State resides in the Knesset, a unicameral parliament that consists of 120 members elected by universal suffrage under a system of proportional representation (see “State of Israel — Form of Government and Political Parties” in the Annual Report for 2015). Israel signed peace treaties with Egypt in 1979 and with Jordan in 1994, but past efforts to achieve peace with Syria, Lebanon and the Palestinians have yet to bear fruit. Relations between Israel and the Palestinian Authority continue to be based on existing agreements. In 2005, Israel withdrew completely from the Gaza Strip (“Gaza”), dismantling all Israeli communities in Gaza and all of its military bases there, as well as four Israeli settlements in the northern West Bank (see “State of Israel — International Relations” in the Annual Report for 2015). In the summer of 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. In June 2007, Hamas, a terror organization, assumed control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 and into 2011. Operation Cast Lead did not materially affect the Israeli economy. From 2011 and into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel launched Operation Pillar of Defense, a military campaign against terrorist targets in Gaza. Operation Pillar of Defense lasted eight days. In response to Hamas firing rockets from Gaza into Israel in the summer of 2014, in July 2014, Israel took defensive military action and commenced Operation Protective Edge with the goal of suppressing the rocket fire, some of which reached Israel cities and towns almost 100 kilometers away from Gaza. The operation ended in August 2014. Having been at a standstill since 2009 (despite a brief round of talks beginning in September 2010), Israeli-Palestinian peace negotiations were again initiated, under the auspices of U.S. Secretary of State John Kerry, in July 2013. Progress was made but, before the last phase of implementation of a prisoner release by Israel, for which Government approval was imminent, the Palestinian Authority breached its commitments and submitted requests to accede to fifteen international conventions. While the talks were suspended, the Palestinians announced a unity pact between Fatah and Hamas, which would lead to a so-called national consensus government. Incorporating Hamas into the Palestinian government, under one guise or another, is unacceptable to Israel as long as Hamas rejects the three benchmarks of the International Quartet (namely, recognizing Israel, accepting existing Israeli-Palestinian agreements, and renouncing violence). Although Israel has expressed its willingness to negotiate without preconditions with Palestinian partners who accept the Quartet’s conditions, Hamas still refuses to do so, leaving negotiations at an impasse. However, improvements have been made in economic and security cooperation with the Palestinian Authority. In September 2011, the Palestinian Authority filed an application for membership with the United Nations. In November 2012, the General Assembly upgraded the Palestinian Authority’s status in the United Nations from a “non-member observer entity” to a “non-member observer state.”

D-6 Beginning in October 2015, there was an increase in acts of violence against Israelis, mostly by individual Palestinians using knives or cars as weapons. This wave of violence was welcomed and encouraged by Hamas and, at first, also by the Palestinian Authority. The Palestinian Authority has, however, continued its security cooperation with Israel and has, in general, become more cautious in expressing encouragement for violence. The overall level of violence has shown a decline over the past few months, although with occasional renewed flare-ups. Since January 2011, there has been political instability and civil unrest in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. This unrest has resulted in the removal of long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. The delicate relations between Israel and its neighbors could become even more fragile with the domestic turmoil and change in regimes. However, such instances of instability in the Middle East and North Africa region have so far not materially affected Israel’s financial or political situation, and countries who have signed peace agreements with Israel remain committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not thereby be affected. This uncertainty is highlighted by recent fighting in Syria and Iraq, where an Islamist militia group known as ISIS (Islamist State in Iraq and Syria) is challenging the territorial boundaries of both states. Since the signing of the Camp David Accords in 1979, peace with Egypt has been important to Israel’s national security. Following the ousting of Egyptian President Hosni Mubarak in 2011, the relationship between Egypt and Israel has been strained, but the election of President Al-Sisi has been accompanied by reassuring statements regarding common interests. As of January 2017, Israel does not perceive a material change in the strategic stance of Egypt, and the peace treaty between the two states remains in force. Moreover, as of January 2017, Israel monitors very closely the situation in Syria, in which many dangerous forces operate. The direct threat to Israel from the Syrian military has diminished. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and the possibility that the ongoing civil war will devolve into a state of anarchy. Israel has declared its intention to extend humanitarian assistance to the people of Aleppo. Fundamentalist regimes such as Iran present a deep concern for the international community and especially for states in the region. Since 2011, the prospect of a nuclear Iran has been at the center of international geopolitical discourse. The comprehensive agreement between the P5+1 group and Iran that was reached in July 2015 (Joint Comprehensive Plan of Action or “JCPOA”) conditioned international economic sanctions relief, mainly United States and EU sanctions, on Iranian nuclear capabilities reduction and supervision by the International Atomic Energy Agency (“IAEA”). Following the IAEA’s approval in January 2016 that Iran had implemented the JCPOA’s requirements, the P5+1 carried out their role in the agreement and eased the international economic sanctions in full compliance with the JCPOA. With the economic sanctions relief, the primary United States sanctions and other types of sanctions remain in place with respect to Iran, including secondary sanctions such as terrorism and weapon transfers sanctions. There is evidence that Iran continues to violate United Nations Security Council resolutions, so far with limited success of deterrence by the international community.

Privatization Historically, the Government has been involved in nearly all sectors of the Israeli economy. In the past several decades, privatization has been an essential element of the broader market reforms initiated by the Government aiming to promote the growth of the private sector, mainly by enhancing competition. Israel has made substantial progress in recent years, resulting in the privatization of many enterprises owned by the State and the reduction of State subsidization of business enterprises. In total, between 1986 and 2015, 98 Government Companies (as defined in “Role of the State in the Economy” in the Annual Report for 2015) became partially or fully-private. The proceeds stemming from these privatizations totaled $14.2 billion. In 2010, privatization proceeds amounted to NIS 4.5 billion (approximately $1.2 billion), partly as a result of the privatization of the State’s interest in two of the five major banks in Israel — Israel’s entire remaining stake in Israel Discount Bank Ltd. and 5% of the outstanding equity securities of Bank Leumi Le-Israel Ltd. Currently, the Government holds approximately 6.03% of Bank Leumi’s outstanding equity securities. The Government plans to continue with the process of privatizing its interests in financial institutions, as well as State-owned land, seaports, Postal Authority, energy and transportation utilities and parts of the defense industry (see “The Economy — Role of the State in the Economy” in the Annual Report for 2015).

D-7 Loan Guarantee Program 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 influx of immigrants over this period. Israel completed its financings under this program in January 1998. In April 2003, the United States approved up to $9 billion in additional loan guarantees for Israel to be issued during U.S. government fiscal years 2003 through 2005, with an option to extend the program by an additional year. In 2005, the United States approved Israel’s request to extend the $9 billion program for two more years; in 2006, this program was extended again through U.S. fiscal year 2011 (with an option to carry forward unused guarantee amounts for an additional year); and in 2012, the program was extended again through 2016. On October 24, 2012, the United States and Israel entered into an agreement establishing a new framework for administering the extended program. A further extension of the program was signed into law by President Obama on December 18, 2015. The new law extends the program until September 30, 2019 (with an option to carry forward unused guarantee amounts for an additional year) and allows the United States to provide access to up to $3.8 billion in future loan guarantees as part of the $9 billion commitment made in 2003. The amount of guarantees that may be issued to Israel under the loan guarantee program may be reduced by an amount equal to the amount extended or estimated to have been extended by Israel for activities that the President of the United States determines are inconsistent with the objectives and understandings reached between the United States and Israel regarding the implementation of the loan guarantee program. Under the program, the United States issues guarantees with respect to all payments of principal and interest on certain bonds issued by Israel. The proceeds of the guaranteed loans may be used to refinance existing debt. Under the $9 billion loan guarantee program, between September 2003 and November 2004 Israel issued guaranteed notes totaling $4.1 billion face value. Israel has not issued any notes under the loan guarantee program since November 2004, and up to $3.8 billion of U.S. loan guarantees (subject to the reductions described above) remains available.

D-8 Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2011 2012 2013 2014 2015 Main Indicators GDP (at constant prices) 918.3 940.1 981.3 1,012.3 1,037.7 Real GDP growth 5.1% 2.4% 4.4% 3.2% 2.5% GDP per capita (at constant 2010 prices) 118,285 118,895 121,806 123,270 123,873 GDP per capita, percentage change 3.1% 0.5% 2.4% 1.2% 0.5% Inflation (change in CPI – annual average) 3.5% 1.7% 1.5% 0.5% -0.6% Industrial production 2.1% 4.0% 0.5% 1.2% 2.2% Business sector product (at constant 2010 prices) 688.4 702.4 737.4 760.1 777.8 Permanent average population (thousands) 7,763 7,907 8,056 8,212 8,377 Unemployment rate(1) 7.0% 6.9% 6.2% 5.9% 5.3% Participation rate 62.6% 63.6% 63.7% 64.2% 64.1% Foreign direct investment (net inflows, in billions of dollars) 8.7 8.5 12.4 6.7 11.5 Trade Data Exports (F.O.B) of goods and services (NIS, at constant 2010 prices) 335.9 329.7 341.4 346.3 331.4 Imports (F.O.B) of goods and services (NIS, at constant 2010 prices) 319.1 325.8 324.7 337.2 335.5 FX reserves, as of months of import 9.66 9.84 10.75 11.00 13.10 CA balance as % of GDP 2.5% 0.6% 3.3% 3.9% 4.6% Government Debt(2) Total government debt (at end-of-year current prices)(3) 633.0 666.8 696.3 715.8 726.7 Total government debt as percentage of GDP 67.7% 67.1% 65.7% 64.8% 62.4% Total Public debt (at end-of-year current prices) 646.0 679.7 709.0 729.4 743.6 Total Public debt as percentage of GDP 69.0% 68.4% 67.0% 66.0% 63.9% External Debt Net external creditor position as % of GDP 23.3% 26.2% 27.9% 32.2% 39.5% External debt liabilities (in millions of dollars, at year end) 109,297 102,029 101,259 96,164 89,436 Net external debt (in millions of dollars, at year end) -60,840 -67,465 -81,812 -99,535 -118,272 Revenues and Expenditures (net) Revenues and grants 233.13 238.69 260.63 273.68 290.27 Expenditures 347.73 376.97 389.47 402.61 381.65 Expenditures other than capital expenditures 245.05 262.76 278.62 287.35 293.63 Development expenditures (including repayments of debt) 102.51 114 110.83 115.22 88.27 Repayments of debt 88.16 97.95 94.42 99.09 66.68

(1) Reflects changes in the Central Bureau of Statistics’ labor survey methodology, resulting in higher values in the unemployment rate line items.

(2) Risk Management Dept., Debt Unit, Ministry of Finance.

(3) Government debt excluding local authorities’debt.

Sources: Central Bureau of Statistics, Bank of Israel and Ministry of Finance.

D-9 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 2 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2015 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO WHICH NAMES OF REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Avi Braf Chief Fiscal Officer for the Western Hemisphere For the Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: STEVEN G. TEPPER, ESQ. Arnold & Porter LLP 399 Park Avenue New York, New York 10022

* The Registrant is filing this annual report on a voluntary basis. THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 2 is to file with the Securities and Exchange Commission certain exhibits to Israel’s Annual Report on Form 18-K for the fiscal year ended December 31, 2015, as amended. EXHIBIT INDEX

Exhibit Number

A: None.

B: None.

C: (P) Copy of the State Budget for Fiscal Years 2015-2016 (in Hebrew).*

D: Current Description of the State of Israel.*

D-1: Recent Developments in the State as of September 23, 2016.*

E: Opinion of the Legal Advisor to the Ministry of Finance of the State of Israel dated October 6, 2016.

F: Opinion of Arnold & Porter LLP dated October 6, 2016.

G: Underwriting Agreement dated September 29, 2016 by and among the State of Israel and Barclays Capital Inc.

* Previously filed. SIGNATURE

STATE OF ISRAEL

By: /s/ Yali Rothenberg Yali Rothenberg Senior Deputy Accountant General Ministry of Finance

By: /s/ Gil Cohen Gil Cohen Managing Director Government Debt Management Ministry of Finance Exhibit E

STATE OF ISRAEL MINISTRY OF FINANCE

OFFICE OF THE LEGAL ADVISOR October 6, 2016

Re: Registration Statement of the State of Israel on Schedule B Registration Statement No. 333-184134

Ladies and Gentlemen:

I, Legal Advisor (Acting) to the Ministry of Finance of the State of Israel, have reviewed the above-referenced Registration Statement (the “Registration Statement”), the Prospectus dated January 6, 2016 (the “Prospectus”), the Prospectus Supplement dated September 29, 2016 (the “Prospectus Supplement”), the Fiscal Agency Agreement dated as of March 13, 2000 (the “Fiscal Agency Agreement”), as amended by Amendment No. 1 to Fiscal Agency Agreement dated as of February 24, 2004, between the State of Israel (“Israel”) and Citibank, N.A., and the Underwriting Agreement dated September 29, 2016 (the “Underwriting Agreement” and, with the Fiscal Agency Agreement, the “Agreements”) by and among Israel and Barclays Capital Inc. (the “Underwriter”), pursuant to which Israel has issued and offered for sale an aggregate of U.S.$200,000,000 4.50% bonds due January 30, 2043 (the “Offered Securities”).

The issuance of the Offered Securities has been authorized pursuant to the State Property Law of the State of Israel.

It is my opinion that when the Offered Securities have been duly authorized, executed and delivered by Israel and authenticated in accordance with the Agreements and delivered to and paid for by the Underwriter as contemplated by the Registration Statement and the Agreements, the Offered Securities will constitute valid and legally binding direct and unconditional obligations of Israel under and with respect to the present laws of Israel.

It is also my opinion that the principal anticipated Israeli tax consequences of the purchase, ownership, and disposition of the Bonds are as set forth in that section of the Prospectus Supplement entitled “Taxation – Israeli Taxation”. I consent to the filing of this opinion as an exhibit to Amendment No. 2 to the Annual Report of the State of Israel on Form 18-K for the fiscal year ended December 31, 2015, and to the use of my name under the headings “Validity of the Bonds” in the Prospectus Supplement and “Validity of the Debt Securities” in the Prospectus. In giving the foregoing consent, I do not thereby admit that I am in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission (the “SEC”) thereunder. I also consent to the reliance on this opinion by Arnold & Porter LLP as to any matter relating to the laws of Israel, in connection with any opinion required to be filed with or delivered to the SEC.

Very truly yours,

/s/ Asi Messing

Asi Messing Legal Advisor (Acting) Ministry of Finance Exhibit F

October 6, 2016

Ministry of Finance Government of Israel 1 Kaplan Street Hakirya, Jerusalem 91008 ISRAEL

Ladies and Gentlemen:

We have acted as special United States counsel for the Government of Israel (“Israel”) in connection with the issuance and offering for sale of U.S.$200,000,000 principal amount of its 4.50% bonds due 2043 (the “Bonds”) in the form of a takedown from Israel’s Registration Statement No. 333-184134 under Schedule B (the “Registration Statement”). The issuance and offering for sale of the Bonds are collectively referred to herein as the “Offering”. In connection with the Offering we have reviewed the Registration Statement, the Prospectus dated January 6, 2016 (the “Prospectus”), the Prospectus Supplement dated September 29, 2016 (the “Prospectus Supplement”), the Fiscal Agency Agreement dated as of March 13, 2000, as amended by Amendment No. 1 to Fiscal Agency Agreement dated as of February 24, 2004 (the “Fiscal Agency Agreement”) between Israel and Citibank, N.A., and the Underwriting Agreement dated September 29, 2016 (the “Underwriting Agreement”) by and among Israel and Barclays Capital Inc. (the “Underwriter”). We have also reviewed Amendment No. 2 to Israel’s Annual Report on Form 18-K/A for the fiscal year ended December 31, 2015 (the “Amendment”) filed with the Securities and Exchange Commission (the “Commission”) under the Securities Exchange Act of 1934, as amended. The Underwriting Agreement and the Fiscal Agency Agreement are collectively defined herein as the “Agreements”.

This opinion is limited to the federal laws of the United States and the laws of the State of New York, and we do not express any opinion herein concerning the laws of any other jurisdiction. Insofar as the opinion set forth herein relates to matters of the laws of Israel, we have relied upon the opinion of the Legal Advisor to the Ministry of Finance of the State of Israel, a copy of which is being filed as Exhibit H to the Amendment, and our opinion herein is subject to any and all exceptions and reservations set forth therein.

We are also of the opinion that the principal anticipated federal income tax consequences of the purchase, ownership, and disposition of the Bonds are as set forth in that section of the Prospectus Supplement entitled “Taxation – United States”.

We hereby consent to the filing of this opinion as Exhibit I to the Amendment and to the reference to this firm under the heading “Validity of the Bonds” in the Prospectus Supplement and under the heading “Validity of the Debt Securities” in the Prospectus. In giving the foregoing consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Commission thereunder.

Very truly yours,

/s/ Arnold & Porter LLP Exhibit G

STATE OF ISRAEL

Underwriting Agreement

New York, New York September 29, 2016

Barclays Capital Inc. 745 Seventh Avenue New York, New York 10019

Ladies and Gentlemen:

The Government of Israel on behalf of the State of Israel (“Israel”) proposes to sell to you (the “Underwriter”) $200,000,000 principal amount of its 4.50% Bonds due 2043 (the “Offered Securities”) pursuant to the provisions of a Fiscal Agency Agreement dated as of March 13, 2000, as amended by Amendment No. 1 to Fiscal Agency Agreement dated as of February 24, 2004 (as so amended, the “Fiscal Agency Agreement”), between Israel and Citibank, N.A., as fiscal agent (the “Fiscal Agent”).

The terms which follow, when used in this Agreement, shall have the meanings indicated:

“Act” means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.

“Commission” means the Securities and Exchange Commission.

“Effective Date” shall mean each date that the Registration Statement and any post-effective amendment or amendments thereto became or becomes effective.

“Execution Time” shall mean 4:30 a.m. Eastern time on the date of this Agreement.

“free writing prospectus” has the meaning set forth in Rule 405. 2

“issuer free writing prospectus” has the meaning set forth in Rule 433.

“Prospectus” means the Basic Prospectus together with the prospectus supplement.

“prospectus supplement” means the final prospectus supplement filed with the Commission pursuant to Rule 424, specifically relating to the Offered Securities.

“Registration Statement” means the registration statement filed on Schedule B with the Commission on September 27, 2012 (Registration Statement File No. 333-184134), which Registration Statement was declared effective by the Commission on November 30, 2012. To the extent any post-effective amendment to the Registration Statement has (or, prior to the Closing Date (as defined below), does) become effective, the term “Registration Statement” shall also mean such registration statement as so amended. The term “Registration Statement” shall also include any Rule 430A Information deemed to be included in the Registration Statement at the Effective Date as provided by Rule 430A.

“Release” means Release No. 33-6424 under the Act relating to delayed offerings by foreign governments or political subdivisions thereof.

“Time of Sale Prospectus” means the preliminary prospectus and the free writing prospectuses, if any, and other information, in each case identified in Schedule I hereto.

1. Representations and Warranties. Israel represents and warrants to, and agrees with, the Underwriter as set forth in this Section 1. 3

(a) Israel meets the requirements for use of Schedule B under the Act, is a “seasoned foreign government” within the meaning of the Release and has filed with the Commission the Registration Statement, including a form of Basic Prospectus, for registration under the Act of the offering and sale of the Offered Securities. Israel may have filed with the Commission one or more amendments to the Registration Statement and may have used a preliminary prospectus, each of which has previously been furnished to the Underwriter. Such Registration Statement, as so amended, has become effective. Although the Basic Prospectus may not include all the information with respect to the Offered Securities and the offering thereof required by the Act and the rules thereunder to be included in the Prospectus, the Basic Prospectus included all such information required by the Act and the rules thereunder as applicable pursuant to the Release to be included therein as of each Effective Date. Israel will hereafter file with the Commission pursuant to the Release and Rules 415 and 424(b)(2) or (5) either (x) a prospectus supplement to the Basic Prospectus or (y) an amendment to such Registration Statement, including such prospectus supplement. In the case of clause (x), Israel has included in such Registration Statement, as amended as of the latest Effective Date, the information required for such procedure pursuant to the Release. As filed, such prospectus supplement or such amendment and prospectus supplement shall include all such required information with respect to the Offered Securities and the offering thereof and, except to the extent the Underwriter shall agree in writing to any modification thereof, shall be in all substantive respects in the form furnished to the Underwriter prior to the Execution Time or, to the extent not completed at the Execution Time, shall be in such form with only such specific additional information and other changes (beyond those contained in the Basic Prospectus and any preliminary prospectus) as Israel has advised the Underwriter, prior to the Execution Time, will be included or made therein and to which the Underwriter shall have agreed.

(b) On the Effective Date of any part of the Registration Statement, such part of the Registration Statement did or will, on the date filed each preliminary prospectus did or will, and, when the Prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date, the Prospectus (as supplemented in the case of the Closing Date) will, comply in all material respects with the applicable requirements of the Act, the rules thereunder and the Release; on the Effective Date of any part of the Registration Statement, such part of the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; the Registration Statement as of the date hereof does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; the Time of Sale Prospectus does not, and at the time of each sale of the Offered Securities in connection with the offering and at the Closing Date, the Time of Sale Prospectus, as then 4 amended or supplemented by Israel, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; the Prospectus does not contain and, as amended or supplemented, if applicable, at the Closing Date will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that Israel makes no representations or warranties as to the information contained in or omitted from the Registration Statement, the Time of Sale Prospectus or the Prospectus (or any supplement thereto) in reliance upon and in conformity with information furnished in writing to Israel by or on behalf of the Underwriter specifically for inclusion in the Registration Statement, the Time of Sale Prospectus or the Prospectus (or any supplement thereto).

(d) The issuance and sale of the Offered Securities have been duly authorized, and, when duly executed, authenticated, issued and delivered as provided in the Fiscal Agency Agreement and paid for in accordance with the terms hereof, will be duly and validly issued and outstanding, and will constitute valid and binding obligations of Israel for the payment and performance of which the full faith and credit of Israel will be pledged; the Offered Securities will rank without preference among themselves and equally with all other unsecured and unsubordinated “external indebtedness” (as defined in the Offered Securities) of Israel (it being understood that Israel will not be required to make payments under the Offered Securities ratably with payments being made under any other “external indebtedness” (as defined in the Offered Securities) of Israel); and the Offered Securities, when issued and delivered, will conform to the description thereof contained in the Prospectus.

(e) Israel is a member of the International Monetary Fund and the International Bank for Reconstruction and Development.

(f) Israel is not a party to any agreement with the United States of America relating in any way to the immunity of Israel from jurisdiction of 5 courts, suit, execution upon a judgment, attachment prior to judgment or in aid of execution upon a judgment or any other legal process. Israel is, under the law of Israel, subject to civil and commercial law with respect to its obligations under this Agreement, the Fiscal Agency Agreement and the Offered Securities and has agreed not to assert the defense of immunity, on the grounds of sovereignty or otherwise, in respect of any suit, action or proceeding arising out of or relating to claims under this Agreement, the Fiscal Agency Agreement or the Offered Securities, except any such suit, action or proceeding instituted by a holder of the Offered Securities (other than the Underwriter instituting such suit, action or proceeding in its capacity as the Underwriter under this Agreement) arising out of or based on United States Federal or state securities laws.

(g) None of Israel or, to the best of Israel’s knowledge, any minister, official, agent, employee or affiliate of Israel is currently a target of any economic sanctions or trade embargoes administered by the Office of Foreign Assets Control of the United States Department of Treasury (“OFAC”), any other United States, European Union, United Nations, United Kingdom or other relevant economic sanctions or trade embargoes that are applicable to Israel (“Sanctions”, and each such target, a “Sanctions Target”) and will not directly or indirectly lend, invest, contribute or otherwise make available the proceeds of the offering of the Offered Securities to or for the benefit of any then-current Sanctions Target, or for any purpose or any activity that would cause any person participating in the offering of the Offered Securities to be in violation of any Sanctions.

(h) (1) None of Israel or, to the best of Israel’s knowledge, any minister, official, agent, employee, affiliate of or person acting on behalf of Israel has engaged in any activity or conduct or taken any action, directly or indirectly, that would result in a violation by such persons of any applicable provision of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), the UK Bribery Act 2010 or any other applicable anti-bribery or anti-corruption law or regulation, which would be material in the context of the issue of the Offered Securities and (2) Israel has instituted, maintains and will continue to maintain policies and procedures designed to prevent violation of such laws, regulations and rules by Israel and by persons associated with Israel.

(i) The operations of Israel have been conducted at all times in compliance with applicable financial record keeping and reporting requirements and money laundering statutes, rules or regulations to which Israel is subject (collectively, “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving Israel with respect to Money Laundering Laws is pending and, to the best of Israel’s knowledge, no such actions, suits or proceedings are threatened or contemplated. 6

2. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, Israel agrees to sell to the Underwriter, and the Underwriter agrees to purchase from Israel, at a purchase price of 113.252% of the principal amount thereof plus accrued interest thereon from July 30, 2016 to the Closing Date, $200,000,000 principal amount of the Offered Securities.

3. Delivery and Payment. Delivery of and payment for the Offered Securities shall be made at 10:00 a.m., New York City time, on October 6, 2016 (such date and time of delivery and payment for the Offered Securities being herein called the “Closing Date”). Delivery of the Offered Securities shall be made to the Underwriter through the facilities of The Depository Trust Company for the account of the Underwriter against payment by the Underwriter of the purchase price thereof to or upon the order of Israel by certified or official bank check or checks drawn on or by a New York Clearing House bank and payable in next day funds. Delivery of the Offered Securities shall be made at such location as the Underwriter shall reasonably designate at least one business day in advance of the Closing Date, and payment for the Offered Securities shall be made at the offices of Cravath, Swaine & Moore LLP, Worldwide Plaza, 825 Eighth Avenue, New York, New York, 10019. Certificates for the Offered Securities shall be registered in such names and in such denominations as the Underwriter may request not less than two full business days in advance of the Closing Date.

Israel agrees to have the Offered Securities available for inspection, checking and packaging by the Underwriter in New York, New York, not later than 1:00 p.m. on the business day prior to the Closing Date.

4. Offering by Underwriter. The Underwriter represents, warrants and agrees that (a) it will only communicate or cause to communicate an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (“FSMA”) received by it in connection with the issue or sale of any Offered Securities in circumstances in which Section 21(1) of FSMA does not apply to Israel and (b) it has complied and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the Securities in, from or otherwise involving the United Kingdom. The Underwriter covenants with Israel not to take any action that would, but for the action of the Underwriter, result in Israel being required to file with the Commission under Rule 433(d) a free writing prospectus prepared by or on behalf of the Underwriter that otherwise would not be required to be filed by Israel.

5. Agreements. Israel agrees with the Underwriter that:

Time of Sale Prospectus unless Israel has furnished the Underwriter a copy for its review prior to filing and will not file any such proposed amendment or supplement to which the Underwriter reasonably objects, unless Israel is otherwise advised by its U.S. counsel that such filing is required under the Act. Subject to the foregoing sentence, Israel will cause the Prospectus, properly completed, and any supplement thereto to be filed with the Commission pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed by such Rule and will promptly provide evidence satisfactory to the Underwriter of such timely filing. Israel will promptly advise the Underwriter (i) when the Registration Statement, if not effective at the Execution Time, and any amendment thereto, shall have become effective, (ii) when the Prospectus, and any supplement thereto, shall have been filed with the Commission pursuant to Rule 424(b), (iii) when, prior to termination of the offering of the Offered Securities, any amendment to the Registration Statement shall have been filed or become effective, (iv) of any request by the Commission for any amendment of the Registration Statement or supplement to the Prospectus or for any additional information, (v) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (vi) of the receipt by Israel of any notification with respect to the suspension of the qualification of the Offered Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. Israel will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued or suspended, to obtain as soon as possible the withdrawal thereof.

(b) Israel will furnish to the Underwriter a copy of each proposed free writing prospectus related to the Offered Securities to be prepared by or on behalf of, used by, or referred to by Israel and will not use or refer to any proposed free writing prospectus to which the Underwriter reasonably objects.

(c) Israel will not take any action that would result in the Underwriter or Israel being required to file with the Commission pursuant to Rule 433(d) a free writing prospectus prepared by or on behalf of the Underwriter that the Underwriter otherwise would not have been required to file thereunder.

(d) If the Time of Sale Prospectus is being used to solicit offers to buy the Offered Securities at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriter, it is necessary to amend or 8 supplement the Time of Sale Prospectus to comply with applicable law, Israel shall forthwith prepare, file with the Commission and furnish, at its own expense, to the Underwriter and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.

(e) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act or the rules thereunder, Israel promptly will (i) prepare and file with the Commission, subject to the second sentence of paragraph (a) of this Section 5, an amendment or supplement which will correct such statement or omission or effect such compliance and (ii) supply any supplemented Prospectus to the Underwriter in such quantities as they may reasonably request.

(f) Subject to Section 6, Israel will endeavor to qualify the Offered Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Underwriter shall reasonably request and to pay all expenses (including reasonable fees and disbursements of counsel) in connection with such qualification and in connection with the determination of the eligibility of the Offered Securities for investment under the laws of such jurisdictions as the Underwriter may reasonably designate; provided, however, that Israel shall not be obligated to file any general or unlimited consent to service of process in any jurisdiction.

(g) Israel will make generally available to holders of the Offered Securities, as soon as practicable, a statement in the English language of revenues and expenditures of Israel covering the first full fiscal year of Israel beginning after the date of this Agreement which will satisfy the provisions of Section 11(a) of the Act; it is understood that this undertaking shall be deemed satisfied if Israel has filed its Annual Report on Form 18-K for the year ended December 31, 2017.

(h) So long as any of the Offered Securities are outstanding, Israel will furnish to the Underwriter copies of all reports and financial and statistical data filed with the Commission in connection with the Offered Securities. 9

(i) Until the business day following the Closing Date, Israel will not, without the consent of the Underwriter, offer, or sell in the United States, or announce the offering in the United States of, any securities other than normal course offers of State of Israel Bonds sold through the Development Corporation for Israel.

(j) Israel will furnish to the Underwriter and counsel for the Underwriter, without charge, copies of the Registration Statement (including exhibits thereto) and, so long as delivery of a prospectus by the Underwriter or dealer may be required by the Act, as many copies of any preliminary prospectus, the Time of Sale Prospectus and the Prospectus and any supplement thereto as the Underwriter may reasonably request.

(k) Israel will use its best efforts to cause the Offered Securities to be listed on the Luxembourg Stock Exchange.

6. Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, except as set forth in the next sentence and as provided in Section 8 hereof, the Underwriter will pay all costs and expenses incident to the performance of the obligations of Israel hereunder, including, without limiting the generality of the foregoing, (i) all costs and expenses incident to the printing and distributing of any preliminary prospectus, the Time of Sale Prospectus, the Prospectus and any amendments thereof or supplements thereto, (ii) any costs and expenses, including fees of listing agents, in connection with the listing of the Offered Securities on the Luxembourg Stock Exchange, (iii) all costs and expenses (including reasonable fees of counsel to the Underwriter and their disbursements) incurred in connection with “Blue Sky” qualifications, (iv) any fees of the Fiscal Agent, and (v) all costs and expenses of the Underwriter’s Israeli, United States and any other outside counsel. Israel will pay (i) all costs and expenses incident to the filing with the Commission of the Registration Statement (including all exhibits thereto), any preliminary prospectus, the Prospectus and any amendments thereof or supplements thereto (including any issuer free writing prospectus), (ii) any fees charged by securities rating services for rating the Offered Securities, (iii) all costs and expenses related to the eligibility and acceptance of the Offered Securities for deposit with The Depository Trust Company and (iv) all costs and expenses of Israel’s Israeli, United States and any other outside counsel.

7. Conditions to the Obligations of the Underwriter. The obligations of the Underwriter to purchase the Offered Securities shall be subject to the accuracy in all material respects of the representations and warranties on the part of Israel contained herein as of the time of the execution of this Agreement and the Closing Date, to the accuracy in all material respects of the statements of Israel made in any certificates pursuant to the provisions hereof, to the performance by Israel of its obligations hereunder and to the following additional conditions:

(a) If filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b), the Prospectus, and any such supplement, shall have 10 been filed in the manner and within the time period required by Rule 424(b) and in accordance with Section 5(a) of this Agreement; no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened; and any request of the Commission for additional information shall have been complied with to the satisfaction of the Underwriter.

(b) Israel shall have furnished to the Underwriter the written opinion, satisfactory to the Underwriter, of the Legal Advisor to the Ministry of Finance of the State of Israel (the “Legal Advisor”) dated the Closing Date, to the effect that:

(ii) the obligations of Israel under the Fiscal Agency Agreement, this Agreement and the Offered Securities are and will be direct, general, unconditional, unsecured and unsubordinated external indebtedness of Israel, and are, under the laws of Israel, subject to civil and commercial substantive and procedural law and to the procedural requirements relating to enforcement and recognition of foreign judgments. The Offered Securities will rank without preference among themselves and equally with all other unsecured and unsubordinated “external indebtedness” (as such term is defined in the Offered Securities) of Israel (it being understood that Israel will not be required to make payments under the Offered Securities ratably with payments being made under any other “external indebtedness” (as defined in the Offered Securities) of Israel); the full faith and credit of Israel has been pledged for the due and punctual payment of the principal of and interest on the Offered Securities and for the performance of the obligations of Israel with respect thereto;

(iv) the Fiscal Agency Agreement has been duly authorized, executed and delivered by Israel in accordance with the laws of Israel and is a valid and binding agreement of Israel;

(v) this Agreement has been duly authorized, executed and delivered by Israel in accordance with the laws of Israel;

(xi) none of the execution or delivery by Israel of this Agreement or the Offered Securities, the performance by Israel of its obligations hereunder or thereunder or under the Fiscal Agency Agreement, or the fulfillment of the respective terms hereof or thereof or of the Fiscal Agency Agreement by Israel, will, to the best knowledge of the Legal Advisor after due inquiry, violate, or result in a breach of, the terms of, or cause a default under, any note, note agreement, bank loan or any other agreement or instrument for money borrowed to which Israel is a party;

(xiii) the Registration Statement, as amended, any preliminary prospectus supplement, and the Prospectus, and their filing with the Commission have been duly authorized by and on behalf of Israel and the Registration Statement has been duly executed on behalf of Israel;

(xiv) the appointment of the Authorized Agent in Section 12 below and any waiver in that section by Israel with respect thereto are legal, valid and binding in accordance with their respective terms under the laws of Israel; and

(xv) the Legal Advisor shall further confirm that appropriate officials in the Ministry of Finance have been apprised of the disclosure standards applicable to the offering described in this Agreement and have reviewed the Registration Statement, Time of Sale Prospectus and the Prospectus. Based on such review, the results of which have been discussed with the Legal Advisor, the Legal Advisor shall confirm that, although the Legal Advisor shall not have made an independent investigation or verification of the correctness and completeness of the information included in the Registration Statement, Time of Sale Prospectus or the Prospectus, nothing has come to the Legal Advisor’s attention that would lead the Legal Advisor to believe that (except as to the financial and statistical data contained therein, as to which the Legal Advisor need not express any belief) (a) the Registration Statement, as of the Effective Date and as of the date of this Agreement, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make statements therein not misleading, (b) the Time of Sale Prospectus, as of the Execution Time, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (c) the Prospectus, as amended or supplemented, as applicable, as of its date and as of the Closing Date, 13

contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

In rendering such opinion, the Legal Advisor may rely without independent investigation on the opinion pursuant to paragraph (c) below as to matters of New York State and United States Federal law and such opinion shall be subject to any limitations and exceptions contained in the opinion so relied upon. References to the Prospectus in this paragraph (b) include any supplements thereto at the Closing Date.

(c) The Underwriter shall have received on and as of the Closing Date an opinion, satisfactory to the Underwriter, of Arnold & Porter LLP, special United States counsel to Israel, to the effect that:

(v) the statements in the Registration Statement, the Time of Sale Prospectus and the Prospectus under the caption “Taxation – United 14

States”, insofar as they purport to constitute a summary of the material United States Federal income and estate tax consequences of the purchase, ownership and disposition of the Offered Securities, provide a fair summary of such consequences;

(vi) Israel has validly submitted, under the laws of the State of New York and the Federal laws of the United States, to the jurisdiction of the State and Federal courts in the Borough of Manhattan in the City of New York, in any suit, action or proceeding arising out of or based on this Agreement, the Fiscal Agency Agreement or the Offered Securities, except any such suit, action or proceeding arising out of or based on United States Federal or state securities laws (other than any legal action or proceeding instituted by the Underwriter in its capacity as the Underwriter under this Agreement);

In giving such opinion, Arnold & Porter LLP may (i) assume that the Fiscal Agency Agreement, the Offered Securities and this Agreement have been duly authorized, executed and delivered by the appropriate party or parties thereto and that each such party has adequate power and authority to enter therein and (ii) rely without independent investigation on the opinion delivered pursuant to 15 paragraph (b) above as to matters governed by the laws of Israel and such opinion shall be subject to any limitations and exceptions contained in the opinion delivered pursuant to paragraph (b) above.

In addition, Arnold & Porter LLP shall have furnished the Underwriter with a letter, dated the Closing Date, confirming that as United States counsel to Israel, such counsel reviewed the Registration Statement, the Time of Sale Prospectus and the Prospectus as then amended or supplemented, participated in discussions with representatives of the Underwriter and their counsel and those of Israel and its Israeli counsel, and advised Israel as to the requirements of the Act and the applicable rules and regulations thereunder; on the basis of the information that such counsel gained in the course of the performance of such services, considered in the light of their understanding of the applicable law and the experience they have gained through their practice under the Act, such counsel will confirm to the Underwriter that, in their opinion, the Registration Statement and the Prospectus as then amended or supplemented, as of the Effective Date and as of the date of this Agreement, appeared on their face to be appropriately responsive in all material respects to the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder; nothing that came to such counsel’s attention in the course of the limited procedures described in such letter has caused such counsel to believe that the Registration Statement, as of the Effective Date and as of the date of this Agreement, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; nothing that has come to such counsel’s attention in the course of the limited procedures described in such letter has caused such counsel to believe that the Time of Sale Prospectus as of the Execution Time contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and nothing that has come to such counsel’s attention in the course of the limited procedures described in such letter has caused such counsel to believe that the Prospectus (as then amended or supplemented) as of its date and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such counsel may state that the limitations inherent in the independent verification of factual matters and the character of determinations involved in the registration process are such that they do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, the Time of Sale Prospectus or the Prospectus except for those made under the captions “Debt Securities”, “Description of the Bonds” and “Taxation” in the Time of Sale Prospectus or the Prospectus as then amended and supplemented insofar as they purport to summarize certain provisions of documents therein described; that such counsel do not express any opinion or belief as to the financial and statistical data contained in the Registration Statement or the Prospectus as then amended or supplemented, or as to matters of the laws of Israel; and that their letter is 16 furnished as United States counsel for Israel to the Underwriter and is solely for their benefit.

(d) The Underwriter shall have received from (i) Cravath, Swaine & Moore LLP, counsel for the Underwriter, such opinion and letter, dated the Closing Date, with respect to the issuance and sale of the Offered Securities, the Fiscal Agency Agreement, the Registration Statement, the Time of Sale Prospectus, the Prospectus (together with any supplement thereto) and other related matters as the Underwriter may reasonably require and (ii) Meitar Liquornik Geva Leshem Tal, special counsel for the Underwriter, such opinion, dated the Closing Date, with respect to the issuance and sale of the Offered Securities, the Fiscal Agency Agreement and other related matters as the Underwriter may reasonably require; and, in each case, Israel shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. In giving the opinion referred to in clause (i) of the preceding sentence, Cravath, Swaine & Moore LLP may rely without independent investigation on the opinion delivered pursuant to paragraph 7(b) above as to the matters governed by the laws of Israel and such opinion shall be subject to any limitations and exceptions contained in the opinion delivered pursuant to paragraph 7(b) above.

(e) Israel shall have furnished to the Underwriter a certificate of Israel, signed by the Senior Deputy Accountant General and the Managing Director, Government Debt Management of the Ministry of Finance, dated the Closing Date, to the effect that the signer of such certificate has carefully examined the Registration Statement, the Time of Sale Prospectus, the Prospectus, any supplement to the Prospectus and this Agreement and that:

(ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to Israel’s knowledge, threatened; and

(f) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any 17

amendment thereof dated after the Execution Time), the Time of Sale Prospectus and the Prospectus (exclusive of any supplement thereto dated after the Execution Time), there shall not have been any change or any development involving a prospective change in the condition (financial, economic or political) of Israel from that set forth in the Registration Statement, the Time of Sale Prospectus and the Prospectus (in each case exclusive of any amendment or supplement thereto dated after the Execution Time) that, in the judgment of the Underwriter, is material and adverse and makes it impractical or inadvisable to proceed with the offering or delivery of the Offered Securities as contemplated by the Registration Statement, the Time of Sale Prospectus and the Prospectus (in each case exclusive of any amendment or supplement thereto dated after the Execution Time).

(g) Subsequent to the Execution Time, there shall not have been any decrease in the rating of any of Israel’s debt securities by the Rating Agencies listed on Schedule II hereto or any written notice given of any intended or potential change in any such rating that is not an upward change.

(i) Subsequent to the Execution Time, Israel shall not have ceased to be a member of the International Monetary Fund and the International Bank for Reconstruction and Development.

(j) Prior to the Closing Date, Israel shall have made an application for the Offered Securities to be listed on the Luxembourg Stock Exchange.

(k) Prior to the Closing Date, Israel shall have furnished to the Underwriter such further information, certificates, opinions and other documents as the Underwriter may reasonably request.

If any of the conditions specified in this Section 7 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Underwriter and to counsel for the Underwriter, this Agreement and all obligations of the Underwriter hereunder may be canceled at, or at any time prior to, the Closing Date by the Underwriter. Notice of such cancellation shall be given to Israel in writing or by telephone or facsimile confirmed in writing. 18

The documents required to be delivered by this Section 7 shall be delivered at the office of Cravath, Swaine & Moore LLP, counsel for the Underwriter, at Worldwide Plaza, 825 Eighth Avenue, New York, New York, 10019, at the Closing Date.

8. Reimbursement of Underwriter’s Expenses. If the sale of the Offered Securities provided for herein is not consummated because any condition to the obligations of the Underwriter set forth in Section 7 hereof is not satisfied, because of any termination pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of Israel to perform any agreement herein or comply with any provision hereof other than by reason of a default by the Underwriter, Israel will reimburse the Underwriter upon demand for all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Offered Securities.

9. Indemnification and Contribution. (a) Israel agrees to indemnify and hold harmless the Underwriter, the directors, officers, employees and agents of the Underwriter and each person who controls the Underwriter within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Time of Sale Prospectus, any issuer free writing prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Israel will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to Israel by or on behalf of the Underwriter specifically for inclusion therein. This indemnity agreement will be in addition to any liability which Israel may otherwise have to the Underwriter. Israel further agrees to indemnify and hold harmless the Underwriter against any requirement under the laws of Israel to pay any stamp or similar taxes in connection with the issuance of the Offered Securities to the Underwriter by Israel.

(b) The Underwriter agrees to indemnify and hold harmless Israel, to the same extent as the foregoing indemnity from Israel to the Underwriter, 19 but only with reference to written information relating to the Underwriter furnished in writing to Israel by or on behalf of the Underwriter specifically for inclusion in the documents referred to in such foregoing indemnity. This indemnity agreement will be in addition to any liability which the Underwriter may otherwise have to Israel. Israel acknowledges that, for all purposes of this Agreement, the Underwriter’s name on the cover page of the prospectus supplement, the Underwriter’s name, address and principal amount of bonds purchased, the third, fourth and fifth sentences of the second paragraph and the fifth and sixth paragraphs under the heading “Underwriting” in the prospectus supplement constitute the only information furnished in writing by or on behalf of the Underwriter for inclusion in the documents referred to in such foregoing indemnity, and the Underwriter confirms that such statements are correct.

(c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 9, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party’s choice at the indemnifying party’s expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party’s election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel, if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the 20 indemnifying party. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to local counsel) for all such indemnified parties and that such fees and expenses shall be reimbursed as they are incurred. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such action or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any indemnified party.

(d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 9 is unavailable or insufficient (unless such indemnity is unavailable or insufficient by operation of the provisos set forth therein) to hold harmless an indemnified party for any reason, Israel and the Underwriter agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively, “Losses”) to which Israel and the Underwriter may be subject in such proportion as is appropriate to reflect the relative benefits received by Israel and by the Underwriter from the offering of the Offered Securities; provided, however, that in no case shall the Underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the Offered Securities purchased by the Underwriter hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, Israel and the Underwriter shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of Israel and of the Underwriter in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by Israel shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by the Underwriter shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by Israel or the Underwriter. Israel and the Underwriter agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such 21

fraudulent misrepresentation. For purposes of this Section 9, each person who controls the Underwriter within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of the Underwriter shall have the same rights to contribution as the Underwriter, and each official of Israel who shall have signed the Registration Statement shall have the same rights to contribution as Israel, subject in each case to the applicable terms and conditions of this paragraph (d).

10. Termination. This Agreement shall be subject to termination in the absolute discretion of the Underwriter, by notice given to Israel prior to delivery of and payment for the Offered Securities, if prior to such time (i) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such Exchange or settlement of securities trading generally shall have been materially disrupted, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or Israeli authorities or (iii) there shall have occurred (x) any outbreak or escalation of hostilities in which the United States or Israel is involved or declaration by the United States or Israel of a national emergency or war or other calamity or crisis or (y) a material adverse change in the general economic, political or financial conditions in Israel or the United States the effect of which on financial markets is such as to make it, in the judgment of the Underwriter, impracticable or inadvisable to proceed with the offering or delivery of the Offered Securities as contemplated by this Agreement and the Prospectus.

11. Representations and Indemnities To Survive. The respective agreements, representations, warranties, indemnities and other statements of Israel and of the Underwriter set forth in or made in writing pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or Israel or any of the officers, directors or controlling persons referred to in Section 9 hereof, and will survive delivery of and payment for the Offered Securities. The provisions of Sections 8 and 9 hereof shall survive the termination or cancellation of this Agreement.

12. Submission to Jurisdiction; Agent for Service of Process. Israel and the Underwriter agree that the Federal courts of the United States sitting in the Southern District of New York, the courts of the State of New York sitting in the City of New York and the courts of Israel shall have exclusive jurisdiction in respect of any legal action or proceeding brought against Israel and arising out of or relating to this Agreement. In respect of any such proceeding which may be brought hereunder, Israel irrevocably submits to the jurisdiction of the Federal courts of the United States in the Southern District of New York, the courts of the State of New York sitting in the City of New York and the courts of Israel and waives any right of objection to the laying of venue in any such court, including, without limitation, any objection on the basis of inconvenient forum. Israel irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Agreement from which no appeal has been taken or is available. 22

Israel hereby appoints the Consul and Chief Fiscal Officer for the Western Hemisphere of the Ministry of Finance of the Government of Israel, whose office address is presently at 800 Second Avenue, 17th Floor, New York, NY 10017, as its authorized agent (“Authorized Agent”) to receive on its behalf service of process in any proceeding which may be brought under the immediately preceding paragraph of this Section 12 in a Federal court of the United States in the Southern District of New York or in a New York State court in the City of New York. Israel may nominate a substitute or replacement for its Authorized Agent in the State of New York by giving notice thereof to the Underwriter, but such appointment shall not be effective until the successor to the Authorized Agent accepts appointment as such. Israel agrees that it will at all times maintain an Authorized Agent to receive such service, as above provided. The failure of the Authorized Agent to give Israel notice of the service of any process shall not affect the validity of any proceeding based on that process or any judgment obtained pursuant to it. Israel will take any and all action, including the filing of any and all documents and instruments, that may be necessary to continue such appointment or appointments in full force and effect as aforesaid. Service of process upon the Authorized Agent at the address indicated in this Section 12, or at such other address in the Borough of Manhattan in the City of New York, as may be the office of the Authorized Agent at the time of such service, and written notice of such service to Israel (mailed or delivered to Israel at the address set forth in Section 13) hereof shall be deemed, in every respect, effective service of process upon Israel.

In respect of any proceeding which may be brought under this Agreement, Israel irrevocably agrees not to assert the defense of immunity, on the grounds of sovereignty or otherwise, from jurisdiction, execution or attachment in aid of execution, personally and in respect of any of its property.

Neither the submission to jurisdiction, the appointment of the Authorized Agent or the agreements with respect to immunity in this Section 12 shall be interpreted to include actions brought under the United States Federal securities laws or any State securities laws (other than any legal action or proceeding instituted by the Underwriter in its capacity as Underwriter under this Agreement).

13. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Underwriter, will be mailed or delivered to Barclays Capital Inc., 745 Seventh Avenue, New York, NY 10019, Attention: Syndicate Registration, Fax: (646) 834-8133; or, if sent to Israel, will be mailed or delivered to it at:

Government of Israel Ministry of Finance 800 Second Avenue 17th Floor New York, NY 10017 Attn: Chief Fiscal Officer

with a copy to: 23

Government of Israel Ministry of Finance 1 Kaplan Street Hakiria, Jerusalem 91008 ISRAEL Attn: Accountant General

14. English Documents. All documents to be delivered under this Agreement by Israel shall be in the English language or accompanied by a certified English translation.

15. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 9 hereof, and no other person will have any right or obligation hereunder. No purchaser of any Offered Securities from any Underwriter shall be deemed to be a successor or assign merely by reason of such purchase.

16. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York, without regard to the conflicts of law principles of such State, except with respect to its authorization and execution by and on behalf of Israel, which shall be governed by the law of Israel.

17. Counterparts. This Agreement may be signed in two or more counterparts, which together shall constitute one and the same instrument.

18. No Fiduciary Duty. Israel acknowledges that in connection with the offering of the Offered Securities: (i) the Underwriter has acted at arms length, is not an agent of, and owes no fiduciary duties to, Israel or any other person, (ii) the Underwriter owes Israel only those duties and obligations set forth in this Agreement and prior written agreement (to the extent not superseded by this Agreement), if any, and (iii) the Underwriter may have interests that differ from those of Israel. Israel waives to the full extent permitted by applicable law any claims it may have against the Underwriter arising from an alleged breach of fiduciary duty in connection with the offering of the Offered Securities. 24

If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among Israel and the Underwriter.

Very truly yours,

THE GOVERNMENT OF ISRAEL, ON BEHALF OF STATE OF ISRAEL

By: /s/ Yali Rothenberg Name: Yali Rothenberg Title: Senior Deputy Accountant General, Ministry of Finance

By: /s/ Gil Cohen Name: Gil Cohen Title: Managing Director, Government Debt Management, Ministry of Finance 25

The foregoing Agreement is hereby confirmed and accepted as of the date first above written.

By: Barclays Capital Inc.

By: /s/ Pamela Kendall Name: Pamela Kendall Title: Director SCHEDULE I

1. Prospectus, dated January 6, 2016.

2. Preliminary Prospectus Supplement, dated September 29, 2016 relating to the Offered Securities.

3. Final Term Sheet, dated September 29, 2016, a copy of which is included as Annex A hereto. ANNEX A to SCHEDULE I

FINAL TERM SHEET ATTACHED STATE OF ISRAEL

4.50% BONDS DUE 2043

Issuer: State of Israel Securities Offered: 4.50% Bonds due 2043 (the “bonds”) The bonds will be a further issuance of, will trade interchangeably with, rank equally with and form a single issue and series with Israel’s 4.50% bonds due 2043 which were initially issued on January 31, 2013 and of which there are currently US$1,500,000,000 aggregate principal amount outstanding. Following the issuance of the bonds, the aggregate principal amount of the outstanding 4.50% bonds due 2043 will be US$1,700,000,000. Principal Amount: US$200,000,000 Maturity Date: January 30, 2043 Trade Date: September 29, 2016 Original Issue Date (Settlement): October 6, 2016 (T+5)1 through the book-entry facility of The Depository Trust Company Issue Price (Price to Public): 113.377%, plus accrued interest from and including July 30, 2016 to, but excluding, the settlement date, such interest to be paid by the purchaser (totaling US$1,650,000.00) Net Proceeds to Issuer (before expenses): US$228,404,000.00 (114.202%) Coupon: 4.50% Yield to Maturity: 3.70% Spread to Benchmark Treasury: +140 basis points (1.40%) Benchmark Treasury: 2.50% due May 15, 2046 Benchmark Treasury Price and Yield: 104-06/07; 2.302% Interest Payment Period: Semi-annually Interest Payment Dates: Each January 30 and July 30, commencing January 30, 2017 Denominations: US$200,000 and multiples of US$1,000 above that amount Business Day: New York CUSIP: 465138 7N9 ISIN: US4651387N91 Bookrunner: Barclays Capital Inc.

The preliminary prospectus supplement relating to the bonds is available under the following link: http://www.sec.gov/Archives/edgar/data/52749/000114420416125891/v449297_424b5.htm

1 Under Rule 15c6-1 of the Securities Exchange Act of 1934, as amended, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade bonds on the date of pricing or the next succeeding business day will be required, by virtue of the fact that the bonds initially will settle in T+5, to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of bonds who wish to trade bonds on the date of pricing or the next succeeding business day should consult their own advisor.

The issuer has filed a registration statement (including a prospectus) with the U.S. Securities and Exchange Commission (“SEC”) for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in the offering will arrange to send you the prospectus, any prospectus supplement or free writing prospectus for this offering if you request it by calling Barclays Capital Inc. toll-free at 1-888-603-5847. SCHEDULE II

Rating Agencies referred to in Section 7(g):

Fitch Investors Service, Inc.

Moody's Investors Service, Inc.

Standard & Poor's Corporation UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 1 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last ﬁscal year: December 31, 2015

SECURITIES REGISTERED* (As of the close of the ﬁscal year)

AMOUNTS AS TO NAMES OF WHICH REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Avi Braf Chief Fiscal Officer for the Western Hemisphere For the Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: STEVEN G. TEPPER, ESQ. Arnold & Porter LLP 399 Park Avenue New York, New York 10022

* The Registrant is ﬁling this annual report on a voluntary basis.

1 THE STATE OF ISRAEL (THE ‘‘STATE’’) The sole purpose of this Amendment No. 1 is to ﬁle with the Securities and Exchange Commission the Summary Information and Recent Developments in the State as of September 23, 2016, which is included as Exhibit D-1 hereto and which updates and amends the Current Description of the State previously ﬁled as Exhibit D.

2 EXHIBIT INDEX

Exhibit Number A: None. B: None. C: None. D: Current Description of the State of Israel.* D-1: Recent Developments in the State as of September 23, 2016.

* Previously ﬁled.

3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in Jerusalem, Israel on the 26th day of September, 2016. STATE OF ISRAEL By: /s/ Yali Rothenberg Yali Rothenberg Senior Deputy Accountant General Ministry of Finance By: /s/ Gil Cohen Gil Cohen Managing Director Government Debt Management Ministry of Finance

4 Exhibit D-1

SUMMARY INFORMATION AND RECENT DEVELOPMENTS The information included in this section supplements the information about the State contained in the State’s Annual Report for 2015 on Form 18-K filed with the SEC on June 30, 2016, as amended from time to time. To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2015, as amended from time to time, through the date hereof, the information in this section supersedes and replaces such information. Capitalized terms not defined in this section have the meanings ascribed to them in the Annual Report for 2015. This section is not complete and may not contain all the information that you should consider. You should read the entire Annual Report and any supplement carefully. Totals in certain tables may differ from the sum of the individual items in such tables due to rounding. Unless otherwise specified, amounts in NIS or US$ are given in current prices without adjustment for inflation. Figures in this section are as of September 23, 2016, except as otherwise indicated.

Economic Developments In August 2013, the Central Bureau of Statistics (‘‘CBS’’) adopted the United Nations System of National Accounts as revised in 2008 (‘‘SNA 2008’’) due to a number of major changes that affected the various data series with respect to values as well as percentages of change between periods. The data series beginning in 2006 was revised for the publication of the 2013 Statistical Abstract. The series from 1995 onwards was revised in August 2014. The revisions are in accordance with the changes to the SNA 2008 which has been accepted globally and includes changes in the measurement of the annual gross domestic product (‘‘GDP’’). Some of the main changes in the SNA 2008 applicable to Israel included: (i) recording research and development as fixed capital formation, (ii) measurement of income from financial intermediation, (iii) recording the Central Bank’s output, and (iv) recording of products for further processing in the balance of payments. The process of fully implementing SNA 2008 in Israel will take several years and will be accompanied by additional adjustments to the Balance of Payments Manual 6 (‘‘BPM6’’) and the new international merchandise trade statistics guide. Further changes have been reflected in the classification of economic activities in Israel, as the classification is in accordance with the new International Standard Industrial Classification (‘‘ISIC Rev4’’). Moreover, there has been integration of the 2006 input-output tables that describe the relationships between various industries, as well as between the industries and the final uses (private consumption, general government consumption, fixed capital formation and exports). These methodology changes resulted in a restatement of the growth rates for 1995 through 2012, as well as certain other indicators including the debt-to-GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable to the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the Central Bureau of Statistics. The Israeli economy grew at a pace of 2.5% in 2015, following a growth rate of 3.2% in 2014. The decrease in growth during this period can be attributed to exogenous factors including the slowdown in economies around the world, which contributed to the slowdown in Israeli exports, the appreciation of the Israeli NIS during the first half of 2014 and Operation Protective Edge which took place in July and August 2014 and weighed on the economy. In 2015, GDP increased by 2.6% in the first quarter, decreased by 0.1% in the second quarter and grew by 2.2% and 3.6% in the third and fourth quarters, respectively, in each case compared to the previous quarter at an annualized rate. During the first quarter of 2016, GDP grew at an annual rate of 2.1%, a decrease compared to the fourth quarter of 2015. During the second quarter of 2016, GDP grew at an annual rate of 4.0%. The budget and economic plan for the fiscal years of 2015 and 2016 was approved by the Knesset on November 19, 2015, ending the temporary measures managed by the Accountant General in the Ministry of Finance, where the expenditure limit for each month was one-twelfth of the 2014 budget (linked to the consumer price index (‘‘CPI’’) rate). In the approved budget, the deficit target was set to 2.9% of GDP for 2015 and 2016, but the actual deficit for 2015 was 2.1% of GDP.

D-1 In 2015, the Government continued its debt-reduction policy, reducing Government debt as a percentage of GDP by 2.4%, to a level of 62.4%. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path, falling to a level of 63.9% in the end of 2015, a decline of 2.1% relative to 2014. After a deviation from the budget deficit target in 2012 (the actual budget deficit amounted to 3.9% of GDP during 2012 compared to a target of 2.0% of GDP), the actual budget deficit in 2013 was reduced to 3.1% of GDP, significantly below the 4.3% of GDP deficit target. The downtrend of the deficit continued in 2014, as the deficit to GDP ratio amounted to 2.7%, below the 3.0% target. In 2015, both tax revenues were higher than expected, and expenditures were lower-than-expected. This led to a 2.1% budget deficit for 2015. As part of the budget and economic plan for fiscal years 2015 and 2016, the Government set the budget deficit target at 2.9% of GDP for each year. The inflation rate in 2015 was -1.0% at year end, below the Bank of Israel’s target range of 1% to 3%. The CPI decreased between August 2015 and August 2016 by 0.7%. The NIS/USD exchange rate as of December 31, 2014 stood at 3.889, which represents a depreciation of 12.0% during 2014. The NIS/USD exchange rate as of December 31, 2015 was 3.902, a slight depreciation relative to December 31, 2014. The NIS/USD exchange rate as of August 31, 2016 stood at 3.7860, representing an appreciation of approximately 3.0% relative to December 31, 2015. During 2015, there was no change in Israel’s foreign currency credit rating from Standard & Poor’s (‘‘S&P’’) (A+ (Stable)), Moody’s Investor Services (A1 (Stable)) or Fitch Ratings (A (Stable)). In April 2016, Fitch Ratings revised the Outlook on Israel’s Long-Term Foreign-Currency IDR to Positive from Stable, reflecting confidence in the strong current account position and in the continued reduction in the debt to GDP ratio. Israel’s economy continues to be affected by current global economic conditions and the slow-growth climate in the global environment, particularly in Europe, and most recently the British referendum to leave the European Union. Europe continues to face uncertainty as many ‘‘eurozone’’ countries face moderate to low growth and inflation close to zero. The continued sluggish growth in the European Union (EU), which is one of Israel’s major trade partners, could have a material adverse impact on Israel’s balance of trade and thereby adversely affect Israel’s financial condition. Since late 2009, several ‘‘eurozone’’ governments, including Greece, Spain, Italy, Ireland, Portugal, France and Cyprus, have experienced rising national debt levels coupled with the downgrade of the credit ratings of their government debt. As a result, there has been significant price volatility in the secondary market for sovereign debt of European and other nations. Additionally, speculation regarding the inability of Greece and other ‘‘eurozone’’ governments to pay their national debts remains uncertain, although these concerns have eased in recent years. Another global economic condition that has had a negative impact on the Israeli economy is the slowdown in key emerging economies, including China, Russia and Brazil, which has contributed to the slowdown in Israeli exports. Although Israel’s economy has sustained moderate rates of growth in recent years, there can be no assurance that Israel’s economy will continue to grow in a prolonged negative global economic climate.

Balance of Payments and Foreign Trade Israel had a high current account surplus of 4.6% of GDP in 2015. This surplus follows twelve years of a positive surplus in the current account. The current account balance decreased steadily from the second half of 2010 through the first quarter of 2012. This decrease was partially attributable to the cessation of natural gas flowing from Egypt and the slowdown in the extraction of natural gas from Yam Tethis reservoir, the combined effect of which required Israel to import expensive alternative fuels during 2011 and 2012. The production of natural gas from the Tamar reservoir, which started in late March 2013, and the decline in fuel prices since the second half of 2012, contributed to an improvement in the current account balance since the second half of 2012 and into 2013, 2014 and 2015. In the first half of 2014, the current account surplus was 4.6%. In the third quarter of 2014, a sharp decrease of the surplus was recorded, mainly due to the negative effects of Operation Protective Edge. In the fourth quarter of 2014, there was an improvement in the current account surplus, but the surplus remained lower than the levels recorded in the first half of 2014. During the first two quarters of 2015, the upward trend in the current account surplus continued, as the surplus amounted to 3.8% and 5.1% of GDP in the first and second quarters, respectively. The second quarter

D-2 figure was the highest surplus recorded since 2010. In the third quarter of 2015, the current account surplus slightly decreased to 4.8% of GDP, and a further decrease was recorded in the fourth quarter of 2015, reaching a surplus of 3.8% of GDP. In the first quarter of 2016, the current account surplus was unchanged at 3.8% of GDP, and in the second quarter the downward trend of the surplus continued as the surplus decreased to 3.4% of GDP. The prior upward trend of exports of goods and services stopped in 2015, as exports recorded a decrease during 2015. A decline was also recorded in the imports of goods and services, mainly due to the decrease in oil prices. Thus, in 2015, Israel recorded a net-export surplus of $9.0 billion, significantly higher than the 2013 and 2014 surplus of $6.6 billion and $5.6 billion, respectively. Compared to 2014, exports in real NIS terms recorded a negative growth rate of -4.3% in 2015, and imports decreased by 0.5%. The decrease of the Israeli exports of goods during 2015 (4.1% in current dollar terms, excluding diamonds) was reflected in a decrease of exports to the EU (-12.0%) and to other destinations (-16.5%, excluding Asia). Exports to the United States and Asia increased by 4.6% and 15.0%, respectively, in 2015. The share of exports to Asia increased by 4.0% (from 20.3% in 2014 to 24.4% in 2015), and the share of exports to the United States increased by 2.0% (from 21.8% in 2014 to 23.8% in 2015). On the other hand, the share of exports to the EU decreased by 2.6% (from 31.6% in 2014 to 29.0% in 2014), and the share of exports to other destinations decreased by 3.4% (from 26.3% in 2014 to 22.9% in 2015). During the first, second, third and fourth quarters of 2015, exports of goods in current USD terms decreased by 5.4%, 5.2%, 1.4% and 0.3%, respectively, in each case compared to the previous quarter. In the first and second quarters of 2016, the negative trend was halted as the exports of goods increased by 0.2% and 1.5%, respectively. At the same time, imports of goods also recorded a downward trend, as imports decreased by 7.4%, 5.7%, and 3.2% in the first, second and third quarters of 2015, respectively, in each case compared to the previous quarter. In the fourth quarter of 2015, the imports of goods increased by 6.2%, but returned to the downward trend in the first quarter of 2016, as imports of goods decreased by 0.5%. In the second quarter of 2016, the imports of goods recorded an increase of 4.6%. The growth of imports in 2015 was limited due to the local production of natural gas which offset the imports of certain energy-related products and the decline in the commodities’ prices, and in particular energy prices. On March 30, 2013, natural gas production at the Tamar reservoir began. The gas flowing from Tamar is being used mainly for domestic electricity production and has led to a significant decrease in energy-related imports. Following the beginning of gas production from Tamar, there were appreciation pressures on the NIS, leading the Bank of Israel to intervene in the foreign exchange market for the first time since 2011. Since the intervention, the Bank of Israel has purchased a total of $9.9 billion in foreign currency within the framework of the gas plan, including $3.5 billion during 2014, $3.1 billion during 2015 and $1.2 billion in the first eight months of 2016. During 2014, the Bank of Israel had unplanned purchases of $3.5 billion in foreign currency. During 2015, the Bank of Israel had unplanned purchases of $5.7 billion, bringing foreign currency purchases to $8.8 billion in 2015. In November 2015, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2016 would be $1.8 billion, and the Bank announced that it would purchase foreign currency during 2016 accordingly. The Bank of Israel intends to continue such purchases of foreign currency until Israel’s sovereign wealth fund becomes operational, which is anticipated in 2018 (subject to legislative review by the Knesset). In the first eight months of 2016, the Bank of Israel had unplanned purchases of $2.8 billion. Israel is a party to free trade agreements with its major trading partners and it is one of the few nations that has signed free trade agreements with both the United States and the EU.

Fiscal Policy The budget deficit amounted to 2.1% of GDP in 2015, below the budget deficit target of 2.9% of GDP for that year. Since 2009, the budget deficit has been on a declining path, with the exception of 2012. In 2009, the budget deficit amounted to 4.8%, due to a decrease in tax revenues resulting from the global financial crisis (the 2009 budget deficit target was set at 6%); 3.5% of GDP in 2010 (the 2010 budget deficit target was set at 5.5%); 3.1% in 2011 (the 2011 budget deficit target was set at 3.0%); 3.9% in 2012 (the 2012 budget

D-3 deficit target was set at 2.0%); 3.1% in 2013 (the 2013 budget deficit target was set at 4.3%); and 2.7% in 2014 (the 2014 budget deficit target was set at 3.0%). Pursuant to recent legislation, the budget deficit target is set at 2.9% of GDP for 2016. In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined in ‘‘Public Finance — Limits on Expenditure and Deficit Reduction,’’ below). The revision modifies the formula that will be used to calculate the annual budget in the coming years. Under the new formula, beginning with the 2015 budget, the expenditure ceiling will be calculated based on the average population growth rate in the three years prior to the submission of the Expenditure Law, plus the ratio of the medium-term debt target (50%) to the current debt-to-GDP ratio. The new rule will be based on the three-year average population growth rate in order to ensure a consistent increase in expenditure per capita.

Inflation and Monetary Policy The inflation rate over the last decade (2005 − 2015) was near the middle of the Government’s target range (1% − 3%) and stood at approximately 2% on average. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. Measured at year-end, the CPI rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013. In 2014 the CPI decreased by 0.2%. Since June 2014, the inflation rate has been below the lower band of the Government’s target range, and since September 2014 the inflation rate has been negative. In 2015 the CPI decreased by 1.0%. The CPI decreased by 0.7% during the twelve-month period ending August 31, 2016. Because of the slowdown in the Israeli and global economies, the Bank of Israel lowered its key interest rate to 0.5% in the middle of 2009. As Israel’s economy recovered and continued to grow, the Bank of Israel began to gradually increase its key interest rate until it peaked at 3.25% in June 2011. The Bank of Israel then repeatedly reduced its key interest rate by 0.25%, beginning in September 2011. In May 2013, the Bank of Israel announced that it would further reduce the interest rate by 0.5%, to 1.25%. In March 2014, the Bank of Israel reduced its key interest rate to 0.75%. In August and September 2014, the Bank of Israel reduced its key interest rate twice, each time by 0.25%, to 0.25%. In March 2015, the Bank made another interest rate cut, lowering its key interest rate to 0.1%. The last interest rate cuts were made primarily because of the appreciation of the NIS. The real interest rate averaged -0.2%, -0.6% and -0.5% in 2013, 2014 and 2015, respectively, after two years of positive real interest rates of 0.4% and 0.3% in 2011 and 2012, respectively. In 2009 and 2010, the real interest rate was negative (-0.7% and -0.9%, respectively). As of August 2016, the real interest rate, less inflation expectations, was -0.3%. In recent years, Israel has been active in the global sovereign debt markets. In March 2009, Israel issued in the global markets an aggregate $1.5 billion principal amount of 5.125% bonds due 2019. In March 2010, Israel issued in the Euro market an aggregate €1.5 billion ($2.07 billion) principal amount of 4.625% bonds due 2020. In January 2012, Israel issued in the global markets an aggregate $1.5 billion principal amount of 4% bonds due 2022. In January 2013, Israel completed a dual-tranche issuance in the global markets, issuing an aggregate $1 billion principal amount of 3.15% bonds due 2023 and an aggregate $1 billion principal amount of 4.5% bonds due 2043. In January 2014, Israel issued in the Euro market an aggregate €1.5 billion ($2.05 billion) principal amount of 2.875% bonds due 2024. In March 2016, the Government raised $1.5 billion through a Yankee Bond offering, consisting of an aggregate of $1 billion 2.875% bonds due March 2026 and $500 million 4.50% bonds due January 2043; the 2043 bonds were a further issuance of the 4.50% bonds due 2043, which were issued on January 31, 2013. The NIS/USD exchange rate saw an appreciation of the NIS between the second half of 2012 and the end of July 2014, averaging NIS 3.61 for 2013 and NIS 3.48 for the first half of 2014 (compared to NIS 3.86 in 2012). On July 31, 2012, December 31, 2012, July 31, 2013 and December 31, 2013, the NIS/USD exchange rate stood at NIS 3.997, NIS 3.733, NIS 3.566 and NIS 3.471, respectively. On July 24, 2014, the NIS/USD exchange rate stood at its lowest rate since July 2011, slightly above NIS 3.4. In view of this appreciation, the Bank of Israel made two interest rate cuts, as discussed above. In the second half of 2014, the NIS/USD exchange rate saw a depreciation of the NIS, as the rate increased from slightly above NIS 3.4 on July 24, 2014 to slightly below NIS 4.0 as of December 3, 2014. The depreciation trend of the

D-4 NIS relative to the USD continued into the first months of 2015; in March and April 2015, the exchange rate was occasionally higher than NIS 4.0. Between May 2015 and July 2015, the exchange rate recorded an appreciation of NIS relative to the USD, standing at NIS 3.783 as of July 31, 2015. Between July 31, 2015 and December, 31 2015, the NIS gradually depreciated relative to the USD, reaching NIS 3.902 at the end of 2015 and NIS 3.983 at January 20, 2016. Since then the NIS appreciated to NIS 3.746 at May 2, 2016, depreciated again to NIS 3.9 at June 27, 2016, and appreciated again to 3.749 as of September 8, 2016. Since the beginning of 2015 and until the end of November 2015 the NIS recorded an appreciation relative to the Euro, mainly due to the Quantitative Easing in the ‘‘eurozone’’; however, since the beginning of December 2015, the NIS has depreciated relative to the Euro, a trend which continued in the first half of 2016. In the third quarter of 2016, the NIS has appreciated relative to the Euro. In response to a sharp appreciation of the NIS that began in 2008 and continued until mid-2011, the Bank of Israel initiated a two-year policy of daily purchases of foreign currency. In August 2009, the Bank of Israel announced that it would terminate its daily purchasing of foreign currency but that it planned to continue purchasing such currency when it deems advisable. Between August 2011 and April 2013, the Bank of Israel did not make substantial foreign currency purchases. In May 2013, the Bank of Israel announced its plan to resume purchasing foreign currency to counteract the adverse effects of natural gas production from the Tamar reservoir, which began operating in late March 2013, on the balance of payments. Appreciation pressures on the NIS began following the commencement of production from the Tamar reservoir. The Bank of Israel’s intervention in the foreign exchange market, for the first time since 2011, is intended to offset the appreciation pressure on the NIS resulting from the increased domestic production of natural gas in order to avoid the phenomenon known as ‘‘Dutch disease’’, which could negatively impact the Israeli economy. The Bank of Israel purchased $2.1 billion by the end of 2013, and another $3.5 billion in planned purchases during 2014. The Bank of Israel also purchased $3.5 billion in unplanned purchases during 2014. During 2015, the Bank of Israel purchased $3.1 billion in planned purchases, as it announced in December 2014, and purchased another $5.7 billion in unplanned purchases. In November 2015, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2016 would be $1.8 billion and announced that it would purchase foreign currency during 2016 accordingly. In the first eight months of 2016, the Bank of Israel purchased $4.0 billion in foreign currency, including $1.2 billion in the context of the aforementioned plan. Since the Bank of Israel’s intervention in the foreign exchange market, the Bank of Israel has purchased a total of $9.9 billion in foreign currency within the framework of the gas plan. At the end of 2010 and 2011, official reserves stood at $70.9 billion and $74.9 billion, respectively. At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.1 billion as of the end of 2014 and $90.6 billion as of the end of 2015. As of the end of August 2016, the official reserves stood at $97.6 billion.

Labor Market The rate of unemployment dropped to 5.3% in 2015, compared to 5.9% in 2014, reflecting a significant decrease compared to 6.2% in 2013, 6.9% in 2012 and 7.0% in 2011. The unemployment rate continued the downward trend in the first eight months of 2016, reaching 4.6% in August 2016. The participation rate increased from 62.6% at the beginning of 2012 to 64.2% in the fourth quarter of 2014. In 2015, the participation rate was stable at 64.1%, slightly lower than the 2014 rate. As of August 2016, the participation rate stood at 64.1%, representing an average of 64.2% in the first eight months of 2016. In accordance with the high participation rate and low unemployment rate, the growth rate of wages has accelerated significantly since the beginning of 2015.

D-5 recovered in 2009 and 2010, rising by 88.8% and 14.9%, respectively. In 2011, the TA-100 fell by 20.1% and the TA-25 fell by 18.2%. The TASE partially recovered in 2012, with the TA-100 and TA-25 rising by 7.2% and 9.2%, respectively. This recovery continued into 2013 as the TA-100 and TA-25 increased by 15.1% and 12.1%, respectively. During 2014, the TA-100 and TA-25 increased by 6.7% and 10.2%, respectively, and in 2015 the TASE continued its upward trend, as the TA-100 and TA-25 rose by 2.0% and 4.4%, respectively. In the first eight months of 2016 through August 31, 2016, the TA-100 and TA-25 declined by 3.3% and 5.3%, respectively. In light of the 0.3% depreciation of the NIS against the USD during 2015, the TA-25 increased by 4.0% in USD terms and 4.4% in nominal terms over the course of the year. The value of the public portfolio of financial assets (a weighted average of the public’s holdings of financial assets and deposits, in Israel and abroad) increased by 8.9% and 6.8% during 2013 and 2014, respectively. In 2015, the value of the public portfolio of financial assets increased further by 4.5%. According to the Bank of Israel estimate, the value of the public portfolio of financial assets shows an increase of 2.7% in the first seven months of 2016. In provident funds in 2013, there was a net inflow of assets under management of NIS 2.757 billion. In 2014, there was a net inflow of NIS 5.370 billion. In 2015 there was a net inflow of NIS 8.242 billion. For the first eight months of 2016, there was an additional net inflow of NIS 5.740 billion. The Bank of Israel, together with governmental authorities and regulators, monitors Israeli banks and financial institutions on an ongoing basis, supervising the banking system’s conditions and operations as a whole. In addition, the Bank of Israel cooperates with the Ministry of Finance and the Israel Securities Authority to achieve comprehensive regulation and supervision of Israel’s financial markets, to ensure coordination among the various entities in the financial sector and to set policies and measures that will be implemented and enforced with respect to such entities. In 2011, the Bank of Israel and the Ministry of Finance took a number of steps to reduce short-term investments by foreign investors. These included, starting in January 2011, requiring banking corporations in Israel to meet a 10% reserve requirement for foreign exchange swap transactions and shekel-based forward contracts entered into by non-residents (which was subsequently canceled at the end of October 2014). In addition, the Ministry of Finance cancelled a tax exemption previously granted to foreign investors on capital gains from non-indexed zero-coupon securities of up to one-year maturity issued by the Bank of Israel (‘‘Makam’’) and short-term government bonds. To improve its ability to analyze transactions in the foreign exchange market and to increase transparency and investor confidence, the Bank of Israel imposed reporting obligations on Israeli residents and non-residents undertaking transactions in foreign exchange swaps and forwards exceeding $10 million per day, and non-residents undertaking transactions in Makam and short-term government bonds exceeding NIS 10 million per day.

D-6 In the summer of 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. In June 2007, Hamas, a terror organization, assumed control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 and into 2011. Operation Cast Lead did not materially affect the Israeli economy. From 2011 and into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel launched Operation Pillar of Defense, a military campaign against terrorist targets in Gaza. Operation Pillar of Defense lasted eight days. In response to Hamas firing rockets from Gaza into Israel in the summer of 2014, in July 2014, Israel took defensive military action and commenced Operation Protective Edge with the goal of suppressing the rocket fire, some of which reached Israel cities and towns almost 100 kilometers away from Gaza. The operation ended in August 2014. Having been at a standstill since 2009 (despite a brief round of talks beginning in September 2010), Israeli-Palestinian peace negotiations were again initiated, under the auspices of U.S. Secretary of State John Kerry, in July 2013. Progress was made but, before the last phase of implementation of a prisoner release by Israel, for which Government approval was imminent, the Palestinian Authority breached its commitments and submitted requests to accede to fifteen international conventions. While the talks were suspended, the Palestinians announced a unity pact between Fatah and Hamas, which would lead to a so-called national consensus government. Incorporating Hamas into the Palestinian government, under one guise or another, is unacceptable to Israel as long as Hamas rejects the three benchmarks of the International Quartet (namely, recognizing Israel, accepting existing Israeli-Palestinian agreements, and renouncing violence). Although Israel has expressed its willingness to negotiate without preconditions with Palestinian partners who accept the Quartet’s conditions, Hamas still refuses to do so, leaving negotiations at an impasse. However, improvements have been made in economic and security cooperation with the Palestinian Authority. In September 2011, the Palestinian Authority filed an application for membership with the United Nations. In November 2012, the General Assembly upgraded the Palestinian Authority’s status in the United Nations from a ‘‘non-member observer entity’’ to a ‘‘non-member observer state.’’ Beginning in October 2015, there was an increase in acts of violence against Israelis, mostly by individual Palestinians using knives or cars as weapons. This wave of violence was welcomed and encouraged by Hamas and, at first, also by the Palestinian Authority. The Palestinian Authority has, however, continued its security cooperation with Israel and has, in general, become more cautious in expressing encouragement for violence. The overall level of violence has shown a decline over the past few months, although with occasional renewed flare-ups. Since January 2011, there has been political instability and civil unrest in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. This unrest has resulted in the removal of long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. The delicate relations between Israel and its neighbors could become even more fragile with the domestic turmoil and change in regimes. However, such instances of instability in the Middle East and North Africa region have so far not materially affected Israel’s financial or political situation, and countries who have signed peace agreements with Israel remain committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not thereby be affected. This uncertainty is highlighted by recent fighting in Syria and Iraq, where an Islamist militia group known as ISIS (Islamist State in Iraq and Syria) is challenging the territorial boundaries of both states. Since the signing of the Camp David Accords in 1979, peace with Egypt has been important to Israel’s national security. Following the ousting of Egyptian President Hosni Mubarak in 2011, the relationship between Egypt and Israel has been strained, but the election of President Al-Sisi has been accompanied by

D-7 reassuring statements regarding common interests. As of September 2016, Israel does not perceive a material change in the strategic stance of Egypt, and the peace treaty between the two states remains in force. Moreover, as of September 2016, Israel monitors very closely the situation in Syria, in which many dangerous forces operate. The direct threat to Israel from the Syrian military has diminished. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and the possibility that the ongoing civil war will devolve into a state of anarchy. Fundamentalist regimes such as Iran present a deep concern for the international community and especially for states in the region. Since 2011, the prospect of a nuclear Iran has been at the center of international geopolitical discourse. The comprehensive agreement between the P5+1 group and Iran that was reached in July 2015 (Joint Comprehensive Plan of Action) conditions international economic sanctions relief, mainly United States and EU sanctions, on Iranian nuclear capabilities reduction and supervision by the International Atomic Energy Agency. With the economic sanctions relief, the primary United States sanctions and other types of sanctions will remain in place. There is evidence that Iran continues to violate United Nations Security Council resolutions, so far with limited success of deterrence by the international community.

Privatization Historically, the Government has been involved in nearly all sectors of the Israeli economy. In the past several decades, privatization has been an essential element of the broader market reforms initiated by the Government aiming to promote the growth of the private sector, mainly by enhancing competition. Israel has made substantial progress in recent years, resulting in the privatization of many enterprises owned by the State and the reduction of State subsidization of business enterprises. In total, between 1986 and 2015, 98 Government Companies (as defined in ‘‘Role of the State in the Economy,’’ below) became partially or fully-private. The proceeds stemming from these privatizations totaled $14.2 billion. In 2010, privatization proceeds amounted to NIS 4.5 billion (approximately $1.2 billion), partly as a result of the privatization of the State’s interest in two of the five major banks in Israel — Israel’s entire remaining stake in Israel Discount Bank Ltd. and 5% of the outstanding equity securities of Bank Leumi Le-Israel Ltd. Currently, the Government holds approximately 6.03% of Bank Leumi’s outstanding equity securities. The Government plans to continue with the process of privatizing its interests in financial institutions, as well as State-owned land, seaports, Postal Authority, energy and transportation utilities and parts of the defense industry (see ‘‘The Economy — Role of the State in the Economy,’’ below).

Loan Guarantee Program 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 influx of immigrants over this period. Israel completed its financings under this program in January 1998. In April 2003, the United States approved up to $9 billion in additional loan guarantees for Israel to be issued during U.S. government fiscal years 2003 through 2005, with an option to extend the program by an additional year. In 2005, the United States approved Israel’s request to extend the $9 billion program for two more years; in 2006, this program was extended again through U.S. fiscal year 2011 (with an option to carry forward unused guarantee amounts for an additional year); and in 2012, the program was extended again through 2016. On October 24, 2012, the United States and Israel entered into an agreement establishing a new framework for administering the extended program. A further extension of the program was signed into law by President Obama on December 18, 2015. The new law extends the program until September 30, 2019 (with an option to carry forward unused guarantee amounts for an additional year) and allows the United States to provide access to up to $3.8 billion in future loan guarantees as part of the $9 billion commitment made in 2003. The amount of guarantees that may be issued to Israel under the loan guarantee program may be reduced by an amount equal to the amount extended or estimated to have been extended by Israel for activities that the President of the United States determines are inconsistent with the objectives and understandings reached between the United States and Israel regarding the implementation of the loan guarantee program. Under the program, the United States issues guarantees with respect to all payments of principal and interest on certain

D-8 bonds issued by Israel. The proceeds of the guaranteed loans may be used to reﬁnance existing debt. Under the $9 billion loan guarantee program, between September 2003 and November 2004 Israel issued guaranteed notes totaling $4.1 billion face value. Israel has not issued any notes under the loan guarantee program since November 2004, and up to $3.8 billion of U.S. loan guarantees (subject to the reductions described above) remains available.

Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2011 2012 2013 2014 2015 Main Indicators GDP (at constant prices) ...... 918.2 940.1 981.3 1,012.3 1,037.7 Real GDP growth ...... 5.1% 2.4% 4.4% 3.2% 2.5% GDP per capita (at constant 2010 prices).... 118,285 118,895 121,806 123,270 123,873 GDP per capita, percentage change ...... 3.1% 0.5% 2.4% 1.2% 0.5% Inﬂation (change in CPI − annual average) . . 3.5% 1.7% 1.5% 0.5% -0.6% Industrial production ...... 2.1% 4.0% 0.5% 1.2% 2.2% Business sector product (at constant 2010 prices) ...... 688.4 702.4 737.4 760.1 777.8 Permanent average population (thousands) . . 7,763 7,907 8,056 8,212 8,377 Unemployment rate(1) ...... 7.0% 6.9% 6.2% 5.9% 5.3% Foreign direct investment (net inﬂows, in billions of dollars) ...... 8.7 8.5 12.4 6.7 11.5 Trade Data Exports (F.O.B) of goods and services (NIS, at constant 2010 prices) ...... 335.9 329.7 341.4 346.3 331.4 Imports (F.O.B) of goods and services (NIS, at constant 2010 prices) ...... 319.1 325.8 324.7 337.2 335.5 Government Debt(2) Total gross government debt (at end-of-year current prices)(3) ...... 633.0 666.8 696.3 715.8 726.7 Total gross government debt as percentage of GDP...... 67.7% 67.1% 65.7% 64.8% 62.4% External Debt External debt liabilities (in millions of dollars, at year end) ...... 109,297 102,029 101,259 96,164 89,436 Net external debt (in millions of dollars, at year end) ...... -60,840 -67,465 -81,812 -99,535 -118,272 Revenues and Expenditures (net) Revenues and grants ...... 233.13 238.69 260.63 273.68 290.27 Expenditures ...... 347.73 376.97 389.47 402.61 381.65 Expenditures other than capital expenditures ...... 245.05 262.76 278.62 287.35 293.63 Development expenditures (including repayments of debt) ...... 102.51 114 110.83 115.22 88.27 Repayments of debt ...... 88.16 97.95 94.42 99.09 66.68

(1) Reﬂects changes in the Central Bureau of Statistics’ labor survey methodology, resulting in higher values in the unemployment rate line items. (2) Government debt excluding local authorities’ debt. (3) Risk Management Dept., Debt Unit, Ministry of Finance. Sources: Central Bureau of Statistics, Bank of Israel and Ministry of Finance.

D-9 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K/A For Foreign Governments and Political Subdivisions Thereof

AMENDMENT NO. 1 TO ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last fiscal year: December 31, 2014 SECURITIES REGISTERED* (As of the close of the fiscal year)

AMOUNTS AS TO NAMES OF WHICH REGISTRATION EXCHANGES ON TITLE OF ISSUE IS EFFECTIVE WHICH REGISTERED N/A N/A N/A

Names and address of persons authorized to receive notices and communications from the Securities and Exchange Commission

Avi Braf Chief Fiscal Officer for the Western Hemisphere For the Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: STEVEN G. TEPPER, ESQ. Arnold & Porter LLP 399 Park Avenue New York, New York 10022

* The Registrant is filing this annual report on a voluntary basis. THE STATE OF ISRAEL (THE “STATE”)

The sole purpose of this Amendment No. 1 is to file with the Securities and Exchange Commission (i) the Copy of the State Budget Proposal for Fiscal Years 2015-2016 (in Hebrew), which is included as Exhibit C; (ii) the Summary Information and Recent Developments in the State as of January 7, 2016, which is included as Exhibit D-1 hereto and which updates and amends the Current Description of the State previously filed as Exhibit D; and (iii) Form of Amendment No. 2, dated as of January 5, 2016, to the Fiscal Agency Agreement, dated as of March 13, 2000, as amended by Amendment No. 1 dated as of February 24, 2004, between the State and Citibank, N.A., as Fiscal Agent, which is included as Exhibit G. EXHIBIT INDEX

Exhibit Number

A: None.

B: None.

C: (P) Copy of the State Budget Proposal for Fiscal Years 2015-2016 (in Hebrew).**

D: Current Description of the State of Israel.*

D-1: Recent Developments in the State as of January 7, 2016.

E: Form of Fiscal Agency Agreement, dated as of March 13, 2000, between the Registrant and Citibank, N.A. as Fiscal Agent.***

F: Form of Amendment No. 1, dated as of February 24, 2004, to Fiscal Agency Agreement between the Registrant and Citibank, N.A., as Fiscal Agent.***

*Previously filed. ** Filed by paper filing under cover of Form SE, pursuant to Rules 306(c) and 311 of Regulation S-T. *** Previously filed in connection with Registration Statement No. 333-184134. SIGNATURE

STATE OF ISRAEL

By: /s/ Yali Rothenberg Yali Rothenberg Senior Deputy Accountant General Ministry of Finance

By: /s/ Gil Cohen Gil Cohen Managing Director Government Debt Management Ministry of Finance Exhibit D-1

SUMMARY INFORMATION AND RECENT DEVELOPMENTS

The information included in this section supplements the information about the State contained in the State’s Annual Report for 2014 on Form 18-K filed with the SEC on June 30, 2015, as amended from time to time. To the extent the information in this section is inconsistent with the information contained in the Annual Report for 2014, as amended from time to time, through the date hereof, the information in this section supersedes and replaces such information. Capitalized terms not defined in this section have the meanings ascribed to them in the Annual Report for 2014. This section is not complete and may not contain all the information that you should consider. You should read the entire Annual Report and any supplement carefully. Totals in certain tables may differ from the sum of the individual items in such tables due to rounding. Unless otherwise specified, amounts in NIS or US$ are given in current prices without adjustment for inflation. Figures in this section are as of January 7, 2016, except as otherwise indicated.

Economic Developments

In August 2013, the Central Bureau of Statistics (“CBS”) adopted the United Nations System of National Accounts as revised in 2008 (“SNA 2008”) due to a number of major changes that affected the various data series with respect to values as well as percentages of change between periods. The data series beginning in 2006 was revised for the publication of the 2013 Statistical Abstract. The series from 1995 onwards was revised in August 2014. The revisions are in accordance with the changes to the SNA 2008 which has been accepted globally and includes changes in the measurement of the annual gross domestic product (“GDP”). Some of the main changes in the SNA 2008 applicable to Israel included: (i) recording research and development as fixed capital formation, (ii) measurement of income from financial intermediation, (iii) recording the Central Bank’s output, and (iv) recording of products for further processing in the balance of payments. The process of fully implementing SNA 2008 in Israel will take several years and will be accompanied by additional adjustments to the Balance of Payments Manual 6 (“BPM6”) and the new international merchandise trade statistics guide. Further changes have been reflected in the classification of economic activities in Israel, as the classification is in accordance with the new International Standard Industrial Classification (“ISIC Rev4”). Moreover, there has been integration of the 2006 input-output tables that describe the relationships between various industries, as well as between the industries and the final uses (private consumption, general government consumption, fixed capital formation and exports).

These methodology changes resulted in a restatement of the growth rates for 1995 through 2012, as well as certain other indicators including the debt-to-GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable to the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the Central Bureau of Statistics.

The Israeli economy grew at a pace of 2.6% in 2014, lower than the growth rate of 3.3% in 2013. The plateau in growth during this period can be attributed to exogenous factors including the slowdown in economies around the world, which contributed to the slowdown in Israeli exports, the appreciation of the Israeli NIS during the first half of 2014 and Operation Protective Edge which took place in July and August 2014 and weighed on the economy. In 2015, GDP increased 2.3%, 0.2% and 2.0% in the first, second and third quarters, respectively, in each case compared to the previous quarter.

According to the estimates for the year 2015, GDP is expected to amount to NIS 1.15 trillion, presenting real growth of 2.3%, relative to 2014.

The budget and economic plan for the fiscal years of 2015 and 2016 was approved by the Knesset on November 19, 2015, ending the temporary measures managed by the Accountant General in the Ministry of Finance, where the expenditure limit for each month was one-twelfth of the 2014 budget (linked to the consumer price index (“CPI”) rate). In the approved budget, the deficit target is set to 2.9% of GDP for 2015 and 2016, but the actual deficit for 2015 is expected to be less than 2.5% of GDP.

In 2014, the Government continued its debt-reduction policy, reducing Government debt as a percentage of GDP by 0.5%, to a level of 65.4%. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path, falling by 0.5% relative to 2013 to 66.7% at the end of 2014. After a deviation from the budget deficit target in 2012 (the actual budget deficit amounted to 3.9% of GDP during 2012 compared to a target of 2.0% of GDP), the actual budget deficit in 2013 was reduced to 3.1% of GDP, significantly below the 4.65% of GDP deficit target. In 2014, tax revenues were higher than expected, due in part to one-time sources of revenue, including the taxation of “trapped profits,” legislative changes and lower-than- expected expenditures. This led to a 2.73% budget deficit for 2014. As part of the budget and economic plan for fiscal years 2015 and 2016, the Government set the budget deficit target at 2.9% of GDP for each year. The inflation rate in 2014 was -0.2% at year end, below the Bank of Israel’s target range of 1% to 3%. The inflation forecast for 2015 is -0.9% at year-end, below the target range, as the CPI decreased between November 2014 and November 2015 by 0.9%. The NIS/USD exchange rate as of December 31, 2014 stood at 3.889, which represents a depreciation of 12.0% during 2014. The NIS/USD exchange rate as of December 31, 2015 was 3.902, a slight depreciation relative to December 31, 2014. During 2015, there was no change in Israel’s foreign currency credit rating from Standard & Poor’s (“S&P”) (A+ (Stable)), Moody’s Investor Services (A1 (Stable)) or Fitch Ratings (A (Stable)). In November 2013, Fitch Ratings revised the Outlook on Israel’s Long-Term Foreign-Currency IDR to Positive from Stable, reflecting confidence in the turnaround in the fiscal position and the Government’s commitment to a credible medium-term path for further deficit reduction. In November 2014, Fitch revised the Outlook on Israel’s Long- Term Foreign-Currency IDR back to Stable, following their view that the fiscal consolidation was set back by the effects of Operation Protective Edge during the third quarter of 2014.

Israel’s economy continues to be affected by current global economic conditions and the slow-growth climate in Europe. Europe continues to face uncertainty as many “eurozone” countries face moderate to low growth and inflation close to zero. The continued sluggish growth in the European Union (EU), which is one of Israel’s major trade partners, could have a material adverse impact on Israel’s balance of trade and thereby adversely affect Israel’s financial condition. Since late 2009, several “eurozone” governments, including Greece, Spain, Italy, Ireland, Portugal, France and Cyprus, have experienced rising national debt levels coupled with the downgrade of the credit ratings of their government debt. As a result, there has been significant price volatility in the secondary market for sovereign debt of European and other nations. Additionally, speculation regarding the inability of Greece and other “eurozone” governments to pay their national debts remains uncertain, although these concerns have eased in recent months. Another global economic condition that has had a negative impact on the Israeli economy is the slowdown in key emerging economies, including China and Brazil, which has contributed to the slowdown in Israeli exports.

Balance of Payments and Foreign Trade

Israel had a current account surplus of 3.7% of GDP in 2014. This surplus follows twelve years of a positive surplus in the current account. The current account balance decreased steadily from the second half of 2010 through the first quarter of 2012. This decrease was partially attributable to the cessation of natural gas flowing from Egypt and the slowdown in the extraction of natural gas from Yam Tethis reservoir, the combined effect of which required Israel to import expensive alternative fuels during 2011 and 2012. The production of natural gas from the Tamar reservoir, which started in late March 2013, and the decline in fuel prices since the second half of 2012, contributed to an improvement in the current account balance since the second half of 2012 and into 2013, 2014 and 2015. In the first half of 2014, the current account surplus was 4.6%. In the third quarter of 2014, a sharp decrease of the surplus was recorded, mainly due to the negative effects of Operation Protective Edge. In the fourth quarter of 2014, there was an improvement in the current account surplus, but the surplus remained lower than the levels recorded in the first half of 2014.

During the first three quarters of 2015, the upward trend in the current account surplus continued, as the surplus amounted to 3.5%, 4.7% and 5.1% of GDP in the first, second and third quarters, respectively. The third quarter figure was the highest surplus recorded since 2010.

During 2014, exports of goods and services continued their upward trend, and imports of goods and services increased. Thus, in 2014, Israel recorded a net-export surplus of $5.0 billion, slightly lower than the 2013 surplus of $5.2 billion. Compared to 2013, exports in real NIS terms grew moderately by 1.5% in 2014, and imports increased by 3.0%. The growth in exports of goods during 2014 was reflected in an increase of exports to the United States (6.1%), to the EU (2.7%) and to Asia (4.1%). Exports to other destinations decreased by 0.5% in 2014. Accordingly, the share of exports to the United States increased by 0.7% (from 26.2% in 2013 to 26.9% in 2014), while the share of exports to other destinations decreased by 0.8% (from 21.4% in 2013 to 20.6% in 2014). The share of exports to the EU (27.4% in 2013 and 27.2% in 2014) and to Asia (25.0% in 2013 and 25.2% in 2014) remained almost unchanged. During the first, second and third quarters of 2015, exports of goods in current USD terms decreased by 3.1%, 5.3% and 0.2%, respectively, in each case compared to the previous quarter. At the same time, imports of goods also recorded a downward trend, as imports decreased by 4.9%, 6.6%, and 4.9% in the first, second and third quarters of 2015, respectively, in each case compared to the previous quarter. The growth of imports in 2015 is expected to be limited due to the local production of natural gas which will offset the imports of certain energy-related products and the decline in the commodities' prices, and in particular energy prices.

On March 30, 2013, natural gas production at the Tamar reservoir began. The gas flowing from Tamar is being used mainly for domestic electricity production and has led to a significant decrease in energy-related imports. Following the beginning of gas production from Tamar, there were appreciation pressures on the NIS, leading the Bank of Israel to intervene in the foreign exchange market for the first time since 2011. Since the intervention, the Bank of Israel has purchased a total of $8.7 billion in foreign currency within the framework of the gas plan, including $3.5 billion during 2014 and $3.1 billion during 2015. During 2014, the Bank of Israel had unplanned purchases of $3.5 billion in foreign currency. During 2015, the Bank of Israel had unplanned purchases of $5.7 billion, bringing foreign currency purchases to $8.8 billion in 2015. In November 2015, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2016 would be $1.8 billion, and the Bank announced that it would purchase foreign currency during 2016 accordingly. The Bank of Israel intends to continue such purchases of foreign currency until Israel’s sovereign wealth fund becomes operational, which is anticipated in 2018 (subject to legislative review by the Knesset).

Israel is a party to free trade agreements with its major trading partners and it is one of the few nations that has signed free trade agreements with both the United States and the EU.

Fiscal Policy

The budget deficit amounted to 2.73% of GDP in 2014, below the budget deficit target of 3.0% of GDP for that year. Since 2009, the budget deficit has been on a declining path, with the exception of 2012. In 2009, the budget deficit amounted to 4.84%, due to a decrease in tax revenues resulting from the global financial crisis (the 2009 budget deficit target was set at 6%); 3.44% of GDP in 2010 (the 2010 budget deficit target was set at 5.5%); 3.06% in 2011 (the 2011 budget deficit target was set at 3.0%); 3.89% in 2012 (the 2012 budget deficit target was set at 2.0%); and 3.15% in 2013 (the 2013 budget deficit target was set at 4.7%). Pursuant to recent legislation, the budget deficit target is set at 2.9% of GDP for each of 2015 and 2016.

In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined in “Public Finance — Limits on Expenditure and Deficit Reduction,” below). The revision modifies the formula that will be used to calculate the annual budget in the coming years. Under the new formula, beginning with the 2015 budget, the expenditure ceiling will be calculated based on the average population growth rate in the three years prior to the submission of the Expenditure Law, plus the ratio of the medium- term debt target (50%) and current debt-to-GDP ratio. The new rule will be based on the three-year average population growth rate in order to ensure a consistent increase in expenditure per capita.

Inflation and Monetary Policy

The inflation rate over the last decade was near the middle of the Government’s target range (1% – 3%) and stood at approximately 2% on average. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. Measured at year-end, the CPI rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013.

In 2014 the CPI decreased by 0.2%. Since June 2014, the inflation rate has been below the lower band of the Government’s target range, and since September 2014 the inflation rate has been negative. The CPI decreased by 0.9% during the twelve-month period ending November 30, 2015.

Because of the slowdown in the Israeli and global economies, the Bank of Israel lowered its key interest rate to 0.5% in the middle of 2009. As Israel’s economy recovered and continued to grow, the Bank of Israel began to gradually increase its key interest rate until it peaked at 3.25% in June 2011. The Bank of Israel then repeatedly reduced its key interest rate by 0.25%, beginning in September 2011. In May 2013, the Bank of Israel announced that it would further reduce the interest rate by 0.5%, to 1.25%. In March 2014, the Bank of Israel reduced its key interest rate to 0.75%. In August and September 2014, the Bank of Israel reduced its key interest rate twice, each time by 0.25%, to 0.25%. In March 2015, the Bank made another interest rate cut, lowering its key interest rate to 0.1%. The last interest rate cuts were made primarily because of the appreciation of the NIS. The real interest rate averaged -0.2% and -0.6% in 2013 and 2014, respectively, after two years of positive real interest rates of 0.2% and 0.1% in 2011 and 2012, respectively. In 2009 and 2010, the real interest rate was negative (-1.0% and -1.2%, respectively). As of the end of November 2015, the real interest rate, less inflation expectations, was -0.2%. In recent years, Israel has been active in the global sovereign debt markets. In March 2009, Israel issued in the global markets an aggregate $1.5 billion principal amount of 5.125% bonds due 2019. In March 2010, Israel issued in the Euro market an aggregate €1.5 billion ($2.07 billion) principal amount of 4.625% bonds due 2020. In January 2012, Israel issued in the global markets an aggregate $1.5 billion principal amount of 4% bonds due 2022. In January 2013, Israel completed a dual-tranche issuance in the global markets, issuing an aggregate $1 billion principal amount of 3.15% bonds due 2023 and an aggregate $1 billion principal amount of 4.5% bonds due 2043. In January 2014, Israel issued in the Euro market an aggregate €1.5 billion ($ 2.05 billion) principal amount of 2.875% bonds due 2024.

The NIS/USD exchange rate saw an appreciation of the NIS between the second half of 2012 and the end of July 2014, averaging NIS 3.61 for 2013 and NIS 3.48 for the first half of 2014 (compared to NIS 3.86 in 2012). On July 31, 2012, December 31, 2012, July 31, 2013 and December 31, 2013, the NIS/USD exchange rate stood at NIS 3.997, NIS 3.733, NIS 3.566 and NIS 3.471, respectively. On July 24, 2014, the NIS/USD exchange rate stood at its lowest rate since July 2011, slightly above NIS 3.4. In view of this appreciation, the Bank of Israel made two interest rate cuts, as discussed above. In the second half of 2014, the NIS/USD exchange rate saw a depreciation of the NIS, as the rate increased from slightly above NIS 3.4 on July 24, 2014 to slightly below NIS 4.0 as of December 31, 2014. The depreciation trend of the NIS relative to the USD continued into the first months of 2015; in March and April 2015, the exchange rate was occasionally higher than NIS 4.0. Between May 2015 and July 2015, the exchange rate recorded an appreciation of NIS relative to the USD, standing at NIS 3.783 as of July 31, 2015. Since then, the NIS/USD exchange rate has been within a range of NIS 3.8–3.95. Since the beginning of 2015, the NIS recorded an appreciation relative to the Euro, mainly due to the Quantitative Easing in the “eurozone”.

In December 2014, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2015 would be $3.1 billion and announced that it would purchase foreign currency during 2015 accordingly. In November 2015, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2016 would be $1.8 billion and announced that it would purchase foreign currency during 2016 accordingly. Since the Bank of Israel’s intervention in the foreign exchange market, the Bank of Israel has purchased a total of $8.7 billion in foreign currency within the framework of the gas plan.

At the end of 2010 and 2011, official reserves stood at $70.9 billion and $74.9 billion, respectively. At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.1 billion as of the end of 2014. As of the end of 2015, the official reserves stood at $90.6 billion. Labor Market

The rate of unemployment dropped to 5.9% in 2014, compared to 6.2% in 2013, reflecting a significant decrease compared to 6.9% in 2012 and 7.0% in 2011. From January to November 2015, the unemployment rate averaged 5.3%, which is very low by historical standards. The participation rate increased from 62.6% at the beginning of 2012 to 64.2% in the fourth quarter of 2014. Since the beginning of 2015, the participation rate has been stable at 64.1%, slightly lower than the 2014 rate. Despite the high participation rate and low unemployment rate, there are no major signs of pressure to increase wages, although the growth rate of wages has significantly accelerated since the beginning of 2015.

Capital Markets

In light of the 0.3% depreciation of the NIS against the USD during 2015, the TA-25 increased by 4.4% in USD terms and 4.0% in nominal terms over the course of the year. The value of the public portfolio of financial assets (a weighted average of the public’s holdings of financial assets and deposits, in Israel and abroad) increased by 8.8% and 6.8% during 2013 and 2014, respectively; According to the Bank of Israel estimate, the value of the public portfolio of financial assets shows a further increase of 4.7% in the first 10 months of 2015. In provident funds in 2013, there was a net inflow of assets under management of NIS 2,757 billion. In 2014, there was a net inflow of NIS 5,370 billion. For the first eleven months of 2015, there was an additional net inflow of 6,308 NIS billion.

In 2011, the Bank of Israel and the Ministry of Finance took a number of steps to reduce short-term investments by foreign investors. These included, starting in January 2011, requiring banking corporations in Israel to meet a 10% reserve requirement for foreign exchange swap transactions and shekel-based forward contracts entered into by non-residents (which was subsequently canceled at the end of October 2014). In addition, the Ministry of Finance cancelled a tax exemption previously granted to foreign investors on capital gains from non-indexed zero-coupon securities of up to one-year maturity issued by the Bank of Israel (“Makam”) and short-term government bonds. To improve its ability to analyze transactions in the foreign exchange market and to increase transparency and investor confidence, the Bank of Israel imposed reporting obligations on Israeli residents and non- residents undertaking transactions in foreign exchange swaps and forwards exceeding $10 million per day, and non-residents undertaking transactions in Makam and short-term government bonds exceeding NIS 10 million per day.

Political Situation

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 but rather a number of basic laws that were granted special status, enabling judicial review by the Israeli Supreme Court. Israel’s constitutional jurisprudence is also grounded in judicial decisions and in the State’s Declaration of Independence. The President of Israel is the Head of State. The presidency is largely an apolitical, figurehead role, with the real executive power in the hands of the Prime Minister. The legislative power of the State resides in the Knesset, a unicameral parliament that consists of 120 members elected by universal suffrage under a system of proportional representation (see “State of Israel — Form of Government and Political Parties,” below). Israel signed peace treaties with Egypt in 1979 and with Jordan in 1994, but past efforts to achieve peace with Syria, Lebanon and the Palestinians have yet to bear fruit. Relations between Israel and the Palestinian Authority continue to be based on existing agreements and on current efforts by the U.S. administration to resume peace talks.

In 2005, Israel redeployed out of the Gaza Strip (“Gaza”), dismantling all Israeli communities in Gaza and all its military bases there, as well as four Israeli settlements in the northern West Bank (see “State of Israel — International Relations,” below).

In the summer of 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. In June 2007, Hamas, a terror organization, assumed control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 and into 2011. Operation Cast Lead did not materially affect the Israeli economy. From 2011 and into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel launched Operation Pillar of Defense, a military campaign against terrorist targets in Gaza. Operation Pillar of Defense lasted eight days. In response to Hamas firing rockets from Gaza into Israel in the summer of 2014, in July 2014, Israel took defensive military action and commenced Operation Protective Edge with the goal of suppressing the rocket fire, some of which reached Israel cities and towns almost 100 kilometers away from Gaza. The operation ended in August 2014.

Having been at a standstill since 2009 (despite a brief round of talks beginning in September 2010), Israeli-Palestinian peace negotiations were again initiated, under the auspices of U.S. Secretary of State John Kerry, in July 2013. Progress was made but, before the last phase of negotiations of a prisoner release by Israel, for which Government approval was imminent, the Palestinian Authority breached its commitments and submitted requests to accede to fifteen international conventions. While the talks were suspended, the Palestinians announced a unity pact between Fatah and Hamas, which would lead to a so-called national consensus government. Incorporating Hamas into the Palestinian government, under one guise or another, is unacceptable to Israel as long as Hamas rejects the three benchmarks of the International Quartet (namely, recognizing Israel, accepting existing Israeli- Palestinian agreements, and renouncing violence). Although Israel has expressed its willingness to negotiate without preconditions with Palestinian partners who accept the Quartet’s conditions, Hamas still refuses to do so, leaving negotiations at an impasse. However, improvements have been made in economic and security cooperation with the Palestinian Authority.

Since January 2011, there has been political instability and civil unrest, in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. This unrest resulted in the removal of long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. The delicate relations between Israel and its neighbors could become even more fragile with the domestic turmoil and change in regimes. However, such instances of instability in the Middle East and North Africa region have not materially affected Israel’s financial or political situation, and Israel believes that countries that have signed peace agreements with Israel remain committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not be affected thereby. This uncertainty is highlighted by recent fighting in Syria and Iraq, where an Islamist militia group known as ISIS (Islamist State in Iraq and Syria) is challenging the territorial boundaries of both states.

Since the signing of the Camp David Accords in 1979, peace with Egypt has been important to Israel’s national security. Following the ousting of Egyptian President Hosni Mubarak, the relationship between Egypt and Israel has been strained, but the election of President Al-Sisi has been accompanied by reassuring statements regarding common interests. As of January 2016, Israel did not perceive a material change in the strategic stance of Egypt, and the peace treaty between the two states remained in force. Moreover, As of January 2016, Israel monitors very closely the situation in Syria, in which many dangerous forces operate. The direct threat to Israel from the Syrian military has clearly diminished, also due to the dismantlement and removal of Syria’s chemical weapons. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and the possibility that the ongoing civil war will devolve into a state of anarchy. Fundamentalist regimes such as Iran present a deep concern for the international community and especially for states in the region. Since 2011, the prospect of a nuclear Iran has been at the center of international geopolitical discourse. The comprehensive agreement between the P5+1 group and Iran that was reached on July 2015 (Joint Comprehensive Plan of Action) conditions international economic sanctions relief, mainly United States and EU sanctions, on Iranian nuclear capabilities reduction and supervision by the International Atomic Energy Agency. Assessments forecast that the sanction relief day (“Implementation Day”) will be at the beginning of 2016. Despite the economic sanctions relief, the primary United States sanctions, and all other non-economic sanctions will remain in place. There is evidence that Iran continues to violate United Nations Security Council resolutions on those matters, so far with limited success of deterrence by the international community.

Privatization

Historically, the Government has been involved in nearly all sectors of the Israeli economy. In the past several decades, privatization has been an essential element of the broader market reforms initiated by the Government aiming to promote the growth of the private sector, mainly by enhancing competition. Israel has made substantial progress in recent years, resulting in the privatization of many enterprises owned by the State and the reduction of State subsidization of business enterprises. In total, between 1986 and 2014, 98 Government Companies (as defined in “Role of the State in the Economy,” below) became partially or fully-private. The proceeds stemming from these privatizations totaled $14.2 billion. In 2010, privatization proceeds amounted to NIS 4.5 billion (approximately $1.2 billion), partly as a result of the privatization of the State’s interest in two of the five major banks in Israel — Israel’s entire remaining stake in Israel Discount Bank Ltd. and 5% of the outstanding equity securities of Bank Leumi Le-Israel Ltd. Currently, the Government holds approximately 6.03% of Bank Leumi’s outstanding equity securities, and on June 9, 2014, the Finance Committee of the Knesset approved the Government’s request to sell the remaining stake over the coming year. The Government did not exercise its right to sell its stake in Bank Leumi, and the Knesset’s approval expired on June 9, 2015. In addition, the Government plans to continue with the process of privatizing its interests in financial institutions, as well as State-owned land, seaports, Postal Authority, energy and transportation utilities and parts of the defense industry (see “The Economy — Role of the State in the Economy,” below).

Loan Guarantee Program

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 influx of immigrants over this period. Israel completed its financings under this program in January 1998. In April 2003, the United States approved up to $9 billion in additional loan guarantees for Israel to be issued during U.S. government fiscal years 2003 through 2005, with an option to extend the program by an additional year. In 2005, the United States approved Israel’s request to extend the $9 billion program for two more years; in 2006, this program was extended again through U.S. fiscal year 2011 (with an option to carry forward unused guarantee amounts for an additional year); and in 2012, the program was extended again through 2016. On October 24, 2012, the United States and Israel entered into an agreement establishing a new framework for administering the extended program. A further extension of the program was signed into law by President Obama on December 18, 2015. The new law extends the program until September 30, 2019 (with an option to carry forward unused guarantee amounts for an additional year) and allows the United States to provide access to up to $3.8 billion in future loan guarantees as part of the $9 billion commitment made in 2003.

Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2010 2011 2012 2013 2014 Main Indicators GDP (at constant prices) 876.1 920.2 946.7 977.4 1002.4 Real GDP growth 5.5% 5.0% 2.9% 3.3% 2.6% GDP per capita (at constant 2010 prices) 114,965 118,536 119,726 121,335 122,070 GDP per capita, percentage change 3.6% 3.1% 1.0% 1.3% 0.6% Inflation (change in CPI – annual average) 2.7% 3.5% 1.7% 1.5% 0.5% Industrial production 9.5% 2.1% 4.0% 0.5% 1.2% Business sector product (at constant 2010 prices) 653.4 691.0 709.3 733.6 750.4 Permanent average population (thousands) 7,621 7,764 7,906 8,056 8,212 Unemployment rate(1) 8.0% 7.0% 6.9% 6.2% 5.9% Participation rate 62.6% 62.6% 63.6% 63.7% 64.2% Foreign direct investment (net inflows, in billions of dollars) 6.3 8.7 8.5 12.4 6.7 Trade Data FX reserves, nominal USD 70.9 74.9 75.9 81.8 86.1 Exports of goods and services (NIS, at constant 2010 prices) 306.8 334.2 337.3 337.6 342.8 FX reserves, as a % of gross public external debt 176.6% 206.9% 240.1% 276.0% 285.8% Imports (F.O.B) of goods and services (NIS, at constant 2010 prices) 287.3 317.2 324.4 326.1 336.1 FX reserves, as of months of import 11.05 9.69 9.86 10.68 11.03 CA balance as % of GDP 3.5% 2.6% 1.6% 2.9% 3.7% Government Debt(2) Total gross government debt (at end-of-year current prices)(3) 608.2 633.0 666.8 696.3 715.8 General Gov Expenditures as % of GDP 40.4% 39.6% 40.1% 40.4% 40.1% Total gross government debt as percentage of GDP 69.4% 67.6% 66.6% 65.9% 65.4% Deficit as % of GDP 3.4% 3.1% 3.9% 3.1% 2.7% External Debt net external creditor position as % of GDP 24.0% 23.2% 26.0% 28.0% 32.5% External debt liabilities (in millions of dollars) 111,860 109,297 102,029 101,259 96,164 Net external debt (in millions of dollars) -56,347 -60,840 -67,465 -81,812 -99,535 Revenues and Expenditures (net) Revenues and grants 217.63 233.13 238.69 260.63 273.68 Expenditures 325.80 347.73 376.97 389.47 402.61 Expenditures other than capital expenditures 233.20 245.05 262.76 278.62 287.35 Development expenditures (including repayments of debt) 92.36 102.51 114 110.83 115.22 Repayments of debt 79.55 88.16 97.95 94.42 99.09

(1) Reflects changes in the Central Bureau of Statistics’ labor survey methodology, resulting in higher values in the unemployment rate line items.

(2) Government debt excluding local authorities’debt.

(3) Risk Management Dept., Debt Unit, Ministry of Finance.

Sources: Central Bureau of Statistics, Bank of Israel and Ministry of Finance. Exhibit G

AMENDMENT NO. 2 TO FISCAL AGENCY AGREEMENT

AMENDMENT No. 2 (this “Amendment”), dated as of January 5, 2016 to the Fiscal Agency Agreement, dated as of March 13, 2000, between the Government of Israel on behalf of the State of Israel (“Israel”) and Citibank, N.A., as Fiscal Agent, as amended by Amendment No. 1 to Fiscal Agency Agreement, dated as of February 24, 2004 (as so amended, the “Fiscal Agency Agreement”).

W I T N E S S E T H:

WHEREAS, the parties hereto have previously entered into the Fiscal Agency Agreement;

WHEREAS, Israel wishes to provide for the issuance of additional series of Securities under (and as defined in) the Fiscal Agency Agreement, which Securities may contain new provisions relating to events of default and certain other changes, all as more fully described herein;

WHEREAS, Section 11(a) of the Fiscal Agency Agreement provides, among other things, that Israel and the Fiscal Agent may, upon agreement between themselves, without the consent of any holder of Securities of any series, amend, modify or supplement the Fiscal Agency Agreement or the Securities of a series (a) for the purpose of curing, correcting or supplementing any defective provision thereof or (b) in any manner which Israel and the Fiscal Agent may determine that shall not be inconsistent with the Securities of such series and shall not adversely affect the interest of any holder of Securities of such series in any material respect; and

WHEREAS, Israel has requested and the Fiscal Agent has agreed, consistent with such Section 11(a), to amend the Fiscal Agency Agreement;

NOW, THEREFORE, in consideration of the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Scope of Amendment. The provisions of this Amendment shall apply only to any Securities of any series issued in the future under the Fiscal Agency Agreement, as amended by this Amendment and as further amended, modified or supplemented from time to time in accordance with the terms thereof, and shall not modify or otherwise affect the terms and conditions of any currently outstanding Securities under the Fiscal Agency Agreement, as amended by this Amendment and as further amended, modified or supplemented from time to time in accordance with the terms thereof, and shall not modify or otherwise affect the terms and conditions of any series of Securities issued prior to January 5, 2016 (including any further issuances of such Securities) under the Fiscal Agency Agreement.

2. Amendment to Section 1(a) of the Fiscal Agent Agreement. Section 1(a) of the Fiscal Agency Agreement is hereby amended and restated in its entirety as follows: “(a) General. Israel may issue its notes, bonds, debentures and/or other unsecured evidences of indebtedness (the “Securities”) in separate series from time to time (each such series of Securities being hereinafter referred to as a “Series” or the “Securities of a Series.” The Securities constitute and will constitute direct, general, unconditional unsecured and unsubordinated External Indebtedness (as defined in the Securities) of Israel for which the full faith and credit of Israel is pledged. The Securities rank and will rank without preference among themselves and equally with all other unsecured and unsubordinated External Indebtedness of Israel. It is understood that this provision shall not be construed so as to require Israel to make payments under the Securities ratably with payments being made under any other External Indebtedness. The aggregate principal amount of the Securities of all Series, which may be authenticated and delivered under this Agreement and which may be outstanding at any time, is not limited by this Agreement.”

3. Amendment to Section 11 of the Fiscal Agent Agreement. Section 11 of the Fiscal Agency Agreement is hereby amended and restated in its entirety as Section 11-1 as follows:

“SECTION 11-1. Consent of Holders.

(a) Provisions for Meeting of Holders.

(i) Israel may convene a meeting of holders of the Securities of any Series at any time in accordance with this Fiscal Agency Agreement. Israel will determine the time and place of the meeting. Israel will instruct the Fiscal Agent to notify the holders of the Securities of such Series of the time, place and purpose of the meeting not less than 30 nor more than 60 days before the meeting.

(ii) Israel or the Fiscal Agent will convene a meeting of holders of Securities of a Series if the holders of at least 10% in principal amount of the Outstanding Securities of such Series have delivered a written request to Israel or the Fiscal Agent (with a copy to Israel) setting out the purpose of the meeting. Within 10 days of receipt of such written request or copy thereof, Israel shall notify the Fiscal Agent, and the Fiscal Agent shall notify the holders of the Securities of that Series, of the time and place of the meeting, which shall take place not less than 30 and not more than 60 days after the date on which such notification is given.

(iii) Israel will set the procedures governing the conduct of any meeting in accordance with this Fiscal Agency Agreement and, if additional procedures are required, Israel shall establish such procedures as are customary in the market.

(iv) The notice convening any meeting of holders of Securities of a Series shall specify: (A) the date, time and location of the meeting; (B) the agenda and the text of any resolution to be proposed for adoption at the meeting; (C) the record date for the meeting, which shall be no more than five (5) Business Days (as defined below) before the date of the meeting; (D) the documentation required to be produced by a holder of Securities in order to be entitled to participate at the meeting or to appoint a proxy to act on behalf of the holder of Securities at the meeting; (E) any time deadline and procedures required by any relevant international and/or domestic clearing systems through which the Securities of such Series are traded and/or held by holders of Securities of such Series; (F) if the meeting is to consider a proposal for a Cross-Series Modification (as defined below), an indication of (x) which Series of Securities will be aggregated for purposes of voting on that proposal and (y) the Modification Method (as defined below) chosen by Israel for the vote on that proposal; (G) for meetings to consider any Reserve Matter Modifications, any information that is required to be provided by Israel pursuant to Section 11-2(j); and (H) the identity of the Modifications Tabulation Agent (as defined below); if any.

-2- (v) To be entitled to vote at any meeting a Person (as defined in the Securities) must be a holder of Outstanding (as defined below) Securities of the relevant Series or a Person duly appointed in writing as a proxy for such a holder.

(b) Written Consent. Modifications (as defined below) may also be approved by holders of the Securities pursuant to a written action consented to by holders of the requisite percentage of Securities of that Series. If a proposed Modification is to be approved by a written action, Israel shall solicit the consent of the relevant holders of the Securities to the proposed Modification not less than 10, nor more than 30, days prior to the expiration date for the receipt of such consents specified by Israel. If the consent solicitation relates to a proposal for a Cross-Series Modification, the solicitation shall include an indication of (x) which Series of Securities will be aggregated for purposes of consenting to that proposal, (y) the Modification Method chosen by Israel for the consent regarding that proposal, and (z) the identity of the Modifications Tabulation Agent, if any. For consent solicitations relating to Reserve Matter Modifications, the solicitation shall also include any information required to be provided by Israel pursuant to Section 11-2(j).”

4. Addition of Section 11-2 of the Fiscal Agent Agreement. A new Section 11-2 is added to the Fiscal Agency Agreement, to read in full as follows:

“SECTION 11-2. Modifications.

(a) Definitions.

(i) “Business Day” means any day that is not a Saturday or Sunday, and that is not a day on which banking or trust institutions are authorized generally or obligated by law, regulation or executive order to close in New York City, London or Israel (or in the city where the relevant Paying Agent or Transfer Agent is located).

(ii) “Cross-Series Modification” means a Reserve Matter Modification to the terms of the Securities of two or more Series, or to this Fiscal Agency Agreement insofar as it affects the Securities of two or more Series.

-3- (iii) “Cross-Series Modification with Single Aggregated Voting” means a Cross-Series Modification that is Uniformly Applicable and is made in accordance with Section 11-2(f).

(iv) “Cross-Series Modification with Two-Tier Voting” means a Cross-Series Modification that is made in accordance with Section 11-2 (g).

(v) “Modification” means any modification, amendment, supplement or waiver, including those effected by way of exchange or conversion, affecting one or more Series of Securities.

(vi) “Modification Method” shall have the meaning set forth in Section 11-2(d).

(vii) “Modifications Tabulation Agent” shall have the meaning set forth in Section 11-2(h).

(viii) “Officer’s Certificate” means, as the context requires, a certificate signed by the appropriate Authorized Official.

(ix) “Opinion of Counsel” means an opinion in writing signed by internal or external legal counsel to Israel.

(x) “Original Issue Discount Security” means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Stated Maturity Date thereof.

(xi) “Outstanding” means, in respect of the Securities of any Series, the Securities of such Series authenticated and delivered pursuant to this Fiscal Agency Agreement except for: (A) Securities of that Series theretofore canceled by the Fiscal Agent or delivered to the Fiscal Agent for cancellation or held by the Fiscal Agent for reissuance but not reissued by the Fiscal Agent; (B) Securities of that Series that have been called for redemption in accordance with their terms or which have become due and payable at maturity or otherwise and with respect to which monies sufficient to pay the principal thereof (and premium, if any, thereon), and any interest thereon shall have been made available to the Fiscal Agent, provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Fiscal Agency Agreement or provision therefor satisfactory to the Fiscal Agent has been made; or (C) Securities of that Series in lieu of or in substitution for which other Securities shall have been authenticated pursuant to this Fiscal Agency Agreement; provided, however, that, in determining whether the holders of the requisite principal amount of Securities Outstanding have taken any action or instruction under this Fiscal Agency Agreement or the Securities, (w) the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of such date upon acceleration of the Stated Maturity Date thereof to such date, (x) if, as of such date, the principal amount payable at the Stated Maturity Date of a Security is not determinable, the principal amount of such Security that shall be deemed to be Outstanding shall be the amount as specified or determined as contemplated by Section 1, (y) the principal amount of a Security denominated in one or more foreign currencies or currency units that shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by Section 1, of the principal amount of such Security (or, in the case of a Security described in clause (w) or (x) above, of the amount determined as provided in such clause), and (z) a Security will be disregarded and deemed not to be Outstanding, and may not be counted in a vote or consent solicitation for or against a proposed Modification, if on the record date for the proposed Modification or other action or instruction hereunder, the Security is held by Israel or by a Public Sector Instrumentality, or by a corporation, trust or other legal entity that is controlled by Israel or a Public Sector Instrumentality, except that (1) Securities held by Israel or any Public Sector Instrumentality or any corporation, trust or other legal entity controlled by Israel or by a Public Sector Instrumentality that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Fiscal Agent the pledgee’s right so to act with respect to such Securities and that the pledgee is not Israel or a Public Sector Instrumentality or a corporation, trust or other legal entity controlled by Israel or a Public Sector Instrumentality, and in case of a dispute concerning such right, the advice of counsel shall be full protection in respect of any decision made by the Fiscal Agent in accordance with such advice, and any certificate, statement or Opinion of Counsel may be based, insofar as it relates to factual matters or information that is in the possession of the Fiscal Agent, upon the certificate, statement or opinion of or representations by the Fiscal Agent; and (2) in determining whether the Fiscal Agent will be protected in relying upon any such action or instructions hereunder, or any notice from holders, only Securities that a Responsible Officer of the Fiscal Agent knows to be so owned or controlled will be so disregarded.

-4- (xii) “Payment Date” means the date described in Section 4.

(xiii) “Public Sector Instrumentality” means the Bank of Israel, any department, ministry or agency of Israel, and a corporation, trust or other legal entity controlled by Israel or by a Public Sector Instrumentality, if Israel or the Public Sector Instrumentality has the power, directly or indirectly, through the ownership of voting securities or other ownership interests, by contract or otherwise, to direct the management of or to elect or to appoint a majority of the board of directors or other Persons performing similar functions in lieu of, or in addition to, the board of directors of that legal entity.

(xiv) “Reserve Matter Modification” means any Modification to the terms of the Securities of any Series, or to this Fiscal Agency Agreement insofar as it affects the Securities of any Series, that would: (A) change the date on which any amount is payable on the Securities; (B) reduce the principal amount (other than in accordance with the express terms of the Securities and this Fiscal Agency Agreement) of the Securities; (C) reduce the interest rate on the Securities; (D) change the method used to calculate any amount payable on the Securities (other than in accordance with the express terms of the Securities and this Fiscal Agency Agreement); (E) change the currency or place of payment of any amount payable on the Securities; (F) modify Israel’s obligation to make any payments on the Securities (including any redemption price therefor); (G) change the identity of the obligor under the Securities; (H) change the definition of “Outstanding” or the percentage of affirmative votes or written consents, as the case may be, required for the taking of any action pursuant to Section 11-2(e), Section 11-2(f) or Section 11-2(g); (I) change the definition of “Uniformly Applicable” or “Reserve Matter Modification”; (J) authorize the Fiscal Agent, on behalf of all holders of the Securities, to exchange or substitute all the Securities for, or convert all the Securities into, other obligations or securities of Israel or any other Person (as defined in the Securities); or (K) change the legal ranking, governing law, agreement to arbitrate, submission to jurisdiction in Israel or waiver of immunities provisions of the terms of the Securities.

-5- (xv) “Responsible Officer” shall mean, when used with respect to the Fiscal Agent, any officer within the corporate trust department of the Fiscal Agent, or any other officer to whom any corporate trust matter is referred because of such person’s knowledge of and familiarity with the particular subject, in each such case, having direct responsibility for the administration of this Fiscal Agency Agreement.

(xvi) “Single Series Modification” means a Modification to the terms of the Securities of a single Series, or to this Fiscal Agency Agreement insofar as it affects the Securities of a single Series.

(xvii) “Single Series Non-Reserve Matter Modification” means a Single Series Modification that does not constitute or include a Reserve Matter Modification.

(xviii) “Single Series Reserve Matter Modification” means a Single Series Modification that constitutes or includes a Reserve Matter Modification.

(xix) “Stated Maturity Date” means, when used with respect to any Security or any installment of principal thereof or interest thereon, the date expressed in such Security (as such Security may be amended or modified pursuant to Section 11-2) as the fixed date on which the principal of such Securities or interest thereon is due and payable, without giving effect to any acceleration of any Payment Dates pursuant to the terms of such Securities or otherwise.

(xx) “Uniformly Applicable” in the context of a proposed Cross-Series Modification, means a Modification by which holders of Securities of all Series affected by that Modification are invited to exchange, convert or substitute their Securities on the same terms for (x) the same new instruments or other consideration or (y) new instruments or other consideration from an identical menu of instruments or other consideration. It is understood that a Modification will not be considered to be Uniformly Applicable if each exchanging, converting or substituting holder of Securities of any Series affected by that Modification is not offered the same amount of consideration per amount of principal, the same amount of consideration per amount of interest accrued but unpaid and the same amount of consideration per amount of past due interest, respectively, as that offered to each other exchanging, converting or substituting holder of Securities of any Series affected by that Modification (or, where a menu of instruments or other consideration is offered, each exchanging, converting or substituting holder of Securities of any Series affected by that Modification is not offered the same amount of consideration per amount of principal, the same amount of consideration per amount of interest accrued but unpaid and the same amount of consideration per amount of past due interest, respectively, as that offered to each other exchanging, converting or substituting holder of Securities of any series affected by that Modification electing the same option under such menu of instruments).

-6- (b) Modifications Not Requiring the Consent of Holders. Israel and the Fiscal Agent may, without the vote or consent of any holder of Securities of any Series, agree to a Modification of Securities of such Series, or to this Fiscal Agency Agreement as it relates to that Series, for the purpose of:

(i) adding to Israel’s covenants for the benefit of the holders;

(ii) surrendering any right or power conferred upon Israel with respect to Securities of that Series;

(iii) securing the Securities of that Series;

(iv) curing any ambiguity or curing, correcting or supplementing any defective provision in the Securities of that Series or the Fiscal Agency Agreement;

(v) amending the Securities of that Series or this Fiscal Agency Agreement in any manner which Israel and the Fiscal Agent may determine and which does not materially adversely affect the interests of any holders of Securities of that Series; or

(vi) correcting a manifest error of a formal, minor or technical nature.

Any such technical Modification shall be binding on all holders of Securities of that Series intended to be affected by the Modification and, unless the Fiscal Agent otherwise requires, any such technical Modification shall be notified by Israel to such holders of Securities as soon as practicable thereafter.

(c) Single Series Non-Reserve Matter Modifications. Single Series Non-Reserve Matter Modifications proposed by Israel that are not covered by Section 11-2(b) may be approved by holders of Securities (by vote at a meeting of holders of Securities or by a written action), and future compliance therewith may be waived, with the written consent of Israel and the affirmative vote (if approved at a meeting of holders of the Securities) or consent (if approved by a written action) of holders of more than 50% of the aggregate principal amount of the Outstanding Securities of that Series.

-7- (d) Reserve Matter Modification Methods. Reserve Matter Modifications proposed by Israel may be approved by holders of the Securities (by vote at a meeting of holders of the Securities or by a written action) in one of three ways (each, a “Modification Method”):

(i) for a Single Series Modification, by the holders of the Securities of the Series subject to the proposed Modification,

(ii) for a proposed Cross-Series Modification with Single Aggregated Voting, by the holders of two or more Series of Securities whose votes or written consents will be aggregated for the purpose of determining whether the approval threshold has been met, and

(iii) for a proposed Cross-Series Modification with Two-Tier Voting, by the holders of two or more Series of Securities whose votes or written consents (x) taken together, must meet an aggregated approval threshold and (y) taken separately with respect to each Series of Securities covered by that proposed Cross-Series Modification, must meet a separate approval threshold.

Israel shall have the discretion to select a Modification Method for a proposed Reserve Matter Modification and to designate which Series of Securities will be included in the aggregated voting for a proposed Cross-Series Modification; provided, however, that once Israel selects a Modification Method and designates the Series of Securities that will be subject to a proposed Cross-Series Modification, such selection and designation will be final for purposes of that vote or consent solicitation.

Israel may simultaneously propose two or more Cross-Series Modifications, each affecting different Series of Securities, or one or more Cross-Series Modifications together with one or more Single Series Reserve Matter Modifications.

(e) Single Series Reserve Matter Modifications. Any Single Series Reserve Matter Modification may be made, and future compliance therewith may be waived, with the written consent of Israel and the affirmative vote or consent of holders of more than 75% of the aggregate principal amount of the Outstanding Securities of that Series.

(f) Cross-Series Modifications with Single Aggregated Voting. Any Cross-Series Modification with Single Aggregated Voting may be made, and future compliance therewith may be waived, with the written consent of Israel and the affirmative vote or consent of holders of more than 75% of the aggregate principal amount of the Outstanding Securities of all the Series affected by the proposed Modification (taken in the aggregate).

-8- (g) Cross-Series Modifications with Two-Tier Voting. Any Cross-Series Modification with Two-Tier Voting may be made, and future compliance therewith may be waived, with the written consent of Israel and:

(i) the affirmative vote or consent of holders of more than 66 2/3% of the aggregate principal amount of the Outstanding Securities of all the Series affected by that proposed Modification (taken in the aggregate), and

(ii) the affirmative vote or consent of holders of more than 50% of the aggregate principal amount of the Outstanding Securities of each Series affected by that proposed Modification (taken individually).

It is understood that a Cross-Series Modification constituting or including a Reserve Matter Modification that is not Uniformly Applicable must be effected pursuant to this Section 11-2(g); a Cross-Series Modification that is Uniformly Applicable may be effected pursuant to Section 11-2(g) or Section 11-2(f), at Israel’s option.

(h) Modifications Tabulation Agent; Claims Valuation. For the purpose of either administering a vote of holders of the Securities or seeking the consent of holders of the Securities to a written action under this Section 11-2, or for calculating the principal amount of the Securities of any Series eligible to participate in such a vote or consent solicitation or that have given consent to a proposed Modification, Israel may appoint a tabulation agent (the “Modifications Tabulation Agent”).

The Fiscal Agent shall notify the holders of all Securities eligible to participate in such a vote or consent solicitation of the methodology, as determined by the Modifications Tabulation Agent by which the principal amount of each Series of Securities eligible to participate in that vote or consent solicitation will be calculated. This notification shall be given in writing not less than five (5) days prior to the meeting of the holders of the Securities at which such vote shall occur or, in the case of a consent solicitation for written action, at the time such solicitation is made. Israel shall cause the Modifications Tabulation Agent to provide the Fiscal Agent with the methodology at least five (5) Business Days before the Fiscal Agent is required to provide the notification thereof.

The Fiscal Agent shall be entitled to conclusively rely upon any certification delivered by the Modifications Tabulation Agent pursuant to this Section 11-2(h).

The Fiscal Agent shall not be responsible for determining whether the Uniformly Applicable condition has been satisfied.

(i) Binding Effect. Any Modification consented to or approved by the holders of Securities pursuant to this Section 11-2 will be conclusive and binding on each holder of the relevant Series of Securities or each holder of each Series of Securities affected by a Cross-Series Modification, as the case may be, whether or not a holder has given such consent, and on all future holders of those Securities whether or not notation of such Modification is made upon the Securities. Any instrument given by or on behalf of any holder of a Security in connection with any consent to or approval of any such Modification will be conclusive and binding on all subsequent holders of that Security.

-9- (j) Information Delivery Requirement. Before soliciting the consent or the vote of any holder of Securities for a Reserve Matter Modification, Israel shall provide to the Fiscal Agent (for onward distribution to the holders of the Securities (which shall be identified by Israel by Series and security code) that would be affected by that proposed Modification) the following information:

(i) a description of Israel’s economic and financial circumstances which are, in Israel’s opinion, relevant to the request for the proposed Modification, a description of Israel’s existing debts and a description of any broad policy reform program and provisional macroeconomic outlook;

(ii) if Israel shall at the time have entered into an arrangement for financial assistance with multilateral and/or other major creditors or creditor groups and/or an agreement with any such creditors regarding debt relief, (x) a description of any such arrangement or agreement and (y) where permitted under the information disclosure policies of the multilateral or other creditors, as applicable, a copy of the arrangement or agreement;

(iii) a description of Israel’s proposed treatment of external debt instruments that are not affected by the proposed Modification and its intentions with respect to any other major creditor groups; and

(iv) if Israel is then seeking a Reserve Matter Modification affecting any other Series of Securities, a description of that proposed Modification.

(k) Outstanding Securities. Upon request of the Fiscal Agent, Israel shall furnish to the Fiscal Agent promptly one or more Officer’s Certificates listing and identifying all Securities, if any, known by Israel to be owned or held by or for the account of Israel or any Public Sector Instrumentality; or any corporation, trust or legal entity controlled by Israel or a Public Sector Instrumentality and, subject to Section 8, the Fiscal Agent shall be entitled to accept such Officer’s Certificate or Certificates as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination.

(l) Certification of Disenfranchised Securities. Prior to any vote on, or consent solicitation for, a Modification, Israel shall deliver to the Fiscal Agent a certificate signed by an Authorized Official specifying any Securities that are deemed not to be Outstanding for the purpose of Section 11-2(k).”

5. Addition of Section 18 of the Fiscal Agent Agreement. A new Section 18 is added to the Fiscal Agency Agreement, to read in full as follows:

“Illegality. Notwithstanding anything else herein contained, the Fiscal Agent may refrain without liability from doing anything that would or might in its opinion be contrary to any law of any state or jurisdiction (including but not limited to Israel, the United States of America or any jurisdiction forming a part of it and England & Wales) or any directive or regulation of any agency of any such state or jurisdiction and may without liability do anything which is, in its opinion, necessary to comply with any such law, directive or regulation.”

-10 - 6. Amendment of Paragraph 1 of Exhibit A to the Fiscal Agency Agreement. The following paragraph within Paragraph 1 of the Form of Reverse of Security which currently reads:

“The Securities constitute direct, unconditional, unsecured and general obligations of Israel without any preference one over the other, and the full faith and credit of Israel is pledged for the due and punctual payment thereof and for the due and timely performance of all obligations of Israel with respect thereto. The Securities of each Series rank pari passu, without any preference among themselves. The payment obligations of Israel under this Series of Securities will at all times rank at least equally with all other payment obligations of Israel relating to unsecured, unsubordinated External Indebtedness of Israel.” is hereby amended and restated in its entirety as follows:

“The Securities constitute and will constitute direct, general, unconditional, unsecured and unsubordinated External Indebtedness of Israel for which the full faith and credit of Israel is pledged. The Securities rank and will rank without any preference among themselves and equally with all other unsecured and unsubordinated External Indebtedness of Israel. It is understood that this provision shall not be construed so as to require Israel to make payments under the Securities ratably with payments being made under any other External Indebtedness.”

7. Amendment of Paragraph 1 of Exhibit A to the Fiscal Agency Agreement. The definition of “External Indebtedness” within Paragraph 1 of the Form of Reverse of Security is hereby amended and restated in its entirety as follows:

““External Indebtedness” means Indebtedness which is payable by its terms or at the option of its holder in any currency other than the currency of Israel (other than any such Indebtedness that is originally issued within Israel).”

8. Amendment of Paragraph 1 of Exhibit A to the Fiscal Agency Agreement. The definition of “Indebtedness” within Paragraph 1 of the Form of Reverse of Security is hereby amended and restated in its entirety as follows:

““Indebtedness” means all unsecured and unsubordinated obligations of Israel in respect of money borrowed and Guarantees given by Israel in respect of money borrowed by others.”

-11- 9. Amendment of Paragraph 7 of Exhibit A to the Fiscal Agency Agreement. Paragraph 7 and Alternative Paragraph 7 of the Form of Reverse of Security are hereby amended and restated in its entirety as follows:

“7. If one or more of the following events shall have occurred and be continuing (each an “Event of Default”):

(a) Israel fails to pay, when due, principal of [(and premium, if any, on)] [or interest on] any of the Securities and such failure continues for a period of 30 days; or

(b) Israel defaults in performance or observance of or compliance with any of its other obligations set forth in the Securities, which default is materially prejudicial to the interests of the holders of the Securities and not remedied within 60 days after written notice of such default shall have been given to Israel by the holder of any Security at the corporate trust office of the Fiscal Agent in The City of London; or

(c) Israel declares a moratorium with respect to the payment of principal of or interest on Securities of a series which is materially prejudicial to the holders of the Securities of such series;

then the registered holder of this Security may, at such holder’s option so long as an Event of Default is continuing, declare [If the Security is not an Original Issue Discount Security—the principal of the Security of this Series and interest accrued thereon] [If the Security is an Original Issue Discount Security —an amount of principal of the Security of this series determined as hereinafter provided] to be due and payable immediately by written demand given to the Fiscal Agent and to Israel at the office of the Fiscal Agent by such holder, and unless prior to receipt of such written demand by the Fiscal Agent all such defaults shall have been cured, [If the Security is not an Original Issue Discount Security — the principal of the Security of this Series and interest accrued thereon] [If the Security is an Original Issue Discount Security — such amount] shall become and be immediately due and payable; provided, however, that any notice declaring the Securities of this Series due and payable shall become effective only when the Fiscal Agent has received such notice from holders of not less than 25% in aggregate principal amount of the Securities of this Series then Outstanding. [If the Security is an Original Issue Discount Security —The amount referred to in the preceding sentence shall be equal to—insert formula for determining the amount.] If any Event of Default shall give rise to a declaration which declaration shall be effective and all Events of Default shall cease to continue following such declaration, then such declaration may be rescinded and annulled by the affirmative vote or written consent of the holders of not less than 50% in aggregate principal amount of the Securities of this Series then Outstanding in accordance with the procedures set forth in paragraph 9 below.”

10. Amendment of Paragraph 9 of Exhibit A to the Fiscal Agency Agreement. Paragraph 9 and Alternative Paragraph 9 of the Form of Reverse of Security are hereby amended and restated in its entirety as follows:

-12 - “9. The Fiscal Agency Agreement sets forth the provisions for the convening of meetings of holders of Securities and actions taken by written consent of the holders of Securities, as well as the provisions for modification of this Security and the Fiscal Agency Agreement itself.”

11. Amendment of Paragraph 10 of Exhibit A to the Fiscal Agency Agreement. Paragraph 10 and Alternative Paragraph 10 of the Form of Reverse of Security are hereby deleted in its entirety and replaced with the following language:

“10. Reserved.”

12. Savings Clause. In all other respects, the Fiscal Agency Agreement shall remain in full force and effect. All references in any other agreement or document to the Fiscal Agency Agreement shall, on and after the date hereof, be deemed to refer to the Fiscal Agency Agreement as amended hereby.

13. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Such counterparts shall together constitute but one and the same agreement.

14. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA WITHOUT REGARD TO THOSE PRINCIPLES OF CONFLICTS OF LAWS THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK, UNITED STATES OF AMERICA; PROVIDED, HOWEVER, THAT AUTHORIZATION AND EXECUTION OF THIS AGREEMENT BY ISRAEL SHALL BE GOVERNED BY THE LAWS OF ISRAEL.

15. Effectiveness. This Amendment shall become effective as of the date hereof upon execution by the parties hereto.

-13 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written.

THE GOVERNMENT OF ISRAEL on behalf of the STATE OF ISRAEL,

By: ______Name: Title:

THE GOVERNMENT OF ISRAEL on behalf of the STATE OF ISRAEL,

By: ______Name: Title:

CITIBANK, N.A. as Fiscal Agent

By: ______Name: Title:

[Signature Page to Amendment No. 2 to Fiscal Agency Agreement] UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 18-K For Foreign Governments and Political Subdivisions Thereof

ANNUAL REPORT OF THE STATE OF ISRAEL (Name of Registrant)

Date of end of last ﬁscal year: December 31, 2014

SECURITIES REGISTERED* (As of the close of the ﬁscal year)

Avi Braf Chief Fiscal Officer for the Western Hemisphere For the Western Hemisphere Ministry of Finance of the State of Israel 800 Second Avenue 17th Floor New York, New York 10017

Copies to: STEVEN G. TEPPER, ESQ. Arnold & Porter LLP 399 Park Avenue New York, New York 10022

* The Registrant is ﬁling this annual report on a voluntary basis.

1 THE STATE OF ISRAEL

STATE OF ISRAEL (THE ‘‘STATE’’) 1. In respect of each issue of securities of the registrant registered, a brief statement as to: (a) The general effect of any material modifications, not previously reported, of the rights of the holders of such securities. No such modifications. (b) The title and the material provisions of any law, decree or administrative action, not previously reported, by reason of which the security is not being serviced in accordance with the terms thereof. No such provisions. (c) The circumstances of any other failure, not previously reported, to pay principal, interest, or any sinking fund or amortization installment. No such circumstances. 2. A statement as of the close of the last fiscal year of the registrant giving the total outstanding of: (a) Internal funded debt of the registrant. (Total to be stated in the currency of the registrant. If any internal funded debt is payable in a foreign currency it should not be included under this paragraph (a), but under paragraph (b) of this item). Reference is made to Table No. 34 of Exhibit D. (b) External funded debt of the registrant. (Totals to be stated in the respective currencies in which payable. No statement needs to be furnished as to intergovernmental debt). Reference is made to pages D-84 − D-87 of Exhibit D. 3. A statement giving the title, date of issue, date of maturity, interest rate and amount outstanding, together with the currency or currencies in which payable, of each issue of funded debt of the registrant outstanding as of the close of the last fiscal year of the registrant. Reference is made to pages D-85 − D-93 of Exhibit D. 4. (a) As to each issue of securities of the registrant which is registered, there should be furnished a break-down of the total amount outstanding, as shown in Item 3, into the following: (i) Total amount held by or for the account of the registrant. As of December 31, 2014, the registrant held none. (ii) Total estimated amount held by nationals of the registrant (or if registrant is other than a national government by the nationals of its national government); this estimate need be furnished only if it is practicable to do so. Information would not be practicable to provide. (iii) Total amount otherwise outstanding. Not applicable. (b) If a substantial amount is set forth in answer to paragraph (a)(i) above, describe briefly the method employed by the registrant to reacquire such securities. Not applicable. 5. A statement as of the close of the last fiscal year of the registrant giving the estimated total of: (a) Internal floating indebtedness of the registrant. (Total to be stated in the currency of the registrant). Reference is made to pages D-85 − D-93 of Exhibit D.

2 (b) External floating indebtedness of the registrant. (Total to be stated in the respective currencies in which payable). Reference is made to pages D-85 − D-93 of Exhibit D. 6. Statements of the receipts, classified by source, and of the expenditures, classified by purpose, of the registrant, for each fiscal year of the registrant ended since the close of the latest fiscal year for which such information was previously reported. These statements should be so itemized as to be reasonably informative and should cover both ordinary and extraordinary receipts and expenditures; there should be indicated separately, if practicable, the amount of receipts pledged or otherwise specifically allocated to any issue registered, indicating the issue. Reference is made to pages D-85 − D-93 of Exhibit D. 7. (a) If any foreign exchange control, not previously reported, has been established by the registrant (or if the registrant is other than a national government, by its national government), briefly describe the effects of any such action not previously reported. Not applicable. (b) If any foreign exchange control previously reported has been discontinued or materially modified, briefly describe the effect of any such action, not previously reported. Not applicable. 8. Brief statements as of a date reasonably close to the date of the filing of this report, (indicating such date) in respect of the note issue and gold reserves of the central bank of issue of the registrant, and of any further gold stocks held by the registrant. Reference is made to pages D-60 − D-73 of Exhibit D. 9. Statements of imports and exports of merchandise for each year ended since the close of the latest year for which such information was previously reported. The statements should be reasonably itemized so far as practicable as to commodities and as to countries. They should be set forth in terms of value and of weight or quantity; if statistics have been established in terms of value, such will suffice. Reference is made to Tables 18 − 21 of Exhibit D. 10. The balances of international payments of the registrant for each year ended since the close of the latest year for which such information was previously reported. The statements of such balances should conform, if possible, to the nomenclature and form used in the ‘‘Statistical Handbook of the League of Nations.’’ (These statements need to be furnished only if the registrant has published balances of international payments). Reference is made to Table 17 of Exhibit D. The annual report comprises: (a) Pages numbered 1 to 5 consecutively. (b) The following exhibits: Exhibit A: None. Exhibit B: None. Exhibit C: (P) Copy of the State Budget Proposal for Fiscal Years 2013 − 2014 (in Hebrew)*. Exhibit D: Current Description of the State of Israel.

* Filed by paper ﬁling under cover of Form SE on June 25, 2013, pursuant to Rules 306(c) and 311 of Regulation S-T. The State Budget for 2015 is not yet available because it has not yet passed into law. This annual report is ﬁled subject to the Instructions for Form 18-K for Foreign Governments and Political Subdivisions Thereof.

3 EXHIBIT INDEX

Exhibit Number Page Number A: None. B: None. C: (P) Copy of the State Budget Proposal for Fiscal Years 2013 − 2014 (in Hebrew)*. D: Current Description of the State of Israel. D-1

4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in Jerusalem, Israel on the 30th day of June, 2015. STATE OF ISRAEL By: /s/ Yali Rothenberg Yali Rothenberg Senior Deputy Accountant General Ministry of Finance By: /s/ Gil Cohen Gil Cohen Managing Director Government Debt Management Ministry of Finance

[This page intentionally left blank.] STATE OF ISRAEL

This description of the State of Israel is dated as of June 30, 2015 and appears as Exhibit D to the State of Israel’s Annual Report on Form 18-K to the U.S. Securities and Exchange Commission for the ﬁscal year ended December 31, 2014.

[This page intentionally left blank.] The delivery of this document at any time does not imply that the information is correct as of any time subsequent to its date. This document (other than as part of a prospectus contained in a registration statement ﬁled under the U.S. Securities Act of 1933) does not constitute an offer to sell or the solicitation of an offer to buy any securities of or guaranteed by Israel.

TABLE OF CONTENTS

Page Map of Israel ...... D-1 Currency Protocol ...... D-2 Fiscal Year ...... D-2 FORWARD LOOKING STATEMENTS ...... D-3 SUMMARY INFORMATION AND RECENT DEVELOPMENTS ...... D-4 Economic Developments ...... D-4 Balance of Payments and Foreign Trade ...... D-5 Fiscal Policy ...... D-6 Inﬂation and Monetary Policy ...... D-6 Labor Market ...... D-8 Capital Markets ...... D-8 Political Situation ...... D-9 Privatization ...... D-10 Loan Guarantee Program ...... D-10 STATE OF ISRAEL ...... D-13 Introduction ...... D-13 Geography ...... D-15 Population ...... D-15 Immigration ...... D-16 Form of Government and Political Parties ...... D-16 The Judicial System ...... D-17 National Institutions ...... D-18 International Relations ...... D-18 Membership in International Organizations and International Economic Agreements ...... D-20 THE ECONOMY ...... D-22 Overview ...... D-22 Gross Domestic Product ...... D-22 Savings and Investments ...... D-25 Business Sector Output ...... D-25 Energy ...... D-31 Tourism ...... D-32 Research and Development ...... D-32 Prices ...... D-33 Employment, Labor and Wages ...... D-34 Role of the State in the Economy ...... D-37 Israel Electric Corporation Ltd...... D-39 Defense Oriented Companies ...... D-40 Ports Companies ...... D-40 Israel Postal Company Ltd...... D-41

i Page Israel Railways Ltd...... D-41 Kibbutzim and Moshavim ...... D-41 The Environment ...... D-42 BALANCE OF PAYMENTS AND FOREIGN TRADE ...... D-48 Balance of Payments ...... D-48 Foreign Trade ...... D-51 Trade Liberalization ...... D-51 Anti-Money Laundering Law ...... D-55 Foreign Exchange Controls and International Reserves ...... D-57 Foreign Exchange Rates ...... D-58 Foreign Investment ...... D-58 THE FINANCIAL SYSTEM ...... D-60 Bank of Israel ...... D-60 Monetary Policy ...... D-61 Banking System ...... D-65 Capital Markets ...... D-70 Gold Reserves ...... D-73 PUBLIC FINANCE ...... D-73 General ...... D-73 The Budget Process ...... D-73 Limits on Expenditure and Deﬁcit Reduction ...... D-73 Socioeconomic Policy ...... D-76 Taxation and Tax Revenues ...... D-77 Government Budget Proposal for 2015 − 2016 ...... D-78 Local Authorities ...... D-78 Social Security System ...... D-79 Pension Funds ...... D-80 PUBLIC DEBT ...... D-81 General ...... D-81 Central Government Debt ...... D-82 Debt-to-GDP Ratio ...... D-83 Maturity of Debt ...... D-83 Domestic Government Debt ...... D-83 External Government Debt ...... D-83 Domestic Public Debt ...... D-84 External Public Debt ...... D-84 Government External Debt ...... D-85 Derivatives and Hedging Transactions ...... D-86 Change in Credit Rating ...... D-87 State Guarantees ...... D-91 DEBT RECORD ...... D-92

ii LIST OF TABLES

Page Table No. 1 NIS/U.S. Dollar Exchange Rates ...... D-2 Table No. 2 Selected Economic Indicators ...... D-12 Table No. 3 Distribution of Knesset Seats by Party ...... D-17 Table No. 4 Main Economic Indicators ...... D-24 Table No. 5 Resources and Use of Resources ...... D-24 Table No. 6 Net Domestic Product Percentage Change by Industry ...... D-25 Table No. 7 Composition and Growth of Business Sector Output ...... D-26 Table No. 8 Manufacturing Index by Category ...... D-26 Table No. 9 Industrial Production Index ...... D-27 Table No. 10 Arrivals by Area of Origin and Receipts ...... D-32 Table No. 11 Selected Price Indices ...... D-33 Table No. 12 Principal Labor Force Indicators ...... D-35 Table No. 13 Unemployment Data by Demographic Group ...... D-35 Table No. 14 Employment Data ...... D-35 Table No. 15 Structure of Employment in Israel ...... D-36 Table No. 16 Selected State-Owned Companies ...... D-38 Table No. 17 Balance of Payments ...... D-50 Table No. 18 Exports of Goods by Major Groups ...... D-52 Table No. 19 Imports of Goods by Major Groups ...... D-53 Table No. 20 Exports of Goods by Region ...... D-54 Table No. 21 Imports of Goods by Region ...... D-54 Table No. 22 Merchandise Trade Indices ...... D-55 Table No. 23 External Assets and Liabilities (Debt Instruments) ...... D-57 Table No. 24 Foreign Currency Reserves at the Bank of Israel ...... D-58 Table No. 25 Nonresident Investment in Israel and Resident Investment Abroad ...... D-58 Table No. 26 Average Exchange Rates ...... D-59 Table No. 27 Selected Interest Rates ...... D-64 Table No. 28 Monetary Indicators ...... D-64 Table No. 29 Assets, Liabilities and Equity Capital of the Five Major Banking Groups ...... D-70 Table No. 30 The Budget Deﬁcit and Its Financing ...... D-75 Table No. 31 General Government Taxes ...... D-78 Table No. 32 Government & Public Debt ...... D-81 Table No. 33 Net Public Debt ...... D-81 Table No. 34 Ratio of Net Public Debt to GDP ...... D-82 Table No. 35 Central Government Debt ...... D-82 Table No. 36 Debt-to-GDP Ratio ...... D-83 Table No. 37 Maturity of Debt — Average Time to Maturity ...... D-83 Table No. 38 Composition of External Government Debt ...... D-84

iii Page Table No. 39 Annual Local Currency Government Debt Issuances ...... D-84 Table No. 40 Net External Debt ...... D-85 Table No. 41 Public Sector External Debt ...... D-85 Table No. 42 Total Funds Raised by Israel Bonds ...... D-86 Table No. 43 Foreign and Local Currency Debt ...... D-87 Table No. 44 Outstanding Public Sector External Debt ...... D-87 Table No. 45 Forward Amortization of External Debt — Principal Payments ...... D-88 Table No. 46 Forward Amortization of External Debt — Interest Payments ...... D-88 Table No. 47 Foreign Currency Debt of the Government of Israel ...... D-89 Table No. 48 Outstanding Public Sector External Debt ...... D-89 Table No. 49 Forward Amortization of Public and Private Sector External Debt — Principal Payments ...... D-90 Table No. 50 Forward Amortization of Public and Private Sector Debt — Interest Payments .... D-90 Table No. 51 State Guarantees ...... D-91

SUPPLEMENTARY INFORMATION

Page Loans from the Government of the Federal Republic of Germany ...... D-92 Loans from Israeli and Non-Israeli Banks ...... D-93 International Capital Markets Issues ...... D-93 State of Israel Bonds ...... D-94 Tradable Local Currency Direct Debt of the Government of Israel ...... D-98 Non-Tradable Local Currency of the Government of Israel ...... D-99 Various Loans of the Government of Israel ...... D-99 Balance of the Government’s Floating Rate Debt by Currency ...... D-99

iv Map of Israel

* These areas are subject to agreements between the State of Israel (the ‘‘State’’ or ‘‘Israel’’) and the Palestinian Authority (see ‘‘State of Israel — International Relations,’’ below).

D-1 Currency Protocol Except as otherwise expressed herein, all amounts in this annual report (‘‘report’’) are expressed in New Israeli Shekels (‘‘NIS’’ or ‘‘shekel’’) or in U.S. dollars (‘‘$,’’ ‘‘dollars,’’ or ‘‘USD’’). Any amount stated in dollars in this report as of a stated date or for a stated period that was converted from NIS into dollars, was either converted at the representative foreign exchange rate for dollars on such date, or at the average of the representative foreign exchange rates for dollars for each day during such period, as published by the Bank of Israel. The Bank of Israel representative rates are indicative exchange rates of foreign currencies versus the shekel and are based on the average buying and selling prices published by banks around the time that the representative rate is set. The representative NIS/USD exchange rates as of the following dates and for the following periods were:

Table No. 1

NIS/U.S. Dollar Exchange Rates

2010 2011 2012 2013 2014 December 31st ...... 3.549 3.821 3.733 3.471 3.889 Yearly Average ...... 3.733 3.578 3.856 3.611 3.578

Source: Bank of Israel. On December 31, 2014, the Bank of Israel representative foreign exchange rate for USD was NIS 3.889 per USD 1.0. The average exchange rate for 2014 was NIS 3.578 per USD 1.0. In October 2000, all restrictions on foreign currency derivative transactions with non-residents were abolished. For further discussion on the convertibility of the NIS to USD (see ‘‘Balance of Payments and Foreign Trade,’’ below). In June 2008, the NIS became one of the seventeen currencies eligible for payment settlements through the Continuous Linked Settlement Bank system. Continuous Linked Settlement eligibility eliminates part of the risk associated with foreign exchange transactions across time zones, enhancing the NIS’s systemic stability. Currently, over half of all Continuous Linked Settlement Bank members are able to settle payments in NIS immediately. Totals in certain tables in this report may differ from the sum of the individual items in such tables due to rounding. Unless otherwise speciﬁed, amounts in NIS or USD are given in current prices without adjustment for inﬂation.

Fiscal Year The ﬁscal year of the Government of Israel (the ‘‘Government’’) ends on December 31. The twelve-month period which ended on December 31, 2014 is referred to in this Report as ‘‘2014,’’ and other years are referred to in a similar manner.

D-2 FORWARD-LOOKING STATEMENTS Forward-looking statements are statements that are not historical facts, including statements about the Government’s beliefs and expectations. Forward-looking statements generally can be identified by the use of forward-looking terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘estimate,’’ ‘‘anticipate,’’ ‘‘believe,’’ ‘‘continue,’’ ‘‘could,’’ ‘‘should,’’ ‘‘would’’ or similar terminology. These statements are based on Israel’s current plans, estimates, assumptions and projections. Therefore, you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and Israel undertakes no obligation to update any of them in light of new information or future events. Forward-looking statements involve inherent risks. Israel cautions you that many factors could affect the future performance of the Israeli economy. These factors include, but are not limited to: • External factors, such as: • interest rates in financial markets outside Israel; • the impact of changes in the credit rating of Israel; • the security situation; • the economic growth and stability of Israel’s major trading partners, including the United States and the European Union (the ‘‘EU’’); • the global high-tech market; and • regional economic and political conditions. • Internal factors, such as: • general economic and business conditions in Israel; • present and future exchange rates of the Israeli currency; • foreign currency reserves; • the level of domestic debt; • domestic inflation; • the level of budget deficit; • the level of foreign direct and portfolio investment; and • the level of Israeli domestic interest rates.

D-3 SUMMARY INFORMATION AND RECENT DEVELOPMENTS The following summary highlights information contained elsewhere in this Report and is qualiﬁed in its entirety by the more detailed information appearing elsewhere in this Report. This section is not complete and may not contain all the information that you should consider. You should read the entire Report and any supplement carefully.

Economic Developments In August 2013, the Central Bureau of Statistics adopted the United Nations System of National Accounts as revised in 2008 (‘‘SNA 2008’’) due to a number of major changes that affected the various data series with respect to values as well as percentages of change between periods. The data series beginning in 2006 was revised for the publication of the 2013 Statistical Abstract. The series from 1995 onwards was revised in August 2014. The revisions are in accordance with the changes to the SNA 2008 which has been accepted globally and includes changes in the measurement of the annual gross domestic product (‘‘GDP’’). Some of the main changes in the SNA 2008 applicable to Israel included: (i) recording research and development as fixed capital formation, (ii) measurement of income from financial intermediation, (iii) recording the Central Bank’s output, and (iv) recording of products for further processing in the balance of payments. The process of fully implementing SNA 2008 in Israel will take several years and will be accompanied by additional adjustments to the Balance of Payments Manual 6 (BPM6) and the new international merchandise trade statistics guide. Further changes have been reflected in the classification of economic activities in Israel, as the classification is in accordance with the new International Standard Industrial Classification (ISIC Rev4). Moreover, there has been integration of the 2006 input-output tables that describe the relationships between various industries, as well as between the industries and the final uses (private consumption, general government consumption, fixed capital formation and exports). These methodology changes resulted in a restatement of the growth rates for 1995 through 2012, as well as certain other indicators including the debt-to-GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable to the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the Central Bureau of Statistics. The Israeli economy grew at a pace of 2.8% in 2014, lower than the growth rate of 3.2% in 2013. The plateau in growth during this period can be attributed to exogenous factors including the contraction of economies around the world, which caused a slowdown in exports, the appreciation of the Israeli NIS during the first half of 2014 and Operation Protective Edge which took place in July and August 2014 and weighed on the economy. During the first quarter of 2015, GDP grew at an annual rate of 2.1%. As of the date of this Report, the Ministry of Finance’s GDP growth forecast for 2015 is 3.1%. This forecast takes into account the contribution of natural gas production from the newly-operating Tamar natural gas field, which is estimated as accounting for 0.1 percentage points of GDP growth for 2015. The budget and economic plan proposal for the fiscal year of 2015 was not approved by the Knesset due to early elections in March 2015. Since the beginning of 2015, expenditures are managed by the Accountant General in the Ministry of Finance according to the last approved budget (2014). The expenditure limit for each month is one-twelfth of the 2014 budget linked to the CPI rate. An updated estimate for government expenditures for the year 2015 is lower than the unapproved budget proposal for 2015, and accordingly the deficit is expected to be lower. The approval of the 2015 and 2016 budgets by the Knesset is planned for later in 2015. In 2014, the Government continued its debt-reduction policy, reducing the Government debt as a percentage of GDP by 0.6%, to a level of 65.9%. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path falling by 0.5% relative to 2013 and standing at 67.1% at the end of 2014. After a deviation from the budget deficit target in 2012 (the actual budget deficit amounted to 3.9% of GDP during 2012), the actual budget deficit in 2013 was significantly below the 4.7% of GDP deficit targeted for the year, amounting to 3.2% of GDP. In 2014, tax revenues were higher than expected, due in part to one-time sources of revenue, including the taxation of ‘‘trapped profits,’’ legislative changes and

D-4 lower-than-expected expenditures. This led to a 2.8% budget deficit compared to the budget deficit target of 3.0% of GDP in 2014. As part of the commitment to debt reduction, the Government set the 2015 budget deficit target at 2.5% of GDP. Inflation in 2014 was -0.2% at year-end, below the Bank of Israel’s target range of 1% to 3%. The inflation forecast for 2015 is 0.6% at year-end, below the target range. The NIS/USD exchange rate as of December 31, 2014 stood at 3.889, which represents a depreciation of 12.0% during 2014. The NIS/USD exchange rate as of May 31, 2015 was 3.876. During 2014, there was no change in Israel’s foreign currency credit rating from Standard & Poor’s (‘‘S&P’’), Moody’s Investor Services or Fitch Ratings. In November 2013, Fitch Ratings revised the Outlook on Israel’s Long-Term Foreign-Currency IDR to Positive from Stable, reflecting confidence in the turnaround in the fiscal position and the Government’s commitment to a credible medium-term path for further deficit reduction. In November 2014 Fitch revised the Outlook on Israel’s Long-Term Foreign-Currency IDR back to Stable, following their view that the fiscal consolidation was setback by the effects of Operation Protective Edge in the third quarter of 2014. Israel’s economy continues to be affected by current global economic conditions and the slow-growth climate in Europe. Europe continues to face uncertainty as many Eurozone countries face moderate growth and the inflation pace is lower than 1%. The continued sluggish growth in the EU, which is one of Israel’s major trade partners, could have a material adverse impact on Israel’s balance of trade and thereby adversely affect Israel’s financial condition. Since late 2009, several Eurozone governments, including Greece, Spain, Italy, Ireland, Portugal, France and Cyprus, have experienced rising national debt levels coupled with the downgrade of the credit ratings of their government debt. As a result, there has been significant price volatility in the secondary market for sovereign debt of European and other nations. Additionally, speculation regarding the inability of Greece and other Eurozone governments to pay their national debts remained uncertain. Although Israel’s economy has sustained moderate rates of growth in recent years, there can be no assurance that Israel’s economy will continue to grow in a prolonged negative global economic climate.

Balance of Payments and Foreign Trade Israel had a current account surplus of 3.7% of GDP in 2014. This surplus follows eleven years of a positive surplus in the current account. The current account balance has decreased steadily since the second half of 2010 and through the first quarter of 2012. This decrease is partially attributable to the cessation of natural gas flowing from Egypt and the slowdown in the extraction of natural gas from Yam Tethis reservoir, the combined effect of which required Israel to import expensive alternative fuels during 2011 and 2012. The production of natural gas from the Tamar reservoir, which started in late March 2013, and the decline in fuel prices since the second half of 2012 contributed to an improvement in the current account balance in the second half of 2012 and into 2013 and 2014. In the first half of 2014, the current account surplus reached its highest level since 2007. In the third quarter of 2014, a sharp decrease of the surplus was recorded, mainly due to effects of Operation Protective Edge. In the fourth quarter of 2014 and in the first quarter of 2015, there was an improvement in the surplus, but the current surplus remains lower than the levels recorded in the first half of 2014. During 2014, exports of goods and services continued their upward trend, and imports of goods and services increased. Thus, in 2014, Israel recorded a net-export surplus of $5.0 billion, slightly lower than the 2013 surplus which amounted to $5.2 billion. Compared to 2013, exports in real NIS terms grew moderately by 1.3% in 2014, and imports decreased by 0.4%. Exports of goods in current dollars increased in the third quarter of 2014 by 0.5% but returned to their downward trend in the fourth quarter of 2014 and the first quarter of 2015, declining by 1.7% and 2.0%, respectively (compared with the previous quarter). The growth in exports of goods during 2014 (1.4% in current dollar terms, excluding diamonds) was reflected in an increase of exports to the United States (4.1%) and to the EU (1.3%), while exports Asia decreased by 0.4%. Exports to other destinations (excluding Asia) grew by 0.6% in 2014. Accordingly, the share of exports to the United States increased by 0.7 percentage points (from 21.3% in 2013 to 22.0% in 2014), while the share of exports to Asia decreased by 0.6 percentage points (from 20.8% in 2013 to 20.2% in 2014). The share of exports to the EU increased by 0.2 percentage points (from 31.6% in 2013 to 31.8% in 2014).

D-5 During the first quarter of 2015, exports of goods decreased by 3.8% in real NIS terms and at an annual rate, compared to the previous quarter, and imports of civilian goods increased by 17.0% at an annual rate. The growth of imports in 2015 is expected to be limited due to the local production of natural gas which will offset the importation of certain energy-related products. On March 30, 2013, natural gas production at the Tamar reservoir began. The gas flowing from Tamar is being used mainly for domestic electricity production and is expected to lead to a significant decrease in energy-related imports. Following the beginning of gas production from Tamar, there were appreciation pressures on the NIS, leading the Bank of Israel to intervene in the foreign exchange market for the first time since 2011. Since the intervention, the Bank of Israel has purchased a total of $5.6 billion in foreign currency within the framework of the gas plan, including $3.5 billion during 2014. Additionally, during 2014 the Bank of Israel had unplanned purchases of $3.5 billion in foreign currency, bringing foreign currency purchases to $7 billion in 2014. In December 2014, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2015 will be $3.1 billion, and the Bank announced that it will purchase foreign currency during 2014 accordingly. The Bank of Israel intends to continue such foreign currency purchases until Israel’s sovereign wealth fund becomes operational, which is anticipated in 2018 (subject to legislative review by the Knesset). Israel is a party to free trade agreements with its major trading partners and it is one of the few nations that signed free trade agreements with both the United States and the EU (see ‘‘State of Israel — Membership in International Organizations and International Economic Agreements’’).

Fiscal Policy The budget deficit amounted to 2.8% of GDP in 2014, below the budget deficit target of 3.0% of GDP for that year. Since 2009, the budget deficit has been on a declining path, with the exception of 2012. In 2009, the budget deficit amounted 4.8%, due to a decrease in tax revenues resulting from the global financial crisis (the 2009 budget deficit target was set at 6%); 3.5% of GDP in 2010 (the 2010 budget deficit target was set at 5.5%); 3.1% in 2011 (the 2011 budget deficit target was set at 3.0%); 3.9% in 2012 (the 2012 budget deficit target was set at 2.0%); and 3.2% in 2013 (the 2013 budget deficit target was 4.7%). Pursuant to recent legislation, the budget deficit target is set at 2.5% of GDP in 2015. In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined in ‘‘Public Finance — Limits on Expenditure and Deficit Reduction,’’ below). The revision modifies the formula that will be used to calculate the annual budget in the coming years. Under the new formula, beginning with the 2015 budget, the expenditure ceiling will be calculated based on the average population growth rate in the three years prior to the submission of the Budget Law, plus the ratio of the medium-term debt target (50%) and current debt-to-GDP ratio. The new rule will be based on the three-year average population growth rate in order to ensure a consistent increase in expenditure per capita.

Inflation and Monetary Policy The inflation rate over the last decade was near the middle of the Government’s target range (1% − 3%) and stood at approximately 2% on average. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. Measured at year-end, the consumer price index (‘‘CPI’’) rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013. In 2014 the CPI decreased by 0.2%. Since June 2014, the inflation rate has been below the lower band of the Government’s target range, and since September 2014 the inflation rate has been negative. The CPI decreased by 0.4% during the twelve-month period ending May 31, 2015. It is expected that the average rate of inflation in 2014 will be -0.2%. Because of the slowdown in the Israeli and global economies, the Bank of Israel lowered its key interest rate to 0.5% in the middle of 2009. As Israel’s economy recovered and continued to grow, the Bank of Israel began to gradually increase its key interest rate until it peaked at 3.25% in June 2011. The Bank of Israel then repeatedly reduced its key interest rate by 0.25 percentage points, beginning in September 2011. In May 2013, the Bank of Israel announced that it would further reduce the interest rate by 0.5 percentage points, to 1.25%. In March 2014, the Bank of Israel reduced its key interest rate to 0.75%. In August and September 2014, the Bank of Israel reduced its key interest rate twice, each time by 0.25 percentage points, to 0.25%. In March 2015, the Bank made

D-6 another interest rate cut, lowering its key interest rate to 0.1%. The last interest rate cuts were made primarily because of the appreciation of the NIS. The real interest rate averaged -0.2% and -0.6% in 2013 and 2014, respectively, after two years of positive interest rates of 0.2% and 0.1% in 2011 and 2012, respectively. In 2009 and 2010, the real interest rate was negative (-1% and -1.2%, respectively). As of May 2015, the real interest rate, less inflation expectations, was -0.79%. In recent years, Israel has been active in the global sovereign debt markets. In March 2009, Israel issued in the global markets $1.5 billion aggregate principal amount of 5.125% bonds due 2019. In March 2010, Israel issued in the Euro market €1.5 billion aggregate principal amount of 4.625% bonds due 2020. In January 2012, Israel issued in the global markets $1.5 billion aggregate principal amount of 4% bonds due 2022. In January 2013, Israel completed a dual-tranche issuance in the global markets, issuing $1 billion aggregate principal amount of 3.15% bonds due 2023 and $1 billion aggregate principal amount of 4.5% bonds due 2043. In January 2014, Israel issued in the Euro market €1.5 billion aggregate principal amount of 2.875% bonds due 2024. The NIS/USD exchange rate saw an appreciation of the NIS between the second half of 2012 to the end of July 2014, averaging NIS 3.61 for 2013 and NIS 3.48 for the first half of 2014 (compared to NIS 3.86 in 2012). On July 31, 2012, December 31, 2012, April 30, 2013 and December 31, 2013, the NIS/USD exchange rate stood at NIS 3.997, NIS 3.733, NIS 3.594 and NIS 3.471, respectively. On July 24, 2014, the NIS/USD exchange rate stood at its lowest rate since July 2011, slightly above NIS 3.4. In view of this appreciation, the Bank of Israel made two interest rates cuts, as discussed above. In the second half of 2014, the NIS/USD exchange rate saw a depreciation of the NIS, as the rate increased from slightly above NIS 3.4 on July 24, 2014 to slightly below NIS 4.0 as of December 3, 2014. The depreciation trend of the NIS relative to the USD continued into the first months of 2015; in March and April 2015, the exchange rate occasionally passed NIS 4.0. During May and the beginning of June 2015, the exchange rate recorded an appreciation of NIS relative to the USD. Since the beginning of 2015, the NIS recorded an appreciation relative to the Euro, mainly due Quantitative Easing in the Euro Area. In response to a sharp appreciation of the NIS that began in 2008 and continued until mid-2011, the Bank of Israel initiated a two-year policy of daily purchases of foreign currency. In August 2009, the Bank of Israel announced that it would terminate its daily purchasing of foreign currency but that it planned to continue purchasing such currency when it deems advisable. Between August 2011 and April 2013, the Bank of Israel did not make substantial foreign currency purchases. In May 2013, the Bank of Israel announced its plan to resume purchasing foreign currency to counteract the adverse effects of natural gas production from the Tamar reservoir, which began operating in late March 2013, on the balance of payments. Appreciation pressures on the NIS began following the commencement of production from the Tamar reservoir. The Bank of Israel’s intervention in the foreign exchange market, for the first time since 2011, is intended to offset the appreciation pressure on the NIS resulting from the increased domestic production of natural gas in order to avoid the phenomenon known as ‘‘Dutch disease’’, which could negatively impact the Israeli economy. The Bank of Israel purchased $2.1 billion by the end of 2013 and another $3.5 billion during 2014. The Bank of Israel also purchased $3.5 billion in unplanned purchases during 2014. In December 2014, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2015 will be $3.1 billion and announced that it will purchase foreign currency during 2015 accordingly. At the end of 2010 and 2011, official reserves stood at $70.9 billion and $74.9 billion, respectively. At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.1 billion as of the end of 2014. In May 2015, the official reserves decreased slightly, compared to the end of 2014, to $85.8 billion, mainly due to the appreciation of the USD relative to the EUR and other major currencies.

D-7 Labor Market The rate of unemployment dropped to 5.9% in 2014, compared to 6.2% in 2013 and reflecting a significant decrease compared to 6.9% in 2012 and 7.0% in 2011. From January to May 2015, the unemployment rate averaged 5.2% which is very low by historical standards. The participation rate improved significantly in the last four years, increasing from 61.6% at the beginning of 2010 to 64.17% in the fourth quarter of 2014 and 64.1% in May 2015. Despite the high participation rate and low unemployment rate, there are still no major signs of pressure to increase wages. This is in part attributable to the entry of a large number of workers into low-paying jobs and part-time positions.

Capital Markets The Tel-Aviv Stock Exchange (the ‘‘TASE’’) is Israel’s sole stock exchange and the Tel-Aviv 100 (‘‘TA-100’’) and Tel-Aviv 25 (‘‘TA-25’’) are its main indices and primary indicators of the performance of Israel’s public companies. The TA-100 and TA-25 measure the 100 and 25 companies, respectively, with the highest market capitalization listed on the TASE. The TASE is highly correlated with major stock markets in developed countries, and the global financial crisis and overall weakening in global growth starting in 2008 have affected Israel’s public companies. The TA-100 fell by 51.1% in 2008 but recovered in 2009 and 2010, rising by 88.8% and 14.9%, respectively. In 2011, the TA-100 fell by 20.1% and the TA-25 fell by 18%. The TASE partially recovered in 2012, with the TA-100 and TA-25 rising by 7.2% and 9.2%, respectively. This recovery continued into 2013 as the TA-100 and TA-25 increased by 15.1% and 12.1%, respectively. During 2014, the TA-100 and TA-25 increased by 6.7% and 10.2 percent, respectively. In light of the 12.0% depreciation of the NIS against the USD during 2014, the TA-25 decreased by 1.6% in USD terms over the course of the year. The TA-25 increased 15.2% in nominal terms and increased by 15.6% in USD terms between January and May 2015, while the USD appreciated by 0.3% against the NIS. The value of the public portfolio of financial assets (a weighted average of the public’s holdings of financial assets and deposits, in Israel and abroad) increased by 7.8%, 8.8% and 6.8% during 2012, 2013 and 2014 respectively; current data (through May 2015) shows a further increase of 5.3%. Redemptions in provident funds caused these funds to record a net outflow of assets under management of NIS 465.73 million in 2012, mainly due to large redemptions in January of that year. In 2013, there was a significant net inflow of assets under management of NIS 2,757 billion. In 2014 there was a net inflow of NIS 5,370 billion. For the first five months of 2015, there was a net inflow of 1,856 NIS billion. The Bank of Israel, together with governmental authorities and regulators, monitors Israeli banks and financial institutions on an ongoing basis, supervising the banking system’s conditions and operations as a whole. In addition, the Bank of Israel cooperates with the Ministry of Finance and the Israel Securities Authority to achieve comprehensive regulation and supervision of Israel’s financial markets, to ensure coordination among the various entities in the financial sector and to set policies and measures that will be implemented and enforced with respect to such entities. In 2011, the Bank of Israel and the Ministry of Finance took a number of steps to reduce short-term investments by foreign investors. These included, starting in January 2011, requiring banking corporations in Israel to meet a 10% reserve requirement for foreign exchange swap transactions and shekel-based forward contracts entered into by non-residents (which was subsequently canceled at the end of October 2014). In addition, the Ministry of Finance cancelled a tax exemption previously granted to foreign investors on capital gains from non-indexed zero-coupon securities of up to one-year maturity issued by the Bank of Israel (‘‘Makam’’) and short-term government bonds. To improve its ability to analyze transactions in the foreign exchange market and to increase transparency and investor confidence, the Bank of Israel imposed reporting obligations on Israeli residents and non-residents undertaking transactions in foreign exchange swaps and forwards exceeding $10 million per day, and non-residents undertaking transactions in Makam and short-term government bonds exceeding NIS 10 million per day.

D-8 Political Situation 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 but rather a number of basic laws that were granted special status, enabling judicial review by the Israeli Supreme Court. Israel’s constitutional jurisprudence is also grounded in judicial decisions and in the State’s Declaration of Independence. The President of Israel is the head of state. The presidency is largely an apolitical, figurehead role, with the real executive power in the hands of the Prime Minister. The legislative power of the State resides in the Knesset, a unicameral parliament that consists of 120 members elected by universal suffrage under a system of proportional representation (see ‘‘State of Israel — Form of Government and Political Parties,’’ below). Israel signed peace treaties with Egypt in 1979 and Jordan in 1994, but past efforts to achieve peace with Syria, Lebanon and the Palestinians have yet to bear fruit. Relations between Israel and the Palestinian Authority continue to be based on existing agreements and on current efforts by the U.S. administration to resume peace talks. In 2005, Israel redeployed out of the Gaza Strip (‘‘Gaza’’), dismantling all Israeli communities in Gaza and all its military bases there, as well as four Israeli settlements in the northern West Bank (see ‘‘State of Israel — International Relations,’’ below). In the summer of 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. In June 2007, Hamas, a terror organization, assumed control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 and into 2011. Operation Cast Lead did not materially affect the Israeli economy. From 2011 and into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel launched Operation Pillar of Defense, a military campaign against terrorist targets in Gaza. Operation Pillar of Defense lasted eight days. In response to Hamas firing rockets from Gaza into Israel in the summer of 2014, in July 2014, Israel took defensive military action and commenced Operation Protective Edge with the goal of suppressing the rocket fire, some of which reached Israel cities and towns almost 100 kilometers away from Gaza. The operation ended in August 2014. Having been at a standstill since 2009 (despite a brief round of talks beginning in September 2010), Israeli-Palestinian peace negotiations were again initiated, under the auspices of U.S. Secretary of State John Kerry, in July 2013. Progress was made but, before the last phase of negotiations of a prisoner release by Israel, for which Government approval was imminent, the Palestinian Authority breached its commitments and submitted requests to accede to fifteen international conventions. While the talks were suspended, the Palestinians announced a unity pact between Fatah and Hamas, which would lead to a so-called national consensus government. Incorporating Hamas into the Palestinian government, under one guise or another, is unacceptable to Israel as long as Hamas rejects the three benchmarks of the International Quartet (namely, recognizing Israel, accepting existing Israeli-Palestinian agreements, and renouncing violence). Although Israel has expressed its willingness to negotiate without preconditions with Palestinian partners who accept the Quartet’s conditions, Hamas still refuses to do so, leaving negotiations at an impasse. However, improvements have been made in economic and security cooperation with the Palestinian Authority. In September 2011, the Palestinian Authority filed an application for membership with the United Nations. In November 2012, the General Assembly upgraded the Palestinian Authority’s status in the United Nations from a ‘‘non-member observer entity’’ to a ‘‘non-member observer state.’’ Since January 2011, there has been political instability and civil unrest, termed the Arab Spring, in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. The Arab Spring has ousted long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. While Israel is hopeful that these developments will lead to increased freedom and opportunity for the citizens of its neighboring countries, it remains concerned regarding the stability of the region. The delicate relations between Israel and its neighbors

D-9 could become even more fragile with the ensuing domestic turmoil and change in regimes. However, such instances of instability in the Middle East and North Africa region have so far not materially affected Israel’s financial or political situation, and countries who have signed peace agreements with Israel remain committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not thereby be affected. This uncertainty is highlighted by recent fighting in Syria and Iraq, where an Islamist militia group known as ISIS (Islamist State in Iraq and Syria) is challenging the territorial boundaries of both states. Since the signing of the Camp David Accords in 1979, peace with Egypt has been important to Israel’s national security. Following the ousting of Egyptian President Hosni Mubarak, the relationship between Egypt and Israel has been strained, but the election of President Al-Sisi has been accompanied by reassuring statements regarding common interests. As of June 2014, Israel did not perceive a material change in the strategic stance of Egypt, and the peace treaty between the two states remained in force. Moreover, as of June 2014, the weakening of the Assad regime in Syria and the removal of its chemical weapons was perceived as diminishing the strategic threat to Israel emanating from the Syrian armed forces. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and the possibility that the ongoing civil war will devolve into a state of anarchy. Fundamentalist regimes such as Iran present a deep concern for the international community and especially for states in the region. Since 2011, the prospect of a nuclear Iran has been at the center of international geopolitical discourse. The implementation of strict international sanctions against Iran, combined with widespread international denouncement of Iranian nuclear military ambitions, serve as evidence that the United States, EU and other world powers share Israel’s concerns. Talks between the P5+1 group and Iran have so far resulted in what Israel considers to be a disadvantageous interim agreement because it validates Iran’s nuclear enrichment capacities. There has yet to be a breakthrough before a final agreement on this matter can be reached. Prime Minister Benjamin Netanyahu has publicly stated that Israel aims to achieve a peaceful resolution to the situation; however, all options for preventing Iran from obtaining nuclear weapons remain on the table.

Privatization Historically, the Government has been involved in nearly all sectors of the Israeli economy. In the past several decades, privatization has been an essential element of the broader market reforms initiated by the Government aiming to promote the growth of the private sector, mainly by enhancing competition. Israel has made substantial progress in recent years, resulting in the privatization of many enterprises owned by the State and the reduction of State subsidization of business enterprises. In total, between 1986 and 2013, 98 Government Companies (as defined in ‘‘Role of the State in the Economy,’’ below) became partially or fully-private. The proceeds stemming from these privatizations totaled $14.2 billion. In 2010, privatization proceeds amounted to NIS 4.5 billion, partly as a result of the privatization of the State’s interest in two of the five major banks in Israel — Israel’s entire remaining stake in Israel Discount Bank Ltd. and 5% proceeds of Israel’s stake in Bank Leumi Le-Israel Ltd. Currently, the Government holds approximately 6.03% of Bank Leumi’s outstanding equity securities, and on June 9, 2014, the Finance Committee of the Knesset approved the Government’s request to sell the remaining stake over the coming year. In addition, the Government plans to continue with the process of privatizing its interests in financial institutions, as well as State-owned land, seaports, and parts of the defense industry (see ‘‘The Economy — Role of the State in the Economy,’’ below).

D-10 2011 (with an option to carry forward unused guarantee amounts for an additional year). A further extension of the program was approved by the U.S. House of Representatives on July 17, 2012 and signed into law by President Obama on July 27, 2012. The new law extends the program until 2016 and allows the United States to provide access to up to $3.8 billion in future loan guarantees as part of the $9 billion commitment made in 2003. On October 24, 2012, the United States and Israel entered into an agreement establishing a new framework for administering the extended program. The amount of guarantees that may be issued to Israel under the loan guarantee program may be reduced by an amount equal to the amount extended or estimated to have been extended by Israel for activities that the President of the United States determines are inconsistent with the objectives and understandings reached between the United States and Israel regarding the implementation of the loan guarantee program. Under the program, the United States issues guarantees with respect to all payments of principal and interest on certain bonds issued by Israel. The proceeds of the guaranteed loans may be used to reﬁnance existing debt. Under the $9 billion loan guarantee program, between September 2003 and November 2004 Israel issued guaranteed notes totaling $4.1 billion face value. Israel has not issued any notes under the loan guarantee program since November 2004, and up to $3.8 billion of U.S. loan guarantees (subject to the reductions described above) remains available.

D-11 Table No. 2 Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2010 2011 2012 2013 2014 Main Indicators GDP (at constant prices) ...... 870.8 907.3 934.5 964.9 991.6 Real GDP growth ...... 5.8% 4.2% 3.0% 3.2% 2.8% GDP per capita (at constant 2010 prices) ...... 114,271 116,878 118,209 119,772 120,745 GDP per capita, percentage change ...... 3.8% 2.3% 1.1% 1.3% 0.8% Inﬂation (change in CPI − annual average) ...... 2.7% 3.5% 1.7% 1.5% 0.5% Industrial production ...... 9.5% 2.1% 4.0% 0.5% 1.2% Business sector product (at constant 2010 prices) . 654.2 683.7 703.2 727.3 747.0 Permanent average population (thousands) ...... 7,621 7,764 7,906 8,056 8,212 Unemployment rate(1) ...... 8.0% 7.0% 6.9% 6.2% 5.9% Foreign direct investment (net inﬂows, in billions of dollars) ...... 6.3 8.7 8.5 12.4 6.7 Trade Data Exports (F.O.B) of goods and services (NIS, at constant 2010 prices) ...... 305.2 325.1 328.2 333.2 336.7 Imports (F.O.B) of goods and services (NIS, at constant 2010 prices) ...... 287.2 318.0 325.8 325.4 333.3 Government Debt(2) Total gross government debt (at end-of-year current prices)(3) ...... 608.2 633.0 666.8 696.3 715.8 Total gross government debt as percentage ofGDP...... 69.8% 68.5% 67.2% 66.4% 65.9% External Debt External debt liabilities (in millions of dollars).... 111,858 109,296 102,028 101,259 96,163 Net external debt (in millions of dollars) ...... -56,349 -60,841 -67,465 -81,812 -99,534 Revenues and Expenditures (net) Revenues and grants ...... 217.76 232.20 237.74 259.98 273.68 Expenditures ...... 325.80 347.76 376.39 389.47 402.61 Expenditures other than capital expenditures ..... 233.20 245.08 262.46 278.61 287.35 Development expenditures (including repayments of debt) ...... 92.61 102.68 113.93 110.87 115.26 Repayments of debt ...... 79.55 88.16 97.68 94.42 99.09

D-12 STATE OF ISRAEL

Introduction Israel is a highly developed, industrialized democracy. Real GDP increased at an annual average rate of 3.8% between 1996 and 2014, and GDP grew 2.8% in 2014. Israel has seen marked improvements in most economic indicators in recent decades. GDP growth has been steady and consistent, with the exception of a contraction during the global slowdown of the early 2000s and fluctuating growth rates surrounding the global financial crisis and the European debt crisis. Since the second half of 2011, there has been a slowdown in the Israeli economy, primarily in the areas of exports and fixed capital formation. In the early 2000s, GDP contracted as a result of ongoing security challenges in Israel, as well as the economic slowdown that followed the burst of the dot-com bubble. An economic recovery began in 2003 and accelerated between 2004 and 2008. During the period between 2003 and 2008, GDP increased by 5.0% on average per year. This growth can be attributed to a reduction in the fiscal deficit and the size of the government, a global economic recovery, growth in the Israeli high-tech sector, and relatively low real interest rates. The global financial crisis caused a slowdown in growth starting in the second half of 2008 and through the first half of 2009. In 2009, GDP grew by 1.9%. Although the Israeli economy was affected by the global crisis, it was affected to a lesser extent than other developed economies. Several unique factors and characteristics of Israel’s economy and financial system served to ameliorate the negative effects of the global financial crisis. They include the low budget deficit, a current account surplus, the resilience and strength of State supervision over the banking system, a stable real estate market, and limited exposure of Israeli financial institutions to toxic foreign assets such as those associated with U.S. subprime mortgages. Israel was therefore able to recover from the global financial crisis relatively quickly, with GDP growing at 5.8% and 4.2% in 2010 and 2011, respectively, though growth slowed in the fourth quarter of 2011. The lower growth rate starting in the fourth quarter of 2011 can be attributed to the deterioration in Europe’s fiscal condition and the high levels of economic uncertainty around the world. This slowdown continued into 2012, as the Israeli economy grew by 3.0%. This slowdown is evident in all GDP components, with the exception of public consumption. In particular, the growth rate of the fixed capital formation was negative in the last three quarters of 2012. Operation Pillar of Defense, which took place in November 2012, also weighed on economic growth, as GDP grew by 3.9% in the fourth quarter of 2012 (at an annual rate). In 2013, the Israeli GDP grew by 3.2%. During the first quarter of 2013, the Israeli economy grew by 1.7%. In the second quarter, growth accelerated to 5.6%, mainly due to the commencement of gas production in the Tamar reservoir and the relatively high volume of start-up companies’ exports. In the third quarter, growth fell sharply to 2.5% mainly due to a significant decline in goods and services exports. This decline stems largely from softening export sales in the pharmaceuticals sector and from a significant regression in the start-up companies’ exports. In the fourth quarter, the growth rate was almost unchanged, amounting to 3.0%. This growth rate was much lower than the quarterly growth rates that were recorded during 2010 − 2012. In 2014, the Israeli GDP grew by 2.8%. In the first quarter of 2014, the Israeli economy grew by 2.8%, mainly due to acceleration in public consumption. In the second quarter, the growth rate declined to 1.6%, mainly due to a contraction in exports of goods and services and fixed capital formation. In the third quarter of 2014, the Israeli economy grew by 0.8%, as Operation Protective Edge which took place in July and August weighed on economic activity. In the fourth quarter of 2014, the Israeli economy recovered from the previous quarterly slowdown and grew 6.5% due to acceleration in all of the GDP components. Israel has made substantial progress in opening its economy since 1990, removing major trade barriers as well as tariffs. Israel has entered into free trade agreements with its major trading partners and is one of the few nations to sign free trade agreements with both the United States and the EU. Israel has also signed free trade agreements with the European Free Trade Association (‘‘EFTA’’) in addition to Canada, Turkey, Jordan, Egypt and Mexico. In September 2010, Israel became a full member of the Organization of Economic Co-operation and Development (‘‘OECD’’), following a unanimous vote by OECD members.

D-13 The total budget deficit, excluding net lending and the realized profits of the Bank of Israel, averaged 3.9% of GDP between 2001 and 2004, primarily as a result of a decline in GDP and in tax revenues in those years. The implementation of a decisive fiscal policy starting in mid-2003, backed by loan guarantees from the U.S. government, contributed significantly to macroeconomic stability by raising fiscal credibility and lowering economic uncertainty. In 2005 and 2006, the total budget deficit amounted to 1.7% and 0.9% of GDP, respectively, and the budget was balanced in 2007, mainly reflecting higher than expected tax revenues. In 2008, the budget deficit increased to 2.1% of GDP due to continued reduction in tax revenues, as well as the slowdown in economic activity and negative developments in global and local capital markets (all of which had a negative effect on tax revenues). In 2009, the budget deficit target was 6%, but the actual deficit stood at 4.8%. While the 2010 budget called for a 5.5% deficit target, the actual deficit was significantly lower at 3.5%, largely due to higher than expected revenues. In 2011, Israel continued to lower its deficit to 3.1%, just slightly above the target of 3%. In 2012, the budget deficit reached 3.9% of GDP, significantly exceeding the Government’s deficit target of 2% of GDP, mainly due to lower than expected tax revenues. In 2013, the government deficit decreased to 3.2%, contrary to early estimates that had predicted a significant increase. The deficit decrease resulted from the implementation of fiscal consolidation measures by the Government (on both income and expenditure sides) and from one-off tax revenues (‘‘trapped profits’’ on sales of startup companies). In 2014, the budget deficit target was 3.0%, but the actual deficit was 2.8%, largely due to lower than expected expenditures, despite the effects of Operation Protective Edge in the third quarter of 2014. The unemployment rate has fallen consistently throughout the past decade, except for a temporary increase during 2009. In 2012, the unemployment rate was 6.9%, and the unemployment rate declined to 6.2% in 2013 and 5.9% in 2014, the lowest rate in the last decade. The reduction in unemployment in recent years was accompanied by an improvement in the labor participation rate. The participation rate in 2014 was 64.2%, continuing a trend of incremental improvement from 59.4% in 2002. One of Israel’s most important resources is its highly educated work force. Based on OECD reports, in 2012 approximately 46% of adults between the ages of 25 and 64 held a university or technical degree in Israel, compared to the 32% OECD average. Between 1990 and 2008, approximately 1.1 million people immigrated to Israel, increasing Israel’s population by approximately 25%. Most of these new immigrants were highly educated and had strong academic and professional backgrounds mainly in science, management, medicine and other technical and professional fields. Although this wave of immigration initially placed a strain on the economy by raising the budget and trade deficits and contributing to a relatively high level of unemployment, these immigrants were ultimately successfully integrated into the economy. According to the Bank of Israel, in 2014 the unemployment rate among immigrants who came to Israel during the first half of the 1990s was 5.1%, which is lower than the general unemployment rate of 5.9%. Over the past three decades, Israel has gradually made progress in reducing hostilities with its Arab neighbors. The first peace agreement between Israel and a hostile neighbor country was signed in 1979 in the form of the Camp David Accords with Egypt. In September 1993, Israel and the Palestinian Liberation Organization (‘‘PLO’’) signed a Declaration of Principles, a turning point in Israeli-Arab relations. Israel also signed a peace treaty with Jordan in 1994. Further agreements have also been signed between Israel and the PLO. In the early 2000s, unrest in the areas under the rule of the Palestinian Authority posed a setback to the peace process. Since 2003, there has been an improvement in the political affairs in the West Bank area, which is reflected by a relative decline in the number of terrorist attacks and security incidents stemming from the West Bank. In 2005, Israel implemented a unilateral disengagement plan, according to which the State dismantled and evicted all Israeli communities in Gaza, four Israeli towns in the northern West Bank and all of its military personnel in those areas. During July and August 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. The conflict has been termed the Second Lebanon War (see ‘‘International Relations,’’ below). After the Israeli disengagement from Gaza, Hamas, a terror organization, assumed administrative control over Gaza and began launching rockets and mortar rounds into Israel, as well as smuggling weapons and ammunition through tunnels under the Egypt-Gaza border, resulting in Israel military responses in 2008 (Operation Cast Lead), 2012 (Operation Pillar of Defense), and 2014 (Operation Protective Edge) to protect Israelis from attacks (see ‘‘International Relations,’’ below).

D-14 Since January 2011, there has been political instability and civil disobedience, termed the Arab Spring, in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Iran, Tunisia, Yemen and Syria. The Arab Spring has ousted long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in the center of this region, it closely monitors these events, aiming to protect its economic, political and security interests. While Israel is hopeful that these developments will lead to increased freedom and opportunity for the citizens of its neighboring countries, it remains concerned regarding the stability of the region. The outcome of the ongoing turmoil in Syria and regime change in several countries including Egypt remains uncertain. The delicate relations between Israel and its neighbors could become even more fragile with the ensuing domestic turmoil and change in regimes. It should be noted that such instances of instability in the Middle East and North Africa region have not so far materially affected Israel’s ﬁnancial or political situation, and that regimes deemed as hostile have nevertheless kept the peace. However, there can be no assurance that such instability in the region will not escalate in the future, such instability will not spread to additional countries in the region, current or new governments in the region will be successful in maintaining domestic order and stability, or Israel’s economic or political situation will not thereby be affected.

Geography Israel is located on the western edge of Asia bordering the Mediterranean Sea. It is bordered to the north by Lebanon and Syria, to the east by Jordan, to the west by the Mediterranean Sea and Egypt, and to the south by Egypt and the Gulf of Eilat. Israel has a total land area, excluding Gaza 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.

Population Israel’s population, including Israeli citizens residing in the West Bank, but not including foreign nationals residing in Israel for employment purposes, is estimated at 8.3 million as of the end of 2014. This is an increase of 2.0% from 8.13 million in 2013, a further increase of 1.9% in 2013 from 7.98 million in 2012. Between 1990 and 2014, Israel’s population grew by 76.3%, largely as a result of immigration from the former Soviet Union. In 2013, 10.5% of the population were 65 years of age or older, 31.9% were between the ages of 35 and 64, 29.4% were between the ages of 15 and 34, and 28.2% were under the age of 15. 91.4% of the population lives in urban areas, with 18.7% of the population living in Israel’s three largest cities: Jerusalem (population 822,600), Tel-Aviv (population 416,600) and Haifa (population 272,700). The Israeli population is composed of a variety of ethnic and religious groups. In 2014, 74.9% of the total Israeli population was Jewish, 17.5% Muslim, 2.0% Christian, and 1.6% was Druze. The State’s Declaration of Independence and various decisions of the Supreme Court of Israel guarantee freedom of worship for all Israeli citizens. Hebrew and Arabic are the official languages in Israel, while English is commonly used. In 2009, the Haredi Jewish community comprised approximately 9.9% of Israel’s population. The Haredi community is characterized by a high fertility rate, which is expected to gradually increase its demographic share among the general population. Based on the demographic projections of the Central Bureau of Statistics, it is anticipated that by 2019 the Haredi community will comprise 12.4% of the population, and by 2039 it will comprise 19% of the population. The Haredi community is also characterized by a relatively low participation rate in the labor market, particularly among men. There is concern that Haredi demographic trends may, over the long-term, contribute to a lower aggregate participation rate in Israel, thereby adversely affecting GDP growth. The impact of Haredi demographic growth may be signiﬁcant with respect to tax revenue, due to lower revenues from taxation of labor. However, due to several governmental initiatives, in recent years there has been a steady increase in the participation rate among the Haredi community. It is anticipated that these governmental initiatives will continue to positively affect the Haredi participation rate, thereby moderating the negative impact of Haredi demographic trends on Israel’s long-term economic and ﬁscal prospects.

D-15 Immigration Israel has experienced a continuous flow of immigrants, in part due to its Law of Return which provides that Jews, those of Jewish ancestry, their spouses and converts to Judaism have the right to immigrate and settle in Israel and gain citizenship. In 2011, 16,893 immigrants arrived in Israel, an increase of 1.6% compared to 2010. In 2012, 16,559 immigrants arrived in Israel, a decrease of 2.0% compared to 2011. In 2013, 16,884 immigrants arrived in Israel, an increase of 2.0% compared to 2012. Between 1990 and 2003, a substantial influx of immigrants, totaling 1.1 million, increased Israel’s population by more than 23%, putting total population growth at 42.5%. Approximately 83% of the immigrants came from the former Soviet Union and many were highly educated. Of those over the age of 15, 58% had academic backgrounds comprising over 13 years of schooling and approximately 62% held scientific, academic, managerial, technical or other vocational degrees. This influx of highly skilled workers has contributed to the growth of the Israeli economy since 1990 (see ‘‘The Economy — Employment, Labor and Wages,’’ below).

Form of Government and Political Parties Israel was established in 1948 as a parliamentary democracy with governmental powers divided among the legislative, executive and judicial branches. Israel has no formal written constitution but rather a number of basic laws which govern the fundamental functions of the state, including the electoral system, the government, the legislature and the judiciary system, and which guarantee the protection of property, life, body and dignity, as well as the right to privacy and freedom of occupation. These basic laws were granted a special status by the Israeli Supreme Court in comparison to other laws and, in some cases, cannot be amended except by an absolute majority vote of the Knesset. All citizens of Israel, regardless of race, religion, gender or ethnic background, are guaranteed full democratic rights. Freedom of worship, speech, assembly, press and political affiliation are embodied in the State’s laws, judicial decisions and Israel’s Declaration of Independence. The President of Israel is the head of state. The President has an apolitical, figurehead role, with the real executive power lying in the hands of the Prime Minister. The current President, Reuven ‘‘Rubi’’ Rivlin took office in June 2014. Presidents are elected by the Knesset for a seven-year term and cannot be reelected for an additional term. The President has no veto powers and the duties of the office are mainly ceremonial. After consulting with different parties’ representatives, the President selects a member of the Knesset to form the government. If this selected Knesset member successfully assembles a coalition, then he or she becomes Prime Minister. The legislative power of the State resides in the Knesset, a unicameral parliament that consists of 120 members elected by nation-wide voting under a system of proportional representation. The Knesset is elected for a four-year term, although most governments have not served a full term and early elections are a frequent occurrence. The legal voting age for Israeli citizens is eighteen. Elections are overseen by the Central Elections Committee and are held in accordance with the Knesset Elections Law. Early elections can be called by a majority vote of Knesset members or by an edict of the Prime Minister approved by the President, and normally occur on occasions of political stalemate and inability of the Government to obtain the Knesset’s support for its policies. Failure to obtain Knesset approval to the annual budget by March 31 (three months after the start of the fiscal year) also triggers early elections. Israel uses the closed list method of party-list proportional representation, whereby citizens vote for their preferred party and have no influence over the position of individual candidates placed on the party list. The 120 seats in the Knesset are assigned proportionally to each party that received votes, provided that the party meets or exceeds a 3.25% electoral threshold. Parties are permitted to form electoral alliances so as to gain enough collective votes to meet the threshold (the alliance as a whole must meet the threshold, not the individual parties) and thus be allocated a seat. After an election, the President, following consultations with the elected party leaders, chooses the Knesset member most likely to form a viable government. While this typically is the leader of the party receiving the most seats, it is not required to be so. In the event a party wins 61 or more seats in an election, it can form a viable government without having to form a coalition.

D-16 However, no party has ever won 61 seats in an election. Thus, a coalition has always been required to form a government, with those remaining outside the coalition comprising the opposition. Israel’s most recent general election was held on March 17, 2015. Following the elections, the President selected Benjamin Netanyahu of the Likud Party to form a coalition government. After successfully forming a coalition government in May 2015, Benjamin Netanyahu became the Prime Minister of Israel for the fourth time. Since the establishment of the State in 1948, the Government has been a coalition government led most often by Avodah (Labor), Likud or a predecessor of these parties. In the March 2015 election, a new party, Kulanu, gained 10 seats in the Knesset. The following table sets forth the distribution of current Knesset seats by political party as of May 28, 2015.

Table No. 3

Distribution of Knesset Seats by Party (As of May 28, 2015)

Number of Seats Likud ...... 30 Zionist Union (formerly Labor) ...... 24 Joint List (Union of three Arab Parties) ...... 13 Yesh Atid ...... 11 Kulanu ...... 10 Ha’Bayit Ha’yehudi (Jewish House) ...... 8 Shas ...... 7 Israel Beitenu ...... 6 United Torah Judaism ...... 6 Meretz ...... 5 Total ...... 120 In May 2015, Prime Minister Benjamin Netanyahu formed a coalition government consisting of the following parties: Likud, Kulanu, Ha’Bayit Ha’yehudi, Shas, and United Torah Judaism. The Prime Minister appointed Moshe Kahlon as Minister of Finance.

The Judicial System The Israeli judicial system, which functions independently from the executive and legislative branches, consists of civil courts and tribunals, as well as religious and military tribunals. The civil courts, which have jurisdiction over civil, administrative, and criminal matters, are administered by the Directorate of Courts, a separate unit operating within the Ministry of Justice. Civil courts consist of Magistrates Courts, District Courts, the Supreme Court and Labor Courts. Religious tribunals, which operate under the auspices of the Ministry of Religious Services, have jurisdiction with respect to certain personal status matters. In addition, there are military tribunals that operate under the auspices of the Ministry of Defense and are authorized to try soldiers for military and civil offenses. Within the civil court system, Magistrates Courts are courts of ﬁrst instance. They have jurisdiction over criminal matters relating to offenses carrying a potential sentence of less than seven years imprisonment, and civil matters for claims of less than NIS 2.5 million or involving the use and possession of real estate. Magistrates Courts also sit as specialized courts based upon subject matter: municipal courts, family courts, small claims courts, traffic courts, rent courts and juvenile courts. There are 31 Magistrates Courts. The six District Courts — Jerusalem, Tel-Aviv, Haifa, Beer Sheba, Nazareth, and Central Region — are courts of ﬁrst instance with jurisdiction over criminal matters relating to offenses carrying a potential sentence of more than seven years imprisonment and civil matters for claims exceeding NIS 2.5 million, as well as matters not within the purview of Magistrates Courts. District Courts also have jurisdiction in cases concerning corporations and partnerships, arbitration issues, administrative matters (e.g., prisoners’ petitions,

D-17 appeals on tax matters, government tenders, planning and building issues, and other petitions against decisions of government bodies and authorities), as well as appeals of Magistrates Court decisions. The Jerusalem District Court has exclusive jurisdiction with respect to certain matters such as extradition and antitrust issues. In addition, the Haifa District Court also functions as a maritime tribunal and has exclusive jurisdiction in maritime matters. The Supreme Court sits as an appellate court in review of trial court judgments and appellate decisions of District Courts. In addition, the Supreme Court sits as the High Court of Justice, a court of first instance in administrative and constitutional cases whose judgments cannot be appealed. Under certain circumstances, the High Court of Justice is also authorized to review the decisions of the National Labor Court. Supreme Court rulings are considered binding upon all lower courts in Israel. The Supreme Court is composed of fifteen Justices, appointed by the nine members of the Judicial Selection Committee, and registrars, appointed by the President of the Supreme Court with the approval of the Minister of Justice. The Judicial Selection Committee is chaired by the Minister of Justice and is composed of three Supreme Court Justices (including the President of the Supreme Court), two Cabinet ministers (including the Minister of Justice), two members of the Knesset and two members of the Israel Bar Association. Judges are appointed by the President of the State, following a recommendation by the Judicial Selection Committee. By tradition, the President of the Supreme Court is selected based on seniority. The President of the Supreme Court serves a term of seven years. Labor and social security issues are under the jurisdiction of the Labor Courts, composed of regional courts and the National Labor Court which serves as both an appellate court and a court of first instance in certain matters.

National Institutions Israel has four so-called ‘‘national institutions’’: The Jewish Agency for Israel, the World Zionist Organization, Keren Hayesod, and the Jewish National Fund. These national institutions, which predate the formation of the state, perform a variety of non-governmental charitable functions. Each national institution is independent of the Government and ﬁnances its activities through private and public sources, including donations from abroad. These national institutions were responsible for a net unilateral transfer into Israel of $0.2 billion in 2014 as well as in 2013.

International Relations Over the past three decades, Israel has persisted in making every effort to reduce the hostilities that have existed with the region’s Arab countries. As ﬁrst expressed in Israel’s Declaration of Independence in 1948, Israel offers ‘‘peace and unity to all the neighboring states and their peoples, and invites them to cooperate with the independent Jewish nation for the common good of all.’’ Even with new and complex challenges in the Middle East, Israel remains committed to peaceful resolutions regarding those challenges facing the region, including a willingness to make difficult compromises for peace, as well as the creation of economic opportunities for regional development. As a result of the historic 1977 visit to Israel by Anwar Sadat, the President of Egypt, and the intensive negotiations held by the two countries with the close assistance of the United States, Egypt and Israel signed a peace treaty on March 26, 1979. This was the ﬁrst peace agreement that was signed between Israel and one of its neighboring countries. The Madrid Conference in 1991 marked the start of a broader peace process in the Middle East. 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 between the two countries and to coordinate regional economic development initiatives. The peace treaty with Jordan and subsequent progress in Israel’s negotiations with the Palestinians enabled Israel to initiate economic and political relations with other foreign countries bordering the region, as well as in North Africa and the Gulf area. The signing of the Declaration of Principles in 1993 (the Oslo Accords) between Israel and the PLO and the commitments undertaken for mutual recognition served as a turning point and led to the introduction of a number of interim agreements that set the grounds for the establishment of the Palestinian Authority. As part

D-18 of the 1994 Gaza Strip and Jericho Agreement signed in Cairo, and the 1995 Interim Agreement on the West Bank and Gaza signed in Washington, DC, several rounds of negotiations were held between Israel and the PLO in 2000, including a summit at Camp David in July 2000, aimed at achieving a permanent agreement and an end to the conflict. In September 2000, relations between Israel and the Palestinian Authority deteriorated due to violence perpetrated by Palestinian terror organizations against Israeli targets and citizens, in violation of the bilateral agreements signed in 1993. The ascent of the Hamas terrorist organization and its violent takeover of Gaza in June 2007 perpetuated this trend. In 2004 and 2005, despite unsuccessful dialogue and increased violence, the Government unilaterally implemented the Gaza disengagement plan, fully withdrawing Israeli civilian and military presence from Gaza. The disengagement plan effectively ended Israel’s 38 years of military presence and authority over the Gaza territory. Following Israel’s disengagement from Gaza, Hamas assumed administrative control over Gaza. Palestinian terrorist organizations began launching locally-manufactured rockets and mortar rounds into Israel in increasing numbers. In 2007 and 2008, over 2,300 and 3,000 rockets, respectively, were launched on civilian targets in Southern Israel. As the range of these missiles continued to increase, by the end of 2008 over one million Israelis found themselves within range of terrorist rocket fire and mortar attacks. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, as well as the continued smuggling of weapons and ammunition to Hamas and other terrorist organizations through tunnels under the Egypt-Gaza border, in 2008 Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire and to protect Israelis from attacks. The operation concluded in January 2009, contributing to relative calm from 2009 and into 2011. From 2011 and into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel commenced Operation Pillar of Defense, a military campaign against targets in Gaza that lasted eight days. In response to Hamas firing rockets from Gaza into Israel in the summer of 2014, in July 2014, Israel took defensive military action and commenced Operation Protective Edge with the goal of suppressing the rocket fire, some of which reached Israel cities and towns almost 100 kilometers away from Gaza. The operation ended in August 2014. In 2014, for the first time Israel saw terrorists using tunnels to reach civilian villages, as well as attempts by Hamas to utilize commandos operating from the sea. While Hamas still exercises effective control over Gaza, its operational capabilities have been considerably weakened and international efforts to prevent cross-border smuggling of weaponry have intensified. On May 23, 2000, Israeli military forces unilaterally withdrew from South Lebanon. This full withdrawal was confirmed by the United Nations. During July and August 2006, Israel became embroiled in a war with Hezbollah, a terror organization supported by Iran and based in Lebanon. The conflict, which was termed the Second Lebanon War, began when militants from Hezbollah fired rockets at Northern Israeli border towns and conducted a deadly ambush on Israeli soldiers. Israel responded with airstrikes and artillery fire on Hezbollah targets in Lebanon. Hezbollah then launched more rockets into Northern Israel and engaged Israel Defense Forces in guerrilla warfare. In accordance with UN Security Council Resolution 1701, a United Nations-brokered ceasefire went into effect on August 14, 2006, calling on the Lebanese government to take full control of Lebanon and prohibiting the presence of paramilitary forces, including Hezbollah, south of the Litani River. Since that conflict, Israel’s border with Lebanon has remained mostly quiet and peaceful. Israel closely monitors security on its northern and southern borders because of the presence of radical forces, including those committed to ISIS. Additionally, in 2015, Israel has observed a greater presence of Hezbollah forces in Syria in support of Syrian President Assad. 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 that have averaged approximately $3 billion per year since 1987, including by way of loan guarantees. Israel and the United States agreed to reduce U.S. foreign assistance to Israel by way of a phase-out of U.S. Economic Support Fund assistance to Israel through incremental annual reductions in the level of such annual assistance over a ten-year period that concluded in 2009. Over that period, the United States increased annually the level of its Foreign Military Financing assistance to Israel in amounts equal to half the amount of the annual

D-19 reduction in Economic Support Fund assistance. Israel and the United States share a commitment to seeking peace and economic development in the Middle East and developing a security framework that makes such progress possible. Cooperation on key defense projects such as the Iron Dome and Arrow missile defense programs has been a great success, highlighting the depth of cooperation between the two countries. Since January 2011 there has been dramatic change in numerous Middle East and North African countries including Bahrain, Libya, Egypt, Iran, Tunisia, Yemen and Syria. As Israel is situated in the center of this region, it closely monitors these events, aiming to protect its economic, political and security interests. While Israel is hopeful that these developments will lead to increased freedom and opportunity for the citizens of its neighboring countries, it remains concerned regarding the stability of the region. Fundamentalist regimes such as Iran’s present a deep concern for the international community and especially for states in the region. For the past several years, the prospect of a nuclear Iran has been a central geopolitical concern both domestically and internationally. Iran continues to support terrorist groups throughout the Middle East and Africa, perpetuating the risk of destabilization and radicalization of many countries in the region. Prime Minister Benjamin Netanyahu has publicly stated that Israel aims to achieve a peaceful resolution to the situation; however, all options for preventing Iran from obtaining nuclear weapons remain on the table. Israel currently maintains diplomatic relations with 159 countries, seeking to develop relations on a full range of issues including trade, cultural ties and building shared values for democracy and mutual respect. During the 1990s, Israel established or re-established commercial, trade and diplomatic relations with all of the republics of the former Soviet Union, Eastern Europe, and other countries that had previously aligned politically with the former Soviet Union. Israel has shown signiﬁcant growth of commercial, trade and diplomatic relations with most key Asian countries, including Japan, South Korea, China and India. In 2014, the Government convened high level integrated committees led by the Prime Minister’s office to support advancing relations with China and India and has increased its diplomatic presence in both these countries.

Membership in International Organizations and International Economic 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 (‘‘IMF’’), the European Bank for Reconstruction and Development and the Inter-American Development Bank. Since September 2010, Israel has been a full member of the OECD. Israel has been a signatory to the General Agreement on Tariffs and Trade of 1947 since 1962, and it is a founding member of the World Trade Organization. In addition, Israel actively participates in multilateral initiatives conducted under the framework of the World Trade Organization, such as the Government Procurement Agreement and the Information Technology Agreement. Israel has an extensive network of free trade agreements with most of its trading partners; among these are the United States, EU, EFTA, Turkey, Canada, Mexico and the MERCOSUR trade bloc (Brazil, Argentina, Uruguay, Paraguay and Venezuela), and Israel is awaiting ratiﬁcation of a free trade agreement signed with Colombia in September 2013. Approximately 60% of Israel’s foreign trade is conducted under its bilateral free trade agreements which provide duty-free access and other preferential treatment schemes. Israel is currently conducting free trade agreement negotiations with India and Ukraine. In 1975, Israel signed a free trade agreement with the European Economic Community that provided for the gradual reduction and ultimate elimination of tariffs on manufactured goods and certain agricultural products. In July 1995, Israel signed an Association Agreement with the EU, which came into effect in June 2000. The 1995 agreement, which replaced the 1975 agreement, addresses issues relating to competition, government procurement, and cooperation in many areas, including research and development (‘‘R&D’’). It also expands the liberalization in agricultural products. Two additional agreements providing for further liberalization in agricultural trade were implemented, the most recent of which became effective as of January 1, 2010. In 1985, Israel and the United States entered into a free trade agreement that resulted in the elimination of tariffs on all industrial products, taking effect at the beginning of 1995. The free trade agreement with the United States also resulted in the elimination of certain non-tariff barriers to trade between the two countries. In 2010, Israel and the United States concluded a work plan with the aim of upgrading their trade relations in

D-20 areas such as agriculture and services. The two sides are conducting a standardization dialogue and have agreed to further enhance this cooperation. In addition to these agreements, Israel has entered recently into three mutual recognition agreements in the area of standardization. Two of them, with the United States and Canada, cover telecommunication equipment; the third, with the EU, covers goods manufacturing processes in the area of pharmaceuticals. Israel, with the assistance of the United States, developed regional trade agreements that stimulate economic cooperation between Israel and its neighbors in the Middle East. Israel signed a Qualified Industrial Zones (‘‘QIZ’’) agreement with Jordan in 1997 and a separate QIZ agreement with Egypt in December 2004. These QIZ agreements allow Egypt and Jordan, respectively, to export products to the United States, free of export duties if the products contain inputs from Israel (8% input from Israel in the Israeli-Jordanian QIZ agreement, 10.5% input from Israel in the Israeli-Egyptian QIZ agreement). This trade initiative aims to support prosperity and stability in the Middle East by encouraging regional economic integration. At the end of 2004, Israel and the EU approved an Action Plan (within the framework of the European Neighborhood Policy) to address several issues including, but not limited to, services and dispute settlement for trade matters and standardization. Since 1996, Israel has participated in the EU Framework Programs for Research and Development, which allows Israeli firms and academic institutions to participate in EU-based R&D projects. Israel is the only country outside of Europe to enjoy this special status, a status granted to Israel largely in recognition of its key role in technology in the global arena. Similar to previous programs, Israel was fully associated with the Seventh Framework Program for Science and Technology from its launch at the end of 2006 until its end in 2013. The program, which was one of the biggest in the world involving academia, business and industry, provided Israel with access to €50 billion in R&D funding from the EU. Overall, 8,984 Israeli entities were included in 6,109 submitted program proposals, resulting in 2,115 Israeli entities participating in 1,200 retained projects, with a total cost of €10.1 billion. The total grant value for Israeli entities amounted to €875.6 million. On June 8, 2014, Israel signed an agreement to join Horizon 2020, the eighth European Framework Program for R&D. Retroactively joining the program officially as of January 1, 2014, Israel has access to the €70 billion in total program funding. Horizon 2020 provides funding in the following areas: health, food, agriculture, biotechnology, bioeconomy, information and communication technologies, big data, nano-sciences and nanotechnologies, energy, environment and climate change, transport and aeronautics, socio-economic sciences and the humanities, space and security. Horizon 2020 allows mobility of research, promotes pioneering research and enables Israeli entities to cooperate in technological development with European industries, research institutions and universities, and showcase Israeli technological abilities. Through Horizon 2020, small and medium-sized enterprises that are EU-based or established in a country associated with Horizon 2020 can obtain EU funding and support for innovative projects that will help the enterprises to grow and expand their activities into countries in Europe and elsewhere. For 2014, Israel’s first year of participation, 1,374 Israeli entities were included in 1,003 submitted proposals resulting in 173 retained projects, with a total cost of €520 million. Israel is an active participant in the EUREKA Network, Europe’s leading platform for R&D entrepreneurs and industries. EUREKA is an inter-governmental public network of over 40 member countries and three associated countries. EUREKA supports R&D-based businesses and institutions through funding and partner-matching services. On a yearly basis, EUREKA supports more than 300 collaborative projects in a variety of industries, totaling over €1.2 billion. Projects can be launched in virtually all industry fields and technological areas — information and communications technology, manufacturing, water technologies, communications, biotechnology and energy. In July 2010, Israel took the reins of the EUREKA Network as its year-long chair. Leveraging Israeli best practices in technological innovation, the Israeli EUREKA chairmanship focused on promoting a culture of innovation and developing new sources of funding for start-up companies, small and medium sized enterprises and research institutions in Israel, throughout Europe and the world. Israel is among EUREKA’s most active participants; of EUREKA’s member and associated countries, Israeli companies have partnered in more than 10% of all EUREKA’s projects.

D-21 THE ECONOMY

Overview Israel’s economy is industrialized and diversified. GDP per capita in 2014 was $37,092 and between 2010 and 2014, real GDP growth averaged 3.8% annually. The global financial crisis had far reaching effects that impacted, both directly and indirectly, the economies of many countries around the world. Israel, however, was affected to a lesser extent: GDP growth in 2009 fell to 1.9% but recovered to 5.8% in 2010. Most of the deficiencies that led to the development of the global financial crisis were not prevalent in Israel. Israel’s economic growth throughout and in spite of the global financial crisis can be attributed to the demand for high-tech products, the adoption of tighter fiscal policy, a relatively calm security situation, and a less restrictive monetary policy. Since 2010, the national accounts were characterized, in general, by overall growth in all components of the GDP, including private consumption, investments and external trade. Israel had a moderate 2.8% rate of growth in 2014, lower than the growth rate of 3.2% in 2013. The plateau in growth during this period can be attributed to exogenous factors including the contraction of economies around the world, which caused a slowdown in exports, the appreciation of the Israeli NIS during the first half of 2014 and Operation Protective Edge which took place in July and August 2014 and weighed on the economy. The overall strength of the domestic economy in 2014 was reflected in a solid labor market, as the unemployment rate declined to the lowest level in the last decade at 5.9% throughout the year. The composition of Israel’s trade of goods reflects the industrialized nature of its economy. In 2014, exports of goods consisted primarily of manufactured goods, and particularly high-tech products. Exports traditionally have been a significant driver of Israel’s economic growth, but the global financial crisis, coupled with the lagged effect of an appreciation of the real exchange rate in 2008, had a negative impact on Israeli exports in 2009. Exports of goods and services declined by 11.9% in 2009 but increased significantly, by 15.1%, in 2010. Exports continued to increase in the first half of 2011, but declined in the latter half of the year (6.5% in total). In 2012 and 2013, exports of goods and services declined, with an annual real growth rate of 0.9% for 2012 and 1.5% in 2013. In 2014 the annual real growth rate of exports of goods and services was 1.3%. Historically, the Government has had substantial involvement in nearly all sectors of the Israeli economy. In the last two decades, however, a central goal of the Government’s economic policy has been to reduce the Government’s role in the economy and to promote private sector growth. In order to advance this goal, the Government has pursued a policy of privatizing state-owned enterprises, including banks, the electricity sector and the ports. The Government has also pursued stability-oriented monetary and fiscal policies. Fiscal discipline has kept Israel’s debt-to-GDP ratio on a declining trend over the last decade, with only a slight increase in 2009 as a result of the global financial crisis. The Government is committed to price stability with an inflation target between 1% and 3%. In the last ten years, prices have risen by an average of 2.2% annually. The average rate of inflation stood at 1.7% in 2012, 1.5% in 2013 and 0.5% in 2014.

Gross Domestic Product GDP is defined as gross national product (‘‘GNP’’) minus income of Israeli residents from investments abroad, earnings of Israeli residents who work abroad, and other income from work and leases abroad, less corresponding payments made abroad (after deduction of payments to foreign companies with respect to production facilities located in Israel). Between October 2000 and the beginning of 2003, the GDP growth rate declined mainly due to the global economic slowdown following the bursting of the dot-com bubble, the September 11, 2001 terrorist attacks and the adverse effects of terrorism. Recovery began in 2003, and the average annual GDP growth between 2004 and 2008 was 5.0%. During the second half of 2008, the Israeli economy became vulnerable to the effects of the global financial crisis. Israel’s GDP growth fell from 5.1% in the first quarter of 2008 to -1.8% in the fourth quarter of 2008. In the first quarter of 2009, GDP continued to contract, with growth being 0.3%. By the second quarter of 2009, however, the Israeli economy began to recover, as GDP expanded at a rate of 3.5%. During the third and the fourth quarters of 2009, GDP growth accelerated at the rates of 4.1% and 5.9%, respectively.

D-22 Growth in these periods reflected an expansion in private consumption and exports of goods and services. Overall, annual GDP growth in 2009 was 1.9%. While this was significantly lower than growth rates of previous years, it was favorable compared to the performance of other developed economies. Real GDP growth recovered in 2010, accelerating at an annual rate of 5.8%. In 2011, GDP continued to grow at lower rate of 4.2%, which was significantly higher than GDP growth in most developed countries during that year. The slowdown continued into 2012, as GDP grew by 3.0% throughout the year. In the first three quarters of 2012, GDP growth stood at 2.2%, 1.7% and 3.8%, respectively, and the growth rate declined, with respect to the third quarter, to 3.9% in the fourth quarter, mainly due to the effects of Operation Pillar of Defense which took place in November 2012. In 2013, economic growth was slightly higher than in 2012, with a GDP annual growth rate of 3.2%. In the first quarter of 2013, GDP grew by 1.7%, with the slowdown in growth partially due to the contraction in expenditures on public consumption, which decreased to 3.2%. Another factor during the first quarter was the delay in the approval of the 2013 − 2014 biannual budget. In the second quarter there was significant acceleration in the GDP growth rate, which rose to 5.6% mainly due to the commencing of natural gas extraction from the Tamar field. The third quarter of 2013 posted a decline in the rate of exports, which stemmed largely from softening export sales in the pharmaceuticals sector, with the volume of exports in this sector falling significantly lower than in 2012. Due to the decline in the exports of goods and services, the GDP growth rate declined to 2.5% in the third quarter. However, a recovery in the volume of exports during the fourth quarter of 2013 contributed to the GDP growth rate, which reached 2.8% in the final quarter. In 2014, the annual economic growth was 3.0%. In the first quarter of 2014, GDP grew by 2.8%. In the second quarter of 2014 the GDP grew by 1.6%, mainly due to a decline in the exports of goods and services. In the third quarter of 2014 GDP grew by 0.8% as Operation Protective Edge, which took place in July and August of 2014, weighed on the economy. In the fourth quarter of 2014, the Israeli economy recovered the previous quarter slowdown with a growth rate of 6.5%, mainly due to acceleration in the exports of goods and services and fixed capital formation. GDP in 2014 amounted to NIS 1.088 trillion and business sector product amounted to NIS 810.8 billion (in each case, at current prices). Business sector product is calculated as GDP less certain general government services (government operations executed through private companies are included in the business sector product), services of private non-profit institutions housing services (representing the imputed value of the use of owner-occupied residential property). This methodology is applied by the Central Bureau of Statistics according to international and national accounts practices. In 2014, government output and product of services of private non-profit institutions amounted to NIS 154.5 billion, and housing services amounted to NIS 123.2 billion. Housing services grew by 3.1% in 2014, below the average of 3.3% over the previous three years (2011 − 2013). Government output and the product of private non-profit institutions increased by 2.8% in 2014, below the average of 3.0% over the previous three years. The leading sector in 2014 was finance and business services, which comprised 30.7% of business sector product, and which grew by 6.4% during 2014. Manufacturing was the second largest business sector in 2014, comprising 19.8% of business sector product, growing by a mere 0.9% during 2014. Wholesale and retail trade was third, comprising 12.2% of business sector product and increasing by 1.9% during 2014. Other sectors, including agriculture, electricity, construction, transportation, information and communication, arts, entertainment, recreation and other service activities, together comprised the remaining 37.3% of the business sector product in 2014. Gross National Income (‘‘GNI’’) is defined as gross domestic product less subsidies on products, taxes on products and net income paid abroad. GNI increased by 4.2% in 2014 at nominal terms.

D-23 Table No. 4

Main Economic Indicators (In Billions of NIS Unless Noted Otherwise)

2010 2011 2012 2013 2014 Growth (percent change) Real GDP growth ...... 5.8% 4.2% 3.0% 3.2% 2.8% GDP growth per capita ...... 3.8% 2.3% 1.1% 1.3% 0.8% Inﬂation (change in CPI − annual average) . . . 2.7% 3.5% 1.7% 1.5% 0.5% Industrial production ...... 9.5% 2.1% 4.0% 0.5% 1.2% Constant 2010 prices GDP...... 870.8 907.3 934.5 964.9 991.6 Business sector output ...... 654.2 683.7 703.3 727.3 747.0 Current Prices GDP...... 870.8 924.6 991.8 1,049.1 1,088.5 Business sector product ...... 654.1 691.6 742.0 785.1 810.8 Permanent average population (thousands of people) ...... 7,620.8 7,763.1 7,905.7 8,056.0 8,212.0

Source: Central Bureau of Statistics.

Table No. 5

Resources and Use of Resources (In Billions of NIS at Constant 2010 Prices)

2010 2011 2012 2013 2014 Resources GDP...... 870.8 907.3 934.5 964.9 991.6 Imports of goods and services ...... 287.2 318.0 325.8 325.4 333.3 Total ...... 1,158.0 1,225.3 1,260.3 1,290.3 1,324.8 Use of resources Private consumption ...... 501.9 516.6 532.5 550.2 572.8 Public consumption ...... 195.5 200.8 208.0 215.3 224.4 Gross domestic capital formation ..... 155.4 182.8 191.4 191.3 190.5 Exports of goods and services ...... 305.2 325.1 328.2 333.2 336.7 Total ...... 1,158.0 1,225.3 1,260.1 1,290.0 1,325.4

Source: Central Bureau of Statistics.

D-24 Table No. 6

Net Domestic Product Percentage Change by Industry

2010 2011 2012 2013 2014 Agriculture, forestry and ﬁshing...... -9.8% 11.3% 11.6% -8.5% 0.7% Manufacturing, mining and quarrying, excluding diamonds ...... 12.0% 0.0% 2.9% 3.2% 0.9% Electricity and water ...... 10.3% -14.2% -45.3% -65.5% -4.4% Construction (building and civil engineering projects) . . 11.2% 11.6% 6.8% 1.3% -5.0% Commerce, restaurants, hotels and Repair of motor vehicles ...... 2.8% 2.9% 2.8% 3.1% 3.1% Transport, storage and communications ...... 9.8% 4.9% 1.9% -7.2% 2.2% Finance and insurance services, activities in real estate, professional and scientiﬁc services ...... 8.2% 14.6% 5.5% 4.0% 6.4% Housing services ...... 2.8% 2.9% 3.8% 3.1% 3.1% Public services ...... 2.2% 3.5% 3.1% 2.4% 2.8% Culture and other services ...... -3.8% 0.2% -4.9% -1.3% -2.0% Net Domestic Product ...... 5.7% 4.2% 3.0% 3.3% 2.8%

Source: Bank of Israel.

Savings and Investments Gross domestic capital formation, the sum of investments in ﬁxed assets and the change in inventories, decreased by 1.0% in 2014, following a decrease of 0.1% in 2013 and an increase of 4.7% in 2012. In 2014, gross ﬁxed capital formation decreased by 2.5%, following an increase of 1.1% in 2013 and 3.2% in 2012. Israel’s savings rate is close to the OECD average. In 2014, gross national saving as a percentage of GDP was 22.2%, an increase compared to the 2012 and 2013 levels of 21.6% and 21.9%, respectively. In 2014, the ratio of private saving as a percentage of disposable private income was 15.9%, lower as compared to 2013 and 2012, as the ratio stood at 16.4% and 16.5% respectively.

Business Sector Output Business sector output in Israel equals GDP less general government services, services of private non-proﬁt institutions and housing services (representing the imputed value of the use of owner-occupied residential property). Since 2003, business sector output has expanded at consistently high rates, averaging 5.4% annual growth between 2004 and 2008. The global economic crisis impacted business sector output starting in the second half of 2008, with total output growing in 2009 by 1.5%. In 2010 and 2011, growth recovered to pre-crisis levels, as business sector output grew by 6.8% and 4.5%, respectively. In 2013, the business sector grew at a moderate rate of 3.4%, due to the slowdown in the world economy. In 2014, the business sector product’s growth did not change signiﬁcantly from 2013, as business sector output grew by 2.7%. In the third quarter of 2014, business sector output was unchanged as Operation Protective Edge which took place in July and August weighed on the economy. In the fourth quarter of 2014, the Israeli economy recovered from the previous quarter slowdown and represented a growth rate of 7.5%.

D-25 Table No. 7

Composition and Growth of Business Sector Output (Annual Growth: Real Terms)

Percent of Total Business 2010 2011 2012 2013 2014 Sector, 2014 Trade and services ...... 5.5% 8.3% 3.0% 2.4% 4.0% 48.6% Manufacturing ...... 11.9% 0.0% 3.0% 3.1% 1.0% 21.7% Transport and communication ...... 12.0% 0.2% 9.0% 1.6% 11.7% 17.3% Construction ...... 11.2% 11.6% 6.8% 1.3% -5.0% 7.4% Agriculture ...... -9.8% 11.3% 11.6% -8.5% 0.7% 1.9% Water and electricity ...... 10.3% -14.2% -45.3% 65.5% -4.4% 3.0% Total Business Sector ...... 6.8% 4.5% 2.9% 3.4% 2.7% 100.0%

Source: Bank of Israel. Trade and Services. The trade and services sector consists of retail and wholesale sales, professional services, banking, hotels and other services. This branch of the business sector has expanded rapidly in the last decade, growing in 2006 and 2007 by 6.9% for both years. Following slower growth rates in 2008 and 2009, the trade and services sector expanded by 5.5% in 2010, 8.3% in 2011, 3.0% in 2012, 2.4% in 2013 and 4.0% in 2014.

Table No. 8

Manufacturing Index by Category (Annual Real Percentage Change)

2010 2011 2012 2013 2014 Food, beverages and tobacco ...... 2.7% 3.5% 0.5% 0.2% -0.7% Mining ...... 85.6% -2.9% -8.4% 32.1% 10.5% Textiles and clothing ...... 0.8% -3.8% -4.4% -4.8% 2.5% Leather and leather products ...... 1.2% -3.0% -4.3% -4.9% 3.2% Wood and wood products ...... 6.4% 4.5% -0.3% -3.2% 4.3% Paper and paper products ...... 4.8% -0.1% -8.4% -4.4% -1.0% Printing and reproduction ...... -0.7% -4.2% -2.2% 3.0% -1.2% Chemical products and reﬁned petroleum ...... 19.2% -4.0% 8.3% 0.9% -1.3% Rubber and plastic products ...... 15.8% 6.5% -0.6% -0.7% 1.0% Non-metallic mineral products ...... 2.3% 3.9% 7.4% 4.4% 6.5% Basic metal ...... 13.0% 6.0% -0.1% -1.4% -1.3% Metal products ...... 17.7% 11.0% 2.6% -2.6% 3.1% Machinery and equipment ...... 0.2% 4.4% 10.5% -1.8% 2.7% Electric motors ...... 6.3% 0.7% -0.3% 0.7% -2.6% Electronic equipment and components ...... 4.9% 2.2% 10.8% -3.0% 0.7% Communication equipment ...... -3.7% 7.0% 3.9% -10.3% 3.5% Transport equipment ...... -5.2% 6.1% -2.0% 5.3% 3.7% Jewelry and goldsmiths ...... -0.9% -5.1% -4.8% * * Other ...... 4.5% -5.4% 2.8% 3.5% 0.5% Total (excluding diamonds) ...... 9.5% 2.1% 4.0% 0.5% 1.4%

Source: Central Bureau of Statistics. * No available data.

D-26 Table No. 9

Industrial Production Index (Base Year: 2011 = 100)

2010 2011 2012 2013 2014 Index Level(1) ...... 97.99 100.00 104.04 104.57 105.80 Annual Real Percentage Change ...... 9.5% 2.0% 4.0% 0.5% 1.2%

(1) Excludes diamonds. Source: Central Bureau of Statistics. Transportation. Israel has a network of over 18,000 kilometers of roads, including highways that link the major cities — Tel-Aviv with Haifa, Jerusalem and Be’er-Sheva. Government-owned railways run from Nahariya on the northern coastline to Dimona in the south (via Be’er-Sheva), linking some of Israel’s major cities with the southern part of the State. Buses are the major form of public transportation in Israel. Bus routes exist in all cities in Israel and connect Israel’s major cities, smaller towns and rural areas. Since 1993, the Government has identified infrastructure improvement as one of its top priorities. In September 2003, the Government founded Netivei Israel — National Transport Infrastructure Company Ltd., a Government Company (as defined in ‘‘Role of the State in the Economy,’’ below), which is responsible for the inter-urban road system, traffic management and control, planning, development, and maintenance of the roads and their safety. The budget for Netivei Israel — National Transport Infrastructure Company projects in 2014 was approximately NIS 5.3 billion. In prior years, the Government approved a number of major road construction projects, including the Cross-Israel Highway, Israel’s North-South toll highway which first opened to traffic in 2004 and is currently 140 kilometers in length. Other projects include the Carmel Tunnel (completed in 2010), an express toll lane at the east entrance to Tel-Aviv (completed in January 2011), and Highway 431 which serves south-eastern suburban Tel-Aviv (completed in 2009) and, unlike existing highways, operates as a private financial initiative pursuant to a public-private partnership. The Government considers the development of an advanced mass transit infrastructure to be a top priority. In 2001, the Government issued a tender to establish a light rail build-operate-transfer project in Jerusalem, and the first Jerusalem line began to operate in 2011. In 2010, the Government decided that the State-owned Metropolitan Mass Transit System Company would set up a light rail in metropolitan Tel-Aviv, and the first Tel-Aviv light rail line is expected to commence operations in 2021. In 2007, the Government commenced work in the Haifa metropolitan area on the first bus rapid transit line, known as the ‘‘Metronit,’’ which in 2013 began connecting Haifa and the Krayot area using an exclusive lane. In 2008, the Government decided to invest NIS 27 billion over a period of five years in a rail development program. This investment followed some significant milestones in the rail development program, including (i) the revival of the old line between Jerusalem and Tel-Aviv (via Beit-Shemesh) which was opened to the public in April 2005; (ii) the opening of a line between Tel-Aviv and Ben-Gurion International Airport in March 2005 and its extension through Modi’in in 2008; and (iii) the opening of a line between Tel-Aviv — Rishon Le-Zion in 2011. As part of the development program, several new and improved lines, such as the Kfar Saba — Rananna — Tel-Aviv line and the Ashkelon — Be’er-Sheva line, are scheduled to commence their operations in 2015 and 2016, respectively, and a direct and upgraded line between Jerusalem and Tel-Aviv is scheduled to commence operations in 2018. In February 2010, the Government decided to embark on an ambitious program to develop the transportation infrastructure in the northern and southern parts of the State. The program, titled Netivei Israel (which is not directly related to the Government Company of the same name), includes the construction of a series of railways and highways and the electrification of Israel’s railway network. It is expected to play a crucial role in accelerating economic activity and shortening travel time between the State’s central and peripheral areas. The program is scheduled to be completed by 2020 at an estimated cost of NIS 27.5 billion.

D-27 Israel has three major seaports: Haifa and Ashdod, on the Mediterranean coast, and Eilat, on the Red Sea. During 2014, 48 million tons of cargo were handled in the Israeli ports, including 2.4 million twenty-foot equivalent units of containers. In July 2004, the Knesset decided to implement a structural reform of the seaports to enhance competition and improve efficiency, thereby strengthening Israel’s foreign trade. As mandated by legislation, the Israel Ports Authority ceased its operations on February 16, 2005 and was replaced by four government-owned companies. The Israel Ports Development and Assets Company Ltd. is one of the four and serves as landlord of the ports’ real estate in Haifa, Ashdod and Eilat and is responsible for developing and leasing those properties. The Ashdod Port Company Ltd., Haifa Port Company Ltd. and Eilat Port Company Ltd. are the three port-operating companies that received a mandate to operate port facilities leased to them by the Government. In the end of 2012, the Government sold its shares of the Eilat Port Company to Papo Maritime after concluding a bidding process among potential strategic investors. Major seaport projects included the development of the Hayovel terminal in Ashdod, which commenced its operations in May 2005, and the Hacarmel terminal in Haifa, which commenced its operations in 2010. The Israel Ports Development and Assets Company Ltd. invested approximately NIS 3.9 billion in these two projects. In July 2013, the Government announced its plans to build two new privately-operated terminals in Ashdod and Haifa. Following tenders valued at approximately NIS 8 billion for construction and operation of the new terminals, construction has started. The Southport and Bayport terminals will be privately operated for a period of 25 years by Terminal Investment Ltd. and Shanghai International Port Group, respectively, after which the terminals will be returned to the Israel Ports Development and Assets Company. Both terminals are slated to begin operation in 2021. Israel has three international airports. The Airports Authority is responsible for maintaining, developing and operating the airports and their security in accordance with the directives of the Minister of Transportation. Israel’s main airport is Ben Gurion Airport in Lod which is located approximately 40 kilometers from Jerusalem and 20 kilometers from Tel-Aviv. Ben Gurion Airport served approximately 14.1 million passengers in 2014, compared to 13.5 million passengers in 2013, with flights to and from most major cities throughout the world. In 2011, the Government approved the building of the Ilan and Assaf Ramon Airport in Timna, with construction having commenced in 2013. The new airport will serve as the international airport of southern Israel and will replace the Eilat Airport and the civilian activity in the Ovda Airport. Communications. The telecommunications market (not including television) presently constitutes approximately 3% (NIS 24 billion) of Israel’s gross national income. Israel’s communications market is characterized by fundamental technological and regulatory changes, large investments in advanced infrastructure by operators, rapid development and significant levels of competition. The market currently comprises five infrastructure-based domestic cellular operators, two of which started operations in 2012, and a number of resale based operators. In addition, there are seven international telephony service providers and two fixed domestic communications operators (fixed broadband and telephony) with universal service obligations. The telecommunications market is fully privatized, and the Government does not hold a stake in any communications operators. Israel has five cellular telephone network operators which provide digital technology and modern third generation services. Three of these operators have long provided countrywide coverage, and the two other operators are rolling out networks while offering services based on ‘‘national roaming’’ in the interim period. As of December 31, 2014, there were approximately 9.5 million cellular subscriptions, i.e., more than 1.2 cellular phones per capita. Total revenues for the cellular market in 2014 were in excess of NIS 10.4 billion. Competition in the mobile sector is fierce, with customers enjoying low rates, while levels of usage (including the number of minutes used, mobile broadband use, etc.) are considered high by international standards. 2014 was marked by continued competition, along with the completion of a tender for next-generation (‘‘4G’’) network frequencies and a network sharing policy, allowing for future investment along with efficiency gains. Trial rollouts of new networks have begun, with wide scale rollouts expected in 2015. Three major internet service providers and about forty smaller ones serve more than 2 million users in Israel, which include more than 85% of households and businesses, making broadband internet available throughout the country. Fixed broadband service in Israel is used in 99% of households that have internet service, and speeds of up to 100 megabits per second are widely available. The average speed purchased by household users is above

D-28 24 Mbps, placing Israel at the forefront of high speed internet access usage in the Western world. A wholesale market in fixed communications, modeled on the practices of EU member states, is currently in the first stages of implementation and is expected to increase competition in the market for provision of fixed high-speed internet access, leading to lower retail rates and increased quality of service. In addition, a joint venture of the Israel Electric Company (‘‘IEC’’) and a strategic investor has begun small-scale rollouts of a fiber network to consumer premises, and the pace of these rollouts is expected to increase in the coming years. The new fiber network will allow for significantly higher-speed broadband services. While the Israel Telecommunications Corp. Ltd. (‘‘Bezeq’’) remains the main fixed telephony service operator, the cable companies and other alternative operators have acquired more than 950,000 voice subscribers, mainly in the households segment, and now comprise more than 35% of this market. In September 2004, the domestic fixed telephone market was opened to competition after the Ministry of Communications promulgated regulations allowing new entrants to provide services without the attendant obligations to provide services over large areas. Under these regulations, five new operators were licensed to provide domestic fixed telephone services. The cable companies and Bezeq are obligated to provide universal deployment of broadband internet access service throughout the national territory. The Israeli Public Broadcasting Authority had an official monopoly on television broadcasts through 1993 and is currently being reorganized. As of December 31, 2014, there were six public and commercial television channels in Israel, as well as one nationwide cable television operator and a single direct broadcast satellite operator. Construction and Housing Prices. Following years of low activity levels, construction activity began to accelerate in 2008 due to high demand in the housing sector. Nevertheless, in 2014, investments in construction decreased at a rate of 5.2%, following growth rates of 7.5% and 3.7% in 2012 and 2013, respectively. Residential development decreased by 7.9% in 2014, following an increase of 9.4% in 2013, and a decrease of 7.7% in 2012. Agriculture. In 2014, agricultural exports totaled NIS 5.1 billion, representing 2.0% of total merchandise exports. The agricultural value of production in 2014 was NIS 29.9 billion, of which livestock accounted for 39% and crops accounted for 61%. In 2014, the agricultural sector’s share in employment amounted to 1.1% of the work force, as compared to 1.4% in 2013. Investments in agriculture amounted to 1.6% of fixed investments in 2014. The Government has implemented structural reforms in order to increase agricultural competition and productivity. In 1994, the Government launched a reform to eliminate production quotas for poultry, cattle and crops. In 1998, a reform in the dairy sector was launched, aimed at enhancing competition and efficiency while reducing pollution levels emanating from dairy farms. The effects of this reform can be seen in the diminishing number of dairy farms and the rising number of cows per farm. The reforms in the poultry, cattle, crops and dairy sectors facilitated a sizeable shift from manufacturing, marketing and financing of agricultural products through large co-operatives, which were heavily subsidized by the Government, to a system in which decisions regarding such matters are made by individual production units that receive fewer subsidies from the Government. Water. The scarcity of natural fresh water resources is a problem not only in Israel but also in the entire Middle East. Since 2000, the Government has significantly increased investments in the water and electricity sectors. Israel is conducting ongoing discussions with Jordan and the Palestinian Authority regarding the allocation of water resources. The primary natural sources of fresh water in Israel consist of the Sea of Galilee, the Eastern mountain region aquifer (partially situated in the West Bank) and the coastline region aquifer. To increase the availability and diversity of its water sources, Israel is developing large scale seawater desalination plants along the Mediterranean. Desalinated water produced in such plants is distributed through the national water system to all parts of Israel, including to the arid areas in the South. Approximately 75% of Israel’s fresh water is distributed through Mekorot Water Co. Ltd., a Government Company (see ‘‘Role of the State in the Economy,’’ below). The remaining 25% of Israel’s fresh water is supplied by private water associations established by agricultural users and certain municipalities. During 2014, Mekorot designated NIS 814 million to capital investments relating to water distribution, compared to NIS 994 million in 2013, NIS 1.15 billion in 2012, NIS 1.03 billion in 2011, and NIS 611 million in 2010.

D-29 Approximately 58% of Israel’s total water consumption and 36% of Israel’s fresh water consumption is used by the agricultural sector. Because most of Israel’s existing fresh water resources are already being utilized, Israel is constantly investing resources to develop additional water sources, mainly from treated wastewater and desalinated seawater. Desalination plants are being built by both local and foreign private sector companies through build-operate-transfer projects. When all of the plants are operational (expected in 2015), the Government expects to purchase approximately 670 million cubic meters of desalinated seawater per year at an estimated annual cost of NIS 2 billion. In accordance with recent government decisions, the costs of purchasing desalinated seawater will be covered by water tariffs. In 2014, the Government purchased approximately 350 million cubic meters of desalinated seawater from desalination plants in Hadera and Sorek and the expanded existing plants in Ashkelon and Palmachim. In addition, further development of agriculture involves intensifying the yield from irrigated land and the reuse of treated wastewater. Israel led the world with a water recycling rate of 90% (400 million cubic meters) in 2014; this is expected to increase to 95% by 2016. To address the relative shortage of water, Israeli companies have developed a number of sophisticated irrigation systems, including micro-drip systems which maximize irrigation efficiency. Israel has also increased its investments in technologies for the puriﬁcation and improvement of contaminated groundwater. The Government budget for 2013 − 2014 included provisions for both grants and loans to stimulate capital investment in these areas. The Government has also taken steps to facilitate the establishment of regional water and sewage companies. The purpose of these steps is to promote the efficient management of water and sewage systems and to direct the revenues from these services to investments in water and sewage infrastructure. In July 2001, the Knesset passed a law regulating the commercial relationship between the regional companies, the municipalities and consumers. As of April 2015, 55 regional companies were in operation, servicing approximately six million people. Electricity. Most of the electric power in Israel is supplied by the IEC, a Government Company that generates 83% of the electricity used in Israel (see ‘‘Role of the State in the Economy — Israel Electric Corporation Ltd.,’’ below). In 1996, the exclusive franchise granted to IEC by the Government expired, the Electricity Sector Law was enacted, and the Public Utility Authority was established to supervise electric utility services and, among other things, regulate the prices associated with providing electricity to the public. The purpose of the Electricity Sector Law is to: establish the tariff base, regulate activity in the electricity sector for the public interest, ensure the reliability, availability, quality and efficiency of services, create conditions for competition, and minimize costs. The law provided for a ten-year transition period during which IEC was granted a license to generate, transmit, distribute, and supply electricity. IEC currently holds licenses to produce electricity at each of its 67 generation units. The generation and transmission licenses, as well as the licenses for distribution and supply, have been extended several times and are valid until January 1, 2016. Any extension beyond January 1, 2016 will require an amendment of the law. Under the Electricity Sector Law, a licensed independent system operator, a transmission operator or a distributer of electricity is required to purchase electricity from private generators and to enable other licensed generators to use the same transmission and distribution channels to supply electricity to their own customers. After the Electricity Sector Law was enacted, the Government passed several resolutions aimed to strengthen independent power production by, among other things, enabling entrepreneurs in the free market to invest in the construction and operation of generation units. Accordingly, pursuant to these governmental resolutions, independent private producers of electricity may generate electricity and sell it directly to end-users using IEC’s transmission and distribution network. In recent years, the Government has reaffirmed and expanded its policy of encouraging competition by means of independent private producers. The Government also plans to establish an independent system operator that will oversee and manage the electricity market. The Government’s goal is to achieve a competitive market in the generation and supply segments of the electricity sector. As of April 2015, two independent private producers were operating and generating 15% of the electricity produced in Israel, and a third producer is expected to begin generating electricity by June 2015. It is anticipated that by the end of 2020, 40% of the electricity in Israel will be produced by independent private producers. During 2009, the Government set a 10% target for power generation using renewable energy by the year 2020, following which, the Ministry of National Infrastructure, Energy, and Water Resources (previously known as the Ministry of Infrastructure) instituted quotas for renewable energy technologies such as wind,

D-30 solar (thermal and photovoltaic), biogas and biomass. As a result, the Public Utility Authority set an appropriate tariff. In 2010, the Government set a target for reducing CO2 emissions by 20% by the year 2020. The emissions reduction plan, which is centered on energy efficiency, was allocated a budget of NIS 2.2 billion through 2020. In 2013, the emissions reduction plan was put on hold until further notice.

Energy Israel’s main sources of energy are natural gas, coal and oil. Although Israel is now a producer of natural gas, Israel is almost totally dependent on imported fuel for coal and oil energy sources because domestic production of crude petroleum is negligible and Israel has no domestic production of coal. Most of Israel’s foreign oil is purchased in the open market. Pursuant to an oil supply arrangement between the United States and Israel, the United States has agreed to supply Israel with oil in the event of a failure of Israel’s oil supply. In 1999, a substantial amount of natural gas was discovered near Israel’s Mediterranean shore. The discovery of the natural gas could reduce Israel’s dependence on imported oil. Exploration efforts have continued for new supplies of natural energy and, in January 2009, a substantial amount of natural gas was discovered in the Mediterranean Sea, estimated at more than 280 billion cubic meters. In December 2010, another natural gas reservoir was discovered which is estimated to hold more than 470 billion cubic meters of high quality natural gas. The natural gas reservoirs discovered in 2009 and 2010 are known as Tamar and Leviathan, respectively. Israel has succeeded in significantly reducing its dependence on oil for the production of electricity by switching to coal-fired power stations located along Israel’s coastline and by expanding a coal facility in Ashkelon. Israel purchases the majority of its coal from South Africa, the United States, Colombia and Australia. Smaller amounts of coal are purchased from other countries including China. Because most of the coal used in Israel is low-sulfur coal, the shift to coal production has not had a significant environmental impact on Israel. In August 2003, the Government founded Israel Natural Gas Lines Ltd. (‘‘INGL’’), a Government Company that was established in order to supervise, control and operate the natural gas transportation system. In February 2004, the first natural gas power station in Israel was inaugurated in Ashdod. Between 2004 and 2011, INGL completed building the first stage of the national transmission system, connecting eight large power stations owned by IEC, two independent private producers of electricity and most of Israel’s largest industries. In light of the natural gas discoveries offshore in recent years, INGL is currently in the midst of a development plan and has already begun constructing additional transmission lines that will reach all Israeli gas distribution areas, including small industries and domestic consumers. Among those distribution areas are Jerusalem and northern Israel, home to several large industries. In addition to the new lines, INGL is currently working to multiply existing lines to meet rising demand of natural gas in Israel. It is anticipated that 50% of all electricity production in 2015 will be generated from natural gas-operated power stations. The demand for natural gas is estimated to increase from 1 billion cubic meters in 2004 to about 8.6 billion cubic meters in 2015 and 9.8 billion cubic meters in 2016. Such demand will be supported by the discovery of the Tamar and Leviathan gas fields (see ‘‘Balance of Payments and Foreign Trade — Foreign Investments,’’ below). Israel experienced a natural gas shortage from 2011 through the beginning of 2013. One major cause of the shortage was the disruption in the gas supply from Egypt. Egyptian gas, which started flowing to Israel in 2008, stopped completely in 2011 due to the occurrence of numerous explosions in the pipeline connecting Egypt and Israel. To mitigate the gas shortfall, the speed of extraction from the Yam Tethis reservoir was increased. However, this accelerated the depletion of the Yam Tethis reservoir whose supply was lower than originally anticipated. The natural gas shortage has been ameliorated by two recent developments: In January 2013, INGL began operating its liquefied natural gas buoy, allowing the importation of liquefied natural gas into Israel; and in March 2013, extraction from the Tamar gas field commenced. Supply from the Tamar field alone is expected to meet most, if not all, of the Israeli demand for gas. It is also anticipated that in the coming years, exploration drilling will take place in additional locations in Israeli waters.

D-31 Tourism Tourism plays an important role in the Israeli economy. Israel’s tourist centers include Jerusalem, various religious sites throughout the State, Eilat, the Dead Sea and the Mediterranean coast. Income derived from foreign tourism, excluding expenditures of foreign workers in Israel, has steadily increased since the middle of the last decade. Tourism revenues amounted $4.1 billion (1.7% of GDP) in 2010 and $4.2 billion (1.6% of GDP) in 2011. In 2012, foreign tourism revenues reached $4.3 billion (1.7% of GDP) and in 2013 amounted to $4.6 billion (1.6% of GDP). In 2014, foreign tourism revenues amounted to $4.6 billion (1.5% of GDP), the lack of growth can be attributed to the Operation Protective Edge which took place in July and August of 2014. In 2010, 2.8 million tourists visited Israel, an increase of 20.8% compared to 2009. In 2011, 2.8 million tourists came to Israel, an increase of 0.6% compared to 2010. In 2012, tourist arrivals increased by 2.3% compared to 2011, amounting to 2.9 million, as the increase took place primarily in the ﬁrst three quarters of 2012 and a relatively poor showing in the fourth quarter due to the effects of Operation Pillar of Defense on the tourism sector. In 2013, 3.0 million tourists came to Israel, an increase of 2.6% compared to 2012. In 2014, 2.9 million tourists visited Israel, a decrease of 1.2% compared to 2013, due to a relatively poor showing in the second half of 2014 from the effects of Operation Protective Edge. The total revenue generated in domestic hotels from foreign visitors amounted to $1.104 billion in 2013, representing a decrease of 2.9% compared to 2012 in real NIS terms, mainly due to the appreciation of the NIS relative to the USD. In 2014 the total revenue generated in domestic hotels from foreign visitors amounted to $1.075 billion in 2014, a decrease of 4.2% in real NIS terms. This decrease is primarily attributed to the effects of Operation Protective Edge.

Table No. 10

Arrivals by Area of Origin and Receipts(1) (Arrivals in Thousands of People)

2010 2011 2012 2013 2014 Asia ...... 232.1 236.4 277.0 275.8 264.6 Africa ...... 75.2 90.7 78.1 74.7 70.0 Europe ...... 2,084.5 1,952.3 2,051.6 2,057.7 1,973.0 Americas United States ...... 620.2 592.2 593.9 607.5 612.2 Other ...... 212.8 202.3 215.8 212.6 196.3 Oceania ...... 36.8 34.2 39.4 38.6 36.2 Other ...... 14.1 16.9 16.5 15.9 11.1 Total arrivals ...... 3,275.7 3,124.9 3,269.2 3,282.9 3,163.4 (In USD Millions) Income from tourism ...... 4,073 4,239 4,342 4,561 4,593 Expenditures of foreign workers in Israel ..... 1,033 1,066 1,104 1,105 1,098

(1) Tourists and day visitors, excluding cruise passengers. Source: Central Bureau of Statistics. Research and Development The Government encourages investment in industrial R&D through advancing support and incentive programs created under the Law for the Encouragement of Industrial Research and Development. The objectives of the Government’s support for industrial R&D are, among others, to foster the development of technology-related industries, create employment opportunities for Israel’s scientiﬁc and technological labor force, and improve Israel’s balance of payments by increasing exports of high-tech products and reducing reliance on imports of such products. In 2013 (the most recent year for which civilian R&D data is currently available), approximately 4.2% of GDP was invested in civilian R&D − the highest level of national

D-32 expenditure on R&D in the OECD. Israel participates in more than 34 different international and bi-national industrial R&D joint ventures, several with the United States (e.g., BIRD, USISTC, Maryland, Virginia), several with the EU (e.g., EUREKA, Eurostars, Galileo, Enterprise Europe Network, Horizon 2020), and other joint ventures with Canada, India, Australia, Germany, China, France, Belgium, Italy, Ireland, Turkey, United Kingdom, Greece, Singapore, Portugal, South Korea, Sweden, Finland, Netherlands, Denmark, Czech Republic, Hungary, Brazil, Argentina and Uruguay. Out of the different 34 ventures, the largest international industrial R&D program expenditure in the 2015 budget is NIS 581 million for the European R&D program Horizon 2020.

Prices Since the end of 1991, the Government has announced annual inflation targets. During the last decade, the rate of inflation was almost 2% on average, close to the middle of the Bank of Israel’s target range of 1% to 3%, and in 2014 inflation was below the target range. In 2014, the CPI averaged 0.5% (-0.2% for December 2013 through December 2014), a decrease relative to 2013 when the CPI averaged 1.5% (1.8% for December 2012 through December 2013). The CPI in previous years was within, or close to, the Government’s target range, averaging 2.7% in 2010, 3.5% in 2011 and 1.7% in 2012. The slowdown in the pace of inflation during 2013 and 2014 was due to relatively low increases in the prices of housing compared with previous years, as well as price decreases in furniture, transportation and communication. In 2014, the food prices, including fruits and vegetables, also contributed to the decline in the inflation rate. Since November 1993, the Bank of Israel has adjusted its key interest rate on a monthly basis. In September 2008, the slowdown in the global economy, coupled with falling inflation, led the Bank of Israel to gradually lower interest rates. By April 2009, the key interest rate was lowered to 0.5% but, as the Israeli economy recovered, the interest rate was raised slightly later that year. The gradual increase of the interest rate continued throughout 2010 and into first half of 2011. In June 2011, the Bank of Israel raised the interest rate to 3.25% and kept it at that level until September 2011. Since then, due to subsiding inflationary pressures and appreciation pressures on the NIS, coupled with a slowdown in the global economy and moderate growth in the Israeli economy, the Bank of Israel gradually lowered the nominal interest rate, reaching 0.1% in March 2015. The real interest rate, derived from the Bank of Israel’s key interest rate and inflation expectations (gauged as the difference between the yields of indexed and non-indexed government bonds) decreased from more than 6% in mid-2003 to averages of 2.6% in 2007 and 1.7% in 2008. Due to the 2008 global financial crisis, the Bank of Israel decreased the key interest rate, and by April 2009 the real interest rate had turned negative, averaging -1% in 2009. Throughout 2010 and for the first five months of 2011, the real interest rate remained negative for the most part, averaging -1.2% in 2010 and 0.2% in 2011. Throughout most of 2012, the real interest rate was near zero and, by the end of 2012, it decreased to -0.2%. Throughout 2013, the real interest rate was negative, averaging -0.2%. In 2014, the real interest rate remained negative, averaging -0.6%. The one year inflation expectation averaged 1.6% in 2009, rose to 2.6% in 2010, and then decreased gradually, reaching 2.5%, 2.1% and 1.7% in, 2011, 2012 and 2013, respectively. In 2014, the one year inflation expectation level was 1.2% close to the lower band of the inflation target.

Table No. 11

Selected Price Indices (Percentage Change, Annual Average)

CPI Excluding Housing, Wholesale Price of Period CPI Fruits and Vegetables Manufacturing Output 2010 ...... 2.7% 1.7% 4.0% 2011...... 3.5% 2.8% 7.8% 2012 ...... 1.7% 1.1% 4.3% 2013 ...... 1.5% 1.0% 0.4% 2014 ...... 0.5% -0.2% -1.4%

Source: Central Bureau of Statistics.

D-33 Employment, Labor and Wages As of January 2012, the Central Bureau of Statistics has made a transition from a quarterly system of measuring labor force characteristics to a new and improved system that better suits the latest international recommendations on employment and unemployment statistical methodology. The principal changes were: adjusting the definition of the population; significantly increasing the samples and transition to monthly coverage; geographic expansion and using more advanced statistical methods in the sampling, both in the questioning model and in data estimation. These changes, based on statistical science, led to many changes in logistics and operations, such as improved technological systems, expansion of work teams, interview methodology and work procedures. With the transition to the new system, and as often happens in the case of updating and in this case revolutionizing a statistical series, a ‘‘break in the series’’ was formed. The ability to compare the past with the present became even more difficult and requires extreme care. In the following sections, data is presented according to the new methodology, and data prior to 2012 has been adjusted accordingly. In 2014, there was a 1.3% increase in real wages (adjusted for inflation), following an increase of 0.9% in 2013, 0.5% in 2012 and of 0.4% in 2011. The increase in wages between 2010 and 2014 reflects an ongoing recovery in the domestic economy and is consistent with the reduction in the unemployment rate. In 2014, wages increased by 1.9% in the public sector and 1.1% in the private sector. In 2014, in nominal terms, wages increased by 1.8% overall, with increases of 2.4% in the public sector and 1.6% in the private sector. The average monthly wage (adjusted for inflation) increased by 2.1% between December 2013 and December 2014. Subsequent to the 2008 global financial crisis, and particularly from 2010 to 2013, there was significant improvement in the labor market. The unemployment rate decreased from 8.9% in 2009 to 5.9% in 2014. Employment increased by 17.6% between the second quarter of 2009 and the fourth quarter of 2014, and real wages increased by 4.3% during the same period. The unemployment rate has been in an overall declining trend since 2003; it declined gradually from a high rate of 12.0% in 2003 to 11.7% in 2004, 10.3% in 2005, 9.7% in 2006, 8.7% in 2007 and 7.4% in 2008. As a result of the global financial crisis and the slowdown in the Israeli economy, the unemployment rate increased to an average of 8.9% in 2009. In the latter half of 2009, the unemployment rate returned to a decreasing trend, reaching 8.0% in 2010, 7.0% in 2011, 6.9% in 2012, 6.2% in 2013 and 5.9% in 2014. Currently, the unemployment rate is at a historically low level of approximately 5.3% (in seasonally adjusted terms). In 2013 (the most recent year for which poverty data is currently available), the improvement in the labor market contributed to the reduction of poverty in Israel; the percentage of families living in poverty rose from 19.8% in 2010 to 19.9% in 2011 and decreased to 19.4% in 2012 and 18.6% in 2013, the lowest percentage since 2004. The percentage of individuals living below the poverty line decreased from 24.8% in 2011 to 23.5% in 2012 and 21.8% in 2013. The percentage of children living in poverty increased from 35.3% in 2010 to 35.6% in 2011 and decreased to 33.7% in 2012 and 30.8% in 2013. The incidence of poverty among working families decreased from 13.8% in 2012 to 12.5% in 2013. Concerning different demographic groups, the incidence of poverty among Ultra-Orthodox (‘‘Haredi’’) Jews increased from 59.8% in 2012 to 66.1% in 2013. On the other hand, the poverty rate among Arabs decreased from 54.3% in 2012 to 47.4% in 2013. In 2013, the incidence of poverty among single parents with dependents was 27.5%, a decrease from 29.0% in 2012. The poverty rate among families with children was 24.8% in 2012 and decreased to 23.0% in 2013. The labor force participation rate (the labor force as a percentage of the population over the age of 15) was 64.2% in 2014, an increase relative to the 2013 level of 63.7%. There has been steady, incremental improvement in the participation rate since 2002 when it was at 59.4%. However, the participation rate is negatively affected by the non-working populations in Israel, such as Haredi men and Arab women. The increase in the participation rate and the number of Israelis employed is attributable to, among other factors, overall economic growth and the successful implementation of the Government’s policy to cut transfer payments and lower taxation on labor. The wave of Eastern European immigrants that came to Israel following the collapse of the Soviet Union led to significant growth in the Israeli labor force beginning in 1990. Despite the initial difficulties experienced by many of the professional and highly skilled immigrants in finding suitable employment, statistical data regarding employment trends in Israel suggest that immigrants have been successfully

D-34 integrated into the labor market and are for the most part able to ﬁnd employment suited to their educational level and employment qualiﬁcations. One important factor in this integration has been the growth in demand driven by Israel’s high-tech companies which matches the educational and professional background of many of the new immigrants.

Table No. 12

Principal Labor Force Indicators(1) (Annual Average — Figures In Thousands Unless Noted Otherwise)

2010 2011 2012 2013 2014 Permanent average population...... 7,620.8 7,763.1 7,905.7 8,056.0 8,211.9 Population aged 15+ ...... 5,488.6 5,584.9 5,672.0 5,775.1 5,884.7 Civilian labor force(2) ...... 3,434.6 3,496.9 3,606.0 3,677.8 3,778.3 Labor force participation rate(3)...... 62.6% 62.6% 63.6% 63.7% 64.2% Unemployment Rate ...... 8.0% 7.0% 6.9% 6.2% 5.9%

(1) All ﬁgures are comparable with the Central Bureau of Statistics’ new methodology for the monthly labor force survey. Due to a change in the methodology, unemployment rate data through 2012 may give different values than those for 2013, as such data were calculated according to different conventions. (2) The sum of the number of workers and the number of job seekers. (3) Civilian labor force as a percentage of the population over the age of 15. Source: Central Bureau of Statistics. Table No. 13

Unemployment Data by Demographic Group(1)

2010 2011 2012 2013 2014 Men...... 8.3% 7.2% 6.8% 6.2% 5.9% Women ...... 7.7% 6.9% 7.0% 6.2% 5.9% Population aged 25 − 64 ...... 6.9% 6.1% 5.9% 5.4% 5.0%

(1) All ﬁgures are comparable with the Central Bureau of Statistics’ new methodology for monthly labor force survey. The unemployment rate for the years prior to, and including, 2012 is calculated according to the difference between participating and working persons as percentage of the number of participating persons. Source: Central Bureau of Statistics. Table No. 14

Employment Data Twelve-Months Ended December 31, 2014 (Wages in USD at Current Prices)

Average Participation Unemployment Month Wage Rate Rate January ...... $2,618 64.1% 5.9% February ...... $2,639 64.4% 5.9% March ...... $2,662 64.0% 5.8% April...... $2,672 64.0% 5.8% May...... $2,667 64.1% 6.0% June ...... $2,720 64.7% 6.5% July ...... $2,664 64.2% 6.2% August ...... $2,559 64.2% 6.3%

D-35 Average Participation Unemployment Month Wage Rate Rate September ...... $2,530 64.3% 6.3% October...... $2,436 64.1% 5.6% November ...... $2,376 64.4% 5.6% December ...... $2,362 64.0% 5.6% Average ...... $2,576 64.2% 6.0%

Source: Central Bureau of Statistics and Bank of Israel; Calculations by the Chief Economist — Department at the Ministry of Finance. In 2014, Israel’s population totaled 8.2 million, an increase of 1.9% compared to 2013. The population has grown at a steady rate of around 1.8% − 1.9% since 2006. The civilian labor force increased by 2.7% in 2014. Of the 3.78 million employed in the labor force in 2014, 35.5% worked in the public sector. One of Israel’s most important resources is its highly educated work force. Based on OECD reports, approximately 46.4% of adults between the ages of 25 and 64 have attained tertiary education, compared to the 32.6% OECD average. Utilizing its highly-educated population, Israel has developed a technology-based and export-oriented economy. In 2014, 40.2% of the work force consisted of employees with an academic, scientiﬁc, technical or related professional background, while 18.1% consisted of administrative or managerial employees. These percentages compare favorably with the percentages of such workers in other developed countries. The employment qualiﬁcations of recent immigrants have been consistent with the high quality of the Israeli work force, with two-thirds of immigrants from the former Soviet Union consisting of scientists, engineers or technical staff.

Table No. 15

Structure of Employment in Israel (Employed Persons by Industry, as Percent of Total Employees)

2010 2011 2012(1) 2013(2) 2014 Employment by Sector Public Sector Employment...... 30.0% 30.3% 34.7% 35.2% 35.5% Private Sector Employment ...... 70.0% 69.7% 65.3% 64.8% 64.5% Employment By Industry Agriculture ...... 1.6% 1.4% 1.6% 1.2% 1.1% Manufacturing ...... 14.3% 14.0% 12.9% 11.9% 11.8% Water and electricity(3)...... 0.7% 0.8% 0.6% 0.9% 0.9% Construction ...... 5.4% 5.5% 4.6% 4.8% 4.9% Trade ...... 13.3% 13.5% 12.4% 11.7% 11.4% Catering ...... 4.6% 4.7% 4.4% 4.4% 4.3% Banking and ﬁnancial services ...... 4.0% 4.0% 3.5% 3.4% 3.5% Business services(4) ...... 14.7% 14.4% 13.7% 16.8% 12.8% Public administration...... 4.6% 4.9% 10.4% 10.5% 10.3% Education ...... 12.6% 12.9% 12.7% 12.0% 12.2% Health, welfare and social work ...... 10.4% 10.3% 10.0% 10.3% 10.6% Transport...... 6.6% 6.6% 6.3% 4.3% 4.1% Personal and other services(5) ...... 5.1% 5.2% 4.9% 4.4% 4.3% Services for households by domestic personnel . . 1.9% 1.8% 1.9% 1.9% 1.9% Other ...... 1.0% 1.6% 2.2% 1.6% 1.7% Total workers(6) (In Thousands) ...... 2,938 3,025 3,359 3,450 3,556

D-36 (1) The 2012 − 2014 data is not comparable with previous years’ data due to a change in the Central Bureau of Statistics’ monthly labor force survey methodology. (2) Due to the reclassification of industries in 2013, the 2013 − 2014 data is not comparable to previous years’ data. (3) ‘‘Water and electricity’’ includes in the new classification: ‘‘Electricity, gas, steam and air conditioning supply’’ and ‘‘Water supply; sewage, waste management and remediation activities.’’ (4) ‘‘Business services’’ includes in the new classification: ‘‘Information and communication,’’ ‘‘Real estate activities,’’ ‘‘Professional, scientific and technical activities’’ and ‘‘Administrative and support service activities.’’ (5) ‘‘Personal and other services’’ includes in the new classification ‘‘Arts, entertainment and recreation’’ and ‘‘Other service activities.’’ (6) Israeli workers only. Source: Central Bureau of Statistics, Bank of Israel. Role of the State in the Economy Historically, the Government has been involved in nearly all sectors of the Israeli economy, particularly in defense-related and monopolistic businesses and industries. Before the privatization process started, ownership of industry in Israel was divided among the Government, the organization of trade unions (‘‘Histadrut’’) and the private sector, with the Government and the Histadrut owning prominent interests in several key industries. In recent decades, the Government has made progress towards the privatization of state-owned enterprises and introduced structural competitive changes in several sectors of the economy. As part of the privatization process, the Government has implemented structural market reforms aiming to enhance competition in certain essential monopolistic sectors such as the communications sector, oil refineries and the seaports. In addition, the Government introduced competition in additional sectors and industries, such as the electricity sector and capital markets. The Government Companies Authority was established under the Government Companies Law, 1975. The Government Companies Authority is a professional unit of the Ministry of Finance, which is the government body charged with exercising the ownership function in state-owned enterprises, including overseeing privatizations and managing structural changes. The Government Companies Authority is responsible for the activity of all state-owned enterprises, including both commercial and non-commercial enterprises. As of December 2014, there were 100 state-owned enterprises, which include business-oriented enterprises, funds established as investment vehicles, academic and educational institutions, real estate companies and social services providers. State-owned enterprises are divided by law into two main categories: Government Companies (including their Government Subsidiaries) and Mixed Companies. In addition to state-owned enterprises, there are statutory corporations which are established pursuant to specific laws regulating their operations and governance structures. Government Companies are companies in which the Government owns more than 50% of the voting shares or the right to appoint more than half of the members of the board of directors. Government Companies are subject to the Israeli Government Companies Law and the regulations promulgated thereunder (collectively, the ‘‘GCL’’). In addition, the Government Companies Authority regularly issues circulars in accordance with the GCL (see ‘‘Privatization,’’ below). A substantial part of the GCL is dedicated to corporate governance of Government Companies and the circumstances under and procedures by which the Government may sell shares in or reorganize Government Companies. Government Companies play a significant role in the Israeli economy. In 2014, they employed 1.6% of the Israeli work force, accounted for 7.4% of total exports and comprised 4.4% of fixed assets investments. These companies include several public utilities, monopolies and defense companies. Mixed Companies are companies in which the State owns 50% or less of the voting shares or has the right to appoint less than half of the members of the board of directors. Under the GCL, Mixed Companies are not subject to the same degree of regulation as Government Companies. However, Mixed Companies are

D-37 subject to certain provisions of the GCL, including qualifications and approvals required for the appointment of certain directors by the Government. Mixed Companies play a relatively minor role in the economy. The Government has initiated a number of regulatory arrangements to increase competition in certain sectors. These arrangements focus on the introduction of privately-owned companies as competitors to state-owned enterprises in sectors in which the Government wishes to increase competition. The pace of privatization is dependent upon further regulatory and structural reforms and the formulation of policies that will define the post-privatization environment in which these companies will operate. The development and implementation of some of these policies and reforms may take a considerable amount of time. Privatization. Privatization is an essential element of the broader market reforms initiated by the Government over the past several decades aiming to promote the growth of the private sector, mainly by enhancing competition. Privatization efforts have included the full or partial sale of state-owned companies and banks and the transfer to private entities of activities that were previously performed by Government Companies or statutory corporations. In total, between 1986 and 2014, 98 Government Companies changed their status to either Mixed Companies or fully-private enterprises. The proceeds stemming from these privatizations totaled $14.2 billion. The most significant individual privatization transactions, measured by revenue, have been Israel Chemicals Ltd. in 1992, Zim Integrated Shipping Services in 2003, Bezeq in 1997 − 2005, El Al Israel Airlines Ltd. in 2003 − 2007, Oil Refineries Ltd. in 2006 − 2007, and Eilat Port Company Ltd. in January 2013. In parallel, the Government sold its shares in the major Israeli banks that came into state ownership following the 1983 banking crisis. The State remains a minority shareholder only in one bank, Bank Leumi, in which it currently holds 6.03%. The implementation of the privatization policy includes a reduction of the State’s holdings in Government Companies, as well as an increase in the number of Government Companies through the consolidation and transformation of various Government units and statutory authorities. In addition, the Government has implemented structural changes to the external controls system, aiming to implement high standards of accounting controls, improve civil services, and increase competition in the infrastructure industry. As part of the revised external controls structure, in July 2002 the State enacted new legislation based on provisions of the U.S. Sarbanes-Oxley Act of 2002. This legislation provides for, among other things accuracy and transparency in financial statements and internal controls systems of Government Companies. Under this legislation (and similar to Section 404 of the Sarbanes-Oxley Act), Government Companies holding or managing assets in excess of NIS 400 million are required to submit statements regarding the scope, adequacy and effectiveness of their internal control procedures for financial reporting, attested to by their accountants. On October 5, 2014, it was decided by a Government resolution to privatize 25% to 49% of the State’s holdings in certain Government Companies in which the State has a long-term interest to control. Certain other Government Companies can be completely privatized.

Table No. 16

Selected State-Owned Companies (As of December 31, 2014)(1) (In Millions of Dollars, Except Percentages)

Direct/ Indirect Government Total Long-Term Total Company Name Ownership Assets Liabilities Revenue Israel Electric Corp. Ltd...... 99.85% 22,504 14,902 7,042 Israel Aerospace Industries Ltd...... 100.00% 4,782 742 3,827 Rafael-Advanced Defense Systems Ltd...... 100.00% 2,490 372 1,963 Israel Military Industries Ltd.(3) ...... 100.00% 916 445 477 Israel Ports Development and Assets Company Ltd.(2) . . . 100.00% 1,678 22 255 Ashdod Port Company Ltd.(2)(3) ...... 100.00% 942 283 300 Haifa Port Company Ltd.(2) ...... 100.00% 638 122 207

D-38 Direct/ Indirect Government Total Long-Term Total Company Name Ownership Assets Liabilities Revenue Israel Railways Ltd...... 100.00% 5,622 5,142 861 Mekorot Water Company Ltd.(3) ...... 91.57% 3,701 2,209 1,250 Israel Postal Company Ltd.(3) ...... 100.00% 1,396 382 496 Israel Natural Gas Lines Company Ltd.(3) ...... 100.00% 1,364 1,108 126 Netivei Israel-National Transport Infrastructure Company Ltd...... 100.00% 494 103 1,534 Petroleum & Energy Infrastructures Ltd.(3) ...... 100.00% 381 43 86

(1) Based on consolidated NIS-denominated financial statements prepared in accordance with either Israeli generally accepted accounting principles or IFRS. Amounts in dollars were converted from NIS at the applicable exchange rates for December 31 set forth in Table No. 1. (2) Spun-off from the Ports Authority in 2004. (3) According to draft 2014 financial statements. Sources: Ministry of Finance, Government Companies Authority. Below are summary descriptions of the state-owned companies set forth in the above table, including specific steps planned or taken by the Government to prepare such companies for privatization or reform their structures and operations.

Israel Electric Corporation Ltd. IEC is a monopoly supplying most of Israel’s electricity demand. Since 1996, IEC has been regulated under the Electricity Sector Law and the regulations promulgated thereunder. Since the enactment of the law, the Government and several ministries have made a number of decisions and recommendations regarding the electricity sector, some of which were subsequently adopted as amendments to the law. The purpose of the Electricity Sector Law is to regulate activity in the electricity sector in the public interest, to ensure the reliability, availability, quality, and efficiency of services, to create conditions for competition and to minimize costs. The Electricity Sector Law’s numerous amendments outline the separation of activities in the generation, transmission, distribution and supply of electricity. The law provides for, among other things, tariff supervision (including efficiency incentives) regulating IEC’s proﬁts and the prices it can charge consumers, and licensing requirements pursuant to which IEC holds licenses that permit it to conduct its business. The law provides for transition periods during which IEC has been granted licenses to generate, transmit, distribute and supply electricity. IEC currently holds licenses to generate electricity at each of its 63 generation units. The generation and transmission licenses, as well as the licenses for distribution and supply, have been extended several times and are valid until January 1, 2016. Under the Electricity Sector Law, the owner of a license for transmission or distribution is required to purchase electricity from other generators of electricity and to enable other licensed generators to use the same transmission and distribution channels to supply electricity to their own customers. After the law was enacted, the Government passed several resolutions aimed to strengthen independent power production by, among other things, enabling entrepreneurs in the free market to invest in the construction and operation of generation units. Accordingly, pursuant to these governmental resolutions, independent private producers of electricity may generate electricity and sell it directly to end-users using IEC’s transmission and distribution network. In recent years, the Government has reaffirmed and expanded its policy of encouraging competition by means of independent private producers. The Government also plans to establish an independent system operator that will oversee and manage the electricity system. The Government’s goal is to achieve a competitive market in the generation segment of the electricity sector. In July 2013, a ministerial steering committee was formed to address the issue of electricity and the electricity sector. The committee’s tasks were: (1) Examining the optimal structure for the electricity sector and IEC, taking into consideration existing acceptable models around the world as well as those considered heretofore, including the model presented to IEC in recent years, emphasizing the implementation of

D-39 competitive segments; (2) Examining the ﬁnancial strength of IEC and implementing reforms that adequately raise the ﬁnancial performance of IEC; (3) Examining IEC’s internal efficiency program; and (4) Proposing a comprehensive reform for the electricity sector and IEC, in light of the foregoing. In March 2014, the committee submitted draft recommendations and called for public comment regarding such draft recommendations during the 30 day comment period. In addition, a negotiating team was established to hold discussions with IEC employees and management and to reach an agreement regarding IEC employees’ rights and the impact of structural changes in the electricity sector on such rights. The negotiating team conducted numerous meetings with employees, the Histadrut and management in an attempt to reach agreement on such issues. While the parties have made progress, a comprehensive agreement has not been reached as the parties continue to disagree on several fundamental issues.

Defense Oriented Companies Israel Aerospace Industries Ltd., Israel Military Industries Ltd. and Rafael-Advanced Defense Systems Ltd. are three defense-oriented Government Companies. Currently, the State holds 100% of each of these companies. Israel Aerospace Industries raises money on the TASE through the issuance of bonds, including $110 million in 2009, $318 million in 2013 and $132 million in 2014. On December 23, 2013, the Ministerial Privatization Committee decided to privatize Israel Military Industries by establishing a new Government Company to which the business-oriented activity of Israel Military Industries would be transferred, and such new company would be sold in a private sale to one or a group of investors from Israel or abroad; during March 2015, the Government Companies Authority began the selling process. On October 7, 2014, the committee decided to privatize 20% to 49% of the State’s holdings in Israel Aerospace Industries and Rafael-Advanced, which will take place during 2016 − 2017.

Ports Companies The Ports Authority, which historically functioned as an operating port authority (with ownership over all port property and assets and responsibility for all vessels and cargo handling operations in Israel’s ports), was one of the strongest and most signiﬁcant monopolies in Israel. In July 2004, the Knesset passed a law abolishing the Ports Authority and dividing its activities among three newly-formed Government Companies, each responsible for operating the ports of Haifa, Ashdod and Eilat, respectively. An additional Government Company was created to hold and manage the ports’ assets and to lease them to these three port operating companies and other companies in the ports industry. An Administration of Shipping and Ports was also established under the jurisdiction of the Ministry of Transport and Road Safety. The implementation of the port sector reform began in February 2005 when the Ports Authority was abolished and the aforementioned companies commenced operations. As part of the privatization process, it was planned that portions of the three port operating companies would be sold to private investors. In September 2009, the Government reached a decision regarding the gradual privatization of the Ashdod and Haifa port companies. The Government’s current policy toward the Ashdod and Haifa port companies contemplates the sale of predetermined percentages of the Government’s holdings of these companies in several stages. In 2010, the Ministerial Privatization Committee decided that the Government would sell all of its holdings in the Eilat Port Company through a private sale. In January 2013, the Eilat Port Company was successfully sold to Papo Maritime Ltd. Papo Maritime paid the State NIS 105 million for the right to manage and operate the port for the next 15 years. Papo Maritime will pay another NIS 105 million should it decide to exercise an option to extend the lease for 10 additional years and provided it meets certain predetermined operational targets. In July 2013, the Government announced its plan to build two additional container terminals, one in the Haifa area and one in Ashdod. During 2014, the Israel Ports Development and Assets Company published a global tender for establishing and operating these new facilities and, in January 2015, signed contracts to build the facilities with two companies and will sign contracts with two global operators for each of the new terminals in May 2015. The Government Companies Authority is currently working on the initial public offering of Ashdod Port’s stock on the TASE toward the end of 2015. Haifa port’s initial public offering is planned to take place in 2016.

D-40 Israel Postal Company Ltd. Israel Postal Company Ltd. and its subsidiary, the Postal Bank Ltd., were established in March 2006 to replace the Postal Authority. These Government Companies were established as part of a comprehensive reform in the postal sector which included, among other things opening the postal sector to competition, licensing the operations of the companies and setting fees for postal services. In September 2006, the Government passed a resolution in principle according to which the Postal Company, including the Postal Bank, would be privatized in two stages. During the first stage, up to 49% of the companies’ shares would be offered on the TASE. During the second stage, the remaining shares would be sold to strategic investors. In 2010, the Postal Company raised $106.7 million through a private issuance of bonds. In 2012, an amendment was added to the Postal Law that enhanced the status of the Postal Bank as an independent subsidiary of the Postal Company and its financial services. The Ministry of Communications and the Ministry of Finance are implementing the relevant arrangements relating to such amendment. In 2013, due to continuing poor financial performance and negative cash flow, the Postal Company presented a comprehensive recovery plan to the Ministry of Finance and to the Ministry of Communications. During 2014 the two ministries signed recommendations regarding the Postal Company’s tariffs and regulation, and in 2015 regulations regarding the Postal Company were signed and the tariffs were updated. In January 2015, the Postal Company signed a collective agreement with its employees to reduce the workforce by 1,200 positions and to implement changes regarding the employees’ working environment. In March 2015, an investment agreement was signed with the State to enable the financing of the recovery plan.

Israel Railways Ltd. Israel Railways was separated from the Ports and Railways Authority pursuant to a December 2002 amendment to the Ports and Railways Authority Law. In 2003, Israel Railways began operating as a Government Company and commenced a five year, $4.5 billion investment plan. In August 2007, this plan was updated and expanded to $7.8 billion, to be implemented in years 2003 − 2013. In 2008, the Government and the company entered into a new infrastructure and investment agreement. This agreement, together with the investment plan, is expected to have a long-term positive impact on the Israeli transportation system in particular and on the Israeli economy in general. In December 2009, the Government and Israel Railways signed an agreement that set forth the principles applicable to the State’s subsidization of the company’s ongoing activity. This agreement was revised in 2014. The new agreement deals with the current subsidization and development subsidization until 2020. In 2015, the Israel Railways raised $253 million on the TASE through the issuance of bonds. The money received from the bonds will finance the company’s investment plan. The company presented profits for the first time as the annual year of 2014 ended with a $400 million net profit. From 2010 to 2012, the Ministries of Finance and Transportation held discussions with Israel Railways’ employees and the Histadrut regarding making structural changes in the company. After protracted negotiations, the parties reached an agreement which was made effective through a Government decision to establish two railway subsidiaries: (1) Israel Railway Station Development Company Ltd. which will enable the development of real estate compounds surrounding Israel Railway stations; and (2) Israel Rail Cargo Company Ltd. which will handle transportation of cargo. In addition, Israel Railways employees agreed to outsource 30% of the maintenance of portable electronic equipment. As of May 2015, the subsidiary companies have a board of directors and are now seeking a chief executive officer. The subsidiary companies have yet to begin operations.

Kibbutzim and Moshavim Kibbutzim are collective settlements that traditionally were primarily agricultural. However, most kibbutzim now derive a majority of their revenues from manufacturing, tourism and other services. There are approximately 266 kibbutzim in Israel with approximately 140,100 inhabitants. Moshavim are cooperative settlements, most of which consist of individual owners of small farms. Moshavim derive a large percentage

D-41 of their revenues from agriculture. There are approximately 443 moshavim with approximately 295,400 inhabitants. Kibbutzim and moshavim both experienced ﬁnancial crises in the 1980s. In 1988, the Government and the bank creditors of the moshavim agreed on a rescue and recovery program for the moshavim. In 1992, the Knesset approved legislation requiring the voluntary discharge of part of the moshavim’s bank debt, partial repayment of outstanding debt by the moshavim using the proceeds of certain mandatory asset sales by the moshavim, and restructuring of the remaining of the moshavim’s debt at below-market interest rates. As of December 31, 2014, the remaining outstanding debt of moshavim amounted to NIS 2 million as compared to NIS 2.5 million at the end of 2013. In 1989 and 1999 the kibbutzim, their bank creditors and the Government signed a series of agreements targeting the establishment of a rescue and recovery program for the kibbutzim. In accordance with these agreements, an aggregate debt of NIS 15.89 billion (calculated as of December 31, 2007) was voluntarily discharged and written off by the banks, out of which NIS 6.66 billion was paid to the kibbutzim’s bank creditors by the Government. An additional NIS 13.3 billion of the kibbutzim’s outstanding bank debt was restructured and funded entirely by below-market loans extended by the Government to the kibbutzim’s creditors. As of December 31, 2014, the remaining outstanding debt of the kibbutzim amounted to NIS 32 million as compared to NIS 36 million at the end of 2013.

The Environment Since the establishment of the Ministry of Environmental Protection (‘‘MOEP’’) in 1989, Israel has enacted many laws and regulations relating to the protection of the environment. The MOEP seeks to, among other things, (i) protect, rehabilitate and prevent the misuse of ecosystems, natural resources and open spaces; (ii) protect the public and the environment from pollution and nuisances; (iii) prepare for adaptation to climate change; (iv) promote sustainable growth and the integration of sustainability in government, the private sector and amongst the public; and (v) develop the MOEP’s ability to accomplish its mission efficiently and effectively. The State’s environmental legislation encompasses laws targeting the protection of natural resources, abatement and prevention of environmental nuisances, and safe treatment of certain contaminants and pollutants. Other comprehensive legislation such as the Planning and Building Law and the Licensing of Businesses Law provides a framework for controlling the use of resources and promoting sustainable development. Planning authorities view environmental considerations as an integral part of the planning and licensing process, and objections are frequently based on environmental issues. Israel has ratified nearly all of the major international conventions on environmental protection and ensured that its national legislation conforms to these conventions. Israel is a party to international conventions on such subjects as climate change, trans-boundary movements of hazardous waste and chemicals, protection of the ozone layer, biological diversity, wetlands protection, international trade in endangered species, and protection of the Mediterranean Sea from pollution. Israel ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change (the ‘‘UNFCCC’’) in February 2004 and soon thereafter created a Designated National Authority for the Clean Development Mechanism. The Clean Development Mechanism in Israel provided investors from countries under Annex I of the Kyoto Protocol with opportunities to implement projects in a wide variety of fields, mainly during the years 2008 − 2012. By December 2013, over 60 projects had been approved by the Designated National Authority, of which around 30 were registered with the UNFCCC. Israel is expected to ratify the Stockholm Convention on Persistent Organic Pollutants by the end of 2015. An inter-ministerial committee was established to prepare recommendations for a national plan for the mitigation of greenhouse gas (‘‘GHG’’) emissions in Israel. The committee submitted its findings to the Government and, in November 2010, a national plan was approved for the reduction of GHG emissions to meet a national target to reduce GHG emissions by 20% by 2020 (as compared to a ‘‘business as usual’’ scenario). Within the framework of the national plan, the Government allocated NIS 2.2 billion for the implementation of various abatement measures up to the year 2020 to be carried out by the relevant ministries. The measures included, among other things, a subsidy program for projects targeting the reduction of greenhouse gas emissions in the industrial, commercial and public sectors; reduction of electricity

D-42 consumption in the household sector through replacement of inefficient refrigerators and air conditioners with energy-efficient models; green building projects; investment in education and information projects and; subsidies for energy surveys in the industrial and commercial sectors. A mandatory requirement for all projects approved in the subsidies program, which was coordinated jointly by the MOEP and the Ministry of Economy, was the submission of a verified annual emissions reduction report to the MOEP until at least 2020. In 2011 − 2012, 206 projects were approved for funding at a total budget of NIS 106 million, and they are expected to result in a significant reduction in GHG emissions by 2020. In May 2013, funding for implementation of the national plan was suspended for a period of three years, including the above-mentioned subsidies program, making it extremely difficult for Israel to meet its target of 20% reduction by 2020. Despite the budget cut, however, the MOEP is establishing a national system for the management of greenhouse gases, which will include a measuring, reporting, and verification system based on UNFCCC requirements. An inter-ministerial committee headed by the Director General of the MOEP is currently examining the economic potential of GHG reduction policies in all sectors of Israel through 2030. Recommendations for a national reduction target for 2030 are expected to be presented to the Government in June 2015, following which, Israel’s ‘‘intended nationally determined contribution’’ will be submitted to the Secretariat of the Climate Change Convention. A voluntary registry for the accounting and reporting of GHG emissions was launched in July 2010. Over 50 companies and organizations have joined and reported on their GHG emissions for 2014. To encourage and recognize companies and organizations that join the registry and report their GHG emissions, an awards program was established with certificates of recognition signed by the Minister of Environmental Protection. Level 1 award certificates are presented to entities to recognize reporting; Level 2 awards are presented to entities that have their reports verified by a third party that received certification; and Level 3 awards are presented to entities that submit certified emissions reductions. Four companies received Level 2 awards in 2014. In 2013, the MOEP and the Small and Medium Enterprises Authority at the Ministry of Economy launched a program initiative to promote sustainable business in Israel. The program offers subsidized professional advice to businesses in environmental and energy efficiency areas. This program constitutes part of a wider system that provides professional consultation to existing and new businesses in areas such as establishing a business, business management, financial management, marketing and sales, operations, industrial design and exports. Increased environmental and energy awareness is expected to result in energy savings and a reduction in GHG emissions. Israel has enacted several environmental laws and regulations, including regulations on the prevention of water pollution, such as requirements for wastewater treatment plants to stabilize and treat the sludge generated for agricultural use or soil conditioning (enacted in 2004) and stringent standards for 36 different parameters to bring wastewater treatment to a level creating effluents suitable for unrestricted irrigation and discharge into rivers (enacted in 2010). Revised regulations on environmental impact assessment, which introduce environmental considerations in earlier stages of planning and decision making and incorporate sustainable development principles, came into force in September 2003. In January 2004, regulations were announced to implement the Montreal Protocol (amended in 2009) by restricting production, consumption, importation and exportation of substances that deplete or are likely to deplete the ozone layer. In August 2004, the Knesset enacted the Law for the Protection of the Coastal Environment which acknowledges the coastal environment as a national resource that must be protected for the benefit and enjoyment of the general public and establishes principles for the sustainable management, development and use of the coastal environment. The Non-Ionizing Radiation Law, which aims to protect the public and the environment from the harmful impact of exposure to non-ionizing radiation (including radiation from cellular base stations and electricity network installations), was enacted in January 2006 and regulations came into effect in January 2010. The Clean Air Law came into effect in 2011, providing a framework for the reduction and prevention of air pollution by setting responsibilities and imposing obligations on the Government, local authorities and the industrial sector. The comprehensive law relates to a wide range of provisions including requirements that major industrial polluters obtain emission permits, publication of air quality data and forecasts, granting the MOEP authority over vehicular pollution, formulation of a national plan for the reduction and prevention of

D-43 air pollution, air pollutant monitoring and sampling, and increased enforcement and stricter penalties. Air quality standards that became effective in May 2013 prevent new factories from receiving building permits if they are expected to exceed the pollution emission standards and require existing factories to meet pollution emission standards by May 2015. To encourage the reduction of air pollution from vehicles, the Government imposes a vehicle sales tax that is linked to the pollution level emitted from the vehicle. The sales tax on hybrid cars was 30% from 2005 through the end of 2014 and is 45% in 2015, 60% in 2016 and thereafter will be identical to regular cars. The sales tax on electric cars was 8% through the end of 2013, 10% in 2014, and will be 30% between 2015 and 2019. The sulfur content of transport fuels has been significantly reduced to 10 ppm (in accordance with Euro 5 standards). New passenger vehicles are required to comply with stringent Euro 5 standards and new heavy-duty vehicles with Euro 6 standards. All vehicles are now required to go through stricter annual air pollution checks. Israel has implemented measures to promote Sustainable Materials Management. Israel has been implementing extended producer responsibility in the waste sector. Regulations on the collection of beverage containers (deposits) for recycling were enacted in 1999 and amended in 2010. The Knesset enacted the Tire Disposal and Recycling Law in January 2007, imposing the responsibility of collecting and treating used tires on importers, manufacturers and retailers. In 2011, the Knesset enacted the Packaging Law which imposes direct responsibility on producers and importers for collecting and recycling the packaging waste of their products. The law provides for the prohibition of landfilling of packaging waste by 2020. In March 2014, the Environmental Treatment of Electronic Equipment Law came into force and imposes responsibility on manufacturers and importers of electronic products in Israel to finance the collection and treatment of their market share’s worth of the waste. The goal is to reach a rate of at least 50% recycling of electronics waste by 2021. In 2014, the MOEP drafted a proposed law that will prohibit supermarkets from giving customers plastic bags free of charge. Future regulations will prohibit the landfilling of recyclable materials, including biodegradable organic material, tires, cardboard and paper. The overall goal of Sustainable Materials Management is to achieve 50% recycling of all types of solid waste by 2020 and to landfill no more than 30% of solid waste produced annually by 2030. In July 2007, a landfill levy was imposed on municipal waste, seeking to internalize the costs associated with landfills. An amendment came into effect in 2011, gradually but significantly raising the landfill levy which currently stands at 109 NIS per ton of mixed waste and 73 NIS per ton of dry waste, as compared to 50 NIS and 10 NIS, respectively, in 2011. The MOEP recommends raising the levy further after 2015. Revenues from the levy are dedicated to establishing infrastructure aimed at reducing landfilling. Since November 2011, approximately 400 million NIS have been allocated to local authorities or private entrepreneurs for the construction or upgrading of 19 organic waste treatment facilities and 10 sorting transfer stations for mixed municipal waste, in addition to 500 million NIS allocated to local authorities for separation at source schemes. Another 100 − 150 million NIS are to be allocated in the near future for the same purpose. Sorting transfer facilities include two phases of waste treatment: (1) sorting of the waste into its different components, with recyclables going to material recovery facilities; and (2) treating the organic portion of the waste (such as food remnants), which constitute 34% of the municipal waste, at composting facilities where the waste will be transformed into fertilizer for agricultural uses, and at anaerobic digestion facilities where the biodegradable waste will be fermented to produce biogas for the generation of electricity. The electricity produced from the anaerobic facilities will be sold through the electricity grid under preferential tariffs. A build-operate-transfer tender for the design, finance, construction, operation and maintenance of a municipal solid waste treatment plant using a private-public partnership model will be published in 2015 (an international preliminary tender achieved 7 proposals). The winning bidder will build the facility, operate it for 25 years in accordance with standards set by the tender, and then transfer ownership to the State at no cost. This waste-to-energy facility is expected to be the largest such plant in the Middle East and one of the largest in the world. It will use anaerobic digestion to produce biogas and fertilizer from sorted and unsorted municipal solid waste at an aggregate input capacity of approximately 1,200 tons per day. To further promote Sustainable Materials Management, the preparation of a National Materials Management Strategy commenced in 2014 and is expected to continue until mid-2015 through an inter-ministerial process. In addition to a general plan on managing materials in Israel, specific plans focus on waste types especially relevant for Israel: plastic, paper and cardboard, tires and aggregates. The strategy will

D-44 identify policy measures that could be implemented to promote sustainable materials management and will include the development of indicators to assess the efficiency of resource use and a national resources account which is expected to show annual changes in resource amounts and the economic value of environmental pollution and damage. The Sheshinski Committee II, which examined the policy concerning state taxation for the use of national natural resources, recommended to establish an inter-ministerial committee, headed by the Director General of the MOEP, aimed at creating a new market-based economic tool — an environmental levy on construction aggregates (including sand, gravel and crushed stone) to help internalize negative externalities, promote efficiencies in the quarrying sector, and encourage use of substitutes for aggregates (including recycled construction materials). The fiscal changes that the committee recommended will come into force in 2017. Limits on pollution from industrial sources are imposed by a variety of methods, including by ambient and emissions standards. The Polluter Pays Law, 2008, increased fines and introduced administrative financial sanctions in various environmental laws. The Prevention of Land Contamination and Remediation of Contaminated Land Law passed initial review in the Knesset in August 2011 and is expected to provide a comprehensive response to the treatment of thousands of pollution sites that constitute a health and environmental hazard. The proposed law defines contaminated land and sets forth guidelines to prevent contaminated land by putting in place procedures for identifying, cleaning up and establishing financial mechanisms to deal with contaminated land, and for informing purchasers about contamination of land. An industrial chemicals management and registration mechanism is currently under development and is expected to be operational by 2017. Construction on a new ammonia factory in Mishor Rotem in southern Israel is set to be complete in 2017. After a pre-qualification tender in January 2014 for participation in the process to select an appropriate plot of land upon which to build a new ammonia factory, eight proposals were submitted and Mishor Rotem was selected as the location. The factory will supply at least all domestic consumption of ammonia — approximately 120,000 tons per year in the current market. The factory is considered a project of national importance because of the importance of ammonia to industrial and commercial uses, and national planning institutions will be asked to give it priority. Completion of the new factory will result in the closure and emptying of the ammonia storage tank in Haifa Bay. Implementation of Integrated Pollution Prevention and Control (‘‘IPPC’’) is currently achieved through licensing under the Licensing of Businesses Law (for waste and wastewater) and the Clean Air Law (for air emissions) which requires industrial plants with the potential for significant air pollution to obtain an emission permit. IPPC implementation is underway in major industrial areas and will be gradually implemented at facilities applying for air emission permits with respect to the sectors designated in the Clean Air Law. The permit request procedure requires a facility to submit a consolidated request for a business license and an air emission permit, and the request is examined using an integrated approach based on IPPC methodology and best available techniques. The minerals and metals production and processing sectors are subject to the permit request procedure, and the procedure will soon be implemented in the food production and waste management sectors. An Integrated Environmental Licensing Law is being prepared and is expected to be approved by 2016. The law will streamline multiple environmental permits into one integrated permit, thus creating one unified and simplified approval procedure, and the law will help remove obstacles such as bureaucratic and cumbersome licensing procedures, lack of centralized information, and inadequate government support, while providing certainty to the drivers of change in the industrial sector, facilitating high environmental performance and serving as a green track to innovation. The law, to be based on the EU’s IPPC methodology, will affect factories in sectors that have a significant environmental impact, and the frequency of inspection of these factories will be based in part on the MOEP’s ‘‘Red List’’ which was published in November 2014 and rates publicly traded and governmental companies by pollution emissions as well as violation of laws, standards and regulations. The Asbestos Law, which became effective in March 2011, seeks to prevent and minimize environmental and health hazards caused by asbestos and harmful dust. The law prohibits new uses of asbestos and requires

D-45 the gradual phase out of friable asbestos in public buildings, industrial facilities and Israel Defense Forces vehicles and equipment to prevent the health hazards associated with exposure to this carcinogen. The Freedom of Information Regulations (Public Access to Environmental Information), 2009, requires a wide range of environmental information held by public authorities to be made accessible to the public, free of charge. The regulations came into effect at the end of 2010. In March 2012, the Environmental Protection Law (Pollutant Release and Transfer-Registering and Reporting Obligation), 2012, was approved by the Knesset and requires the industry to report the annual quantity of emissions of pollutants (including GHG emissions) and waste transfers from 460 facilities with the most signiﬁcant environmental impact. The information for 2012 and 2013 has been made publicly available on an Internet-based Pollutant Release and Transfer Register which became operational in December 2013 (http://www.sviva.gov.il/prtrisrael/pages/default.aspx). Along with governmental and ﬁnancial measures, the State has been convincing industries that pollution prevention and waste reduction are cost-effective. Hundreds of Israeli companies are voluntarily adopting environmental management systems, such as ISO 14000, as they recognize their importance in creating international business opportunities. The Government has also taken steps to promote environmental quality and sustainable development. In May 2003, the Government decided to prepare a sustainable development strategy for the State. As of February 2009, all ministries and Government Companies are required to use at least 20% recycled materials in all new national projects. In October 2011, the Government approved the proposal to prepare a national green growth strategy for the years 2012 − 2020. The national plan, which was presented to the Government in September 2012 and is being implemented, assesses the economic potential of a transition to a green economy and recommends measures for implementation. The plan is expected to add billions of NIS to the Israeli economy in addition to saving billions more of NIS that are currently invested in combating environmental and health hazards. The recommendations relate to the following subjects: • Removing obstacles to green growth: mapping and removing environmentally harmful subsidies and dealing with regulatory failures. • Encouraging the environmental technologies industry: developing new industry and creating markets for green products and services, accelerating green innovation, developing the environmental technologies industry including professional training, and increasing Israel’s competitiveness and promotion of export. • Promoting employment in sectors that promote environmental sustainability. • Transitioning to sustainable industry: promoting clean production, implementing of efficiency surveys in production, energy and water processes and, in environmental industrial design for small and medium businesses, promoting green industrial zones, increasing use of eco-efficiency indicators and environmental management systems and integrating environmental legislation and licensing procedures. • Transitioning to a more environmentally-friendly business sector. • Transitioning to green consumption, including a boost to green public procurement, taxation of environmentally unfriendly products and anti-‘‘greenwash’’ measures. In December 2009, the Government decided to require its ministries to take measures to reduce their consumption of paper, water and electricity according to set annual targets. In 2010, Israel’s Accountant General issued instructions requiring the use of recycled construction and demolition waste in Government or ministry contracts and in large-scale infrastructure bids issued by the State. Economic ministries, especially the Ministry of Finance and the Ministry of Economy, have taken the lead in recent years in promoting initiatives such as tax incentives imposed on private vehicles based on their level of pollutants emissions, environmental fair disclosure standards and environmental risk management. Examples of such initiatives include: the Israeli Securities Authority requirement of environmental risk management and disclosure by issuers of securities (effective March 2011, public corporations must include environmental risks in their reports to the ISA); the Bank of Israel’s Supervisor of Banks’ issuance of guidelines to banks recommending the incorporation of environmental risks among general banking risks; the Ministry of Finance’s Regulator of Insurance and Capital’s requirement that environmental risks be assessed by investment bodies; and the Government Companies Authority’s requirement that an annual report on environmental risks be reviewed by

D-46 a company’s management committee and that a periodical report on sustainability be prepared by all Government Companies. In July 2011, the MOEP and the Israel Standards Institution launched a new voluntary green building standard which complies with international standards and considers issues of energy, land use and soil, water, conservation, materials, health and wellbeing, waste, transportation and construction management. The Government has taken several steps to decrease pollution produced by public utility providers. In November 2002, the Government called for the introduction of renewable energy into the electricity sector. Within the framework of this decision, the Public Utility Authority (see ‘‘The Economy — Water and Electricity,’’ above) established tariffs for the production of electricity from renewable resources based on the estimated costs of pollution prevention per ton of emissions. In addition, in 2008, the Public Utility Authority introduced fees in tariffs for small scale photovoltaic solar installations. A Government decision from January 2009 set a target of 10% renewable energy use and 20% reduction in energy demand by 2020, followed by an additional decision on ways to promote renewable energy use. In 2009, the Government also set a target of 20% reduction in electricity consumption by 2020. The introduction of natural gas to the electricity sector (see ‘‘The Economy — Energy,’’ above) is expected to have major consequences on pollution abatement from the electricity sector. Israel’s 2010 acceptance as a member of the OECD has major ramiﬁcations for the State’s environmental protection regime, as the State continues to take steps to comply with the OECD’s decisions and recommendations, including further implementation of chemicals management, IPPC and comprehensive waste management.

D-47 BALANCE OF PAYMENTS AND FOREIGN TRADE

Balance of Payments1 Israel’s balance of payments consists of: (i) the current account, which measures the trade balance (receipts and payments derived from the sale of goods and rendering of services), balance of primary income and balance of secondary income (current transfers); and (ii) the capital and financial accounts, which reflect borrowing by the Government and the private sector, foreign direct investment in Israel and investment by Israeli residents abroad, as well as assets and liabilities of commercial banks. In the latter half of the 1990s, the current account deficit steadily decreased, mainly due to an improvement in Israel’s terms of trade and a greater increase in exports than in imports. Israel’s current account transitioned into a surplus of $0.9 billion in 2003 and has been mostly positive since. Between 2003 and 2006, the current account surplus grew gradually, reaching 5.2% of GDP in 2006 ($8.0 billion). In 2007, the current account surplus was 4.3% of GDP ($7.5 billion) and, in 2008, the surplus declined to 1.4% of GDP ($3.1 billion) due to a greater increase in imports than in exports. In 2009, the current account grew to a surplus of 4.0% of GDP ($8.3 billion) as a result of a greater decrease in imports than in exports. In 2010, trade remained strong, contributing to a high surplus in the current account of 3.5% of GDP ($8.1 billion). In 2011, due to a significant increase in imports, the current account surplus declined to 2.6% of GDP ($6.8 billion). In 2012, Israel had a current account surplus of 1.8% of GDP ($4.5 billion). In 2013, the current account surplus was 2.8% of GDP ($8.1 billion). In 2014, due to improvement in the primary income balance and secondary income (current transfers), the current account surplus was 3.7% of GDP ($11.3 billion). Between 2005 and 2008, annual export growth averaged 12.6%, led by an increase in high-tech exports. The global economic crisis, coupled with the lagged effect of the appreciation of the real exchange rate in 2008, had a negative impact on exports in 2009, with exports of goods and services declining by 16.8%. The concurrent decline in imports was sharper (-24.7%), which helped maintain a high surplus despite the global crisis. In 2010 and 2011, exports of goods and services recovered and grew by 18.2% and 14.9%, respectively. Imports grew faster than exports in both 2010 and 2011 (by 21.2% and 20.4%, respectively), leading to a decrease in the current account surplus. In 2012, exports grew by 1.3%, while imports decreased by 0.4%, reflecting slower growth than in 2010 and 2011. In 2013, exports grew by 1.5%, while imports decreased by 0.5%. In 2014, exports grew by 1.6% and imports grew by 1.9%. Current transfers, which include assistance furnished by the United States, German reparations, and personal and institutional remittances, increased in 2014 by 7.1% to $12.4 billion, following an 11.6% increase in 2013 and a 5.9% decrease in 2012. Official reserves stood at $86.1 billion at the end of 2014, an increase of 5.3% from the previous year. In March 2008, the Bank of Israel announced a two-year policy of daily purchases of foreign currency in order to increase the reserves. Official reserves increased by 48.9% in 2008 from a low level of $28.6 billion at the end of 2007, to $42.5 billion at the end of 2008. In 2009, the Bank of Israel continued its foreign currency purchases and reserves reached $60.6 billion by the end of that year, an increase of 42.6%. During 2009, the Bank of Israel terminated its scheduled purchasing policy and announced that it would intervene in the foreign exchange market in the event of unusual movements in the exchange rate that are inconsistent with underlying economic conditions, or when conditions in the foreign exchange market are disorderly. By the end of 2011, foreign currency reserves reached $74.9 billion, reflecting an increase of 5.6% from the end of the previous year. The Bank of Israel did not purchase foreign currency between the end of August 2011 and April 2013. As a result, the Bank of Israel foreign currency reserves grew in 2012 at a low pace of 1.4%, reaching $75.9 billion as the end of 2014.

1 As presented in this section, balance of payments data are calculated at current U.S. dollar amounts while foreign trade data are calculated at constant NIS prices. Due to these differences in calculation methodology, there may be inconsistency among the data presented under the subsections ‘‘Balance of Payments’’ and ‘‘Foreign Trade.’’

D-48 In May 2013, the Bank of Israel announced its plan to resume purchasing foreign currency to counteract the adverse effects on the balance of payments of natural gas production from the Tamar reservoir, which began operating in late March 2013. Following the beginning of production from the Tamar reservoir, there were appreciation pressures on the NIS. The Bank of Israel’s intervention in the foreign exchange market, for the ﬁrst time since 2011, was intended to offset the appreciation pressure on the NIS resulting from the increased domestic production of natural gas in order to avoid the phenomenon known as ‘‘Dutch disease,’’ which could negatively impact Israel’s economy. The Bank of Israel purchased $5.6 billion by the end of 2014 within the framework of this plan. Due to this plan, as well as foreign exchange purchases not included in the plan, the Bank of Israel foreign currency reserves grew by 7.8% and 5.3% in 2013 and 2014, respectively, reaching record levels of $81.8 billion and $86.1 billion by the end of 2013 and 2014, respectively. In December 2014, the Bank of Israel announced that it projects that the overall effect of natural gas production on the balance of payments in 2015 will be $3.1 billion, and that it will purchase foreign currency in 2015 accordingly. The Bank of Israel continues to purchase foreign currency under the above-mentioned program. Israel’s external debt position (liabilities to foreigners minus assets abroad, negative values represent surplus of assets against liabilities) has been favorable since the end of 2003. Net external debt amounted to negative $99.5 billion (-35.6% of GDP) at the end of 2014, following a negative $81.8 billion (-27.1% of GDP) at the end of 2013.

D-49 Table No. 17

Balance of Payments(1) (In Millions of Dollars)

2010 2011 2012 2013 2014 Current Account Receipts Exports of goods and services ...... 82,212 94,434 95,693 97,155 98,712 Income from abroad ...... 6,400 7,913 7,694 8,222 9,637 Current transfers ...... 10,665 11,059 10,412 11,615 12,442 Total current account receipts ...... 99,726 113,407 113,799 116,992 120,790 Payments Imports of goods and services ...... 77,021 92,771 92,418 91,923 93,715 Income to foreigners ...... 11,600 11,347 14,442 14,508 13,246 Current transfers ...... 2,523 2,465 2,404 2,495 2,448 Total current account payments ...... 91,144 106,583 109,265 108,926 109,409 Balances Trade in goods and services ...... 5,191 1,663 3,274 5,232 4,997 Net income ...... -5,201 -3,433 -6,748 -6,286 -3,610 Net current transfers ...... 8,142 8,594 8,008 9,120 9,994 Current account balance ...... 8,132 6,824 4,534 8,065 11,381 Capital Account Capital account balance ...... 1,184 1,451 778 1,806 2,594 Financial Account Investments Abroad Direct investment ...... 8,589 9,166 3,257 5,502 3,667 Portfolio investment ...... 9,181 3,450 7,531 9,348 10,337 Other investments ...... -217 683 -2,409 4,177 4,687 Financial derivatives ...... -30 12 -297 -458 -421 Change in reserves assets ...... 11,912 4,535 -179 4,357 7,395 Total investments abroad ...... 29,436 17,846 7,903 22,925 25,664 Investments in Israel Direct investment ...... 6,335 8,728 8,468 12,448 6,738 Portfolio investment ...... 8,985 -5,370 -3,323 1,771 9,555 Other investments ...... 3,500 1,523 -3,677 -812 -6,597 Total investments in Israel ...... 18,820 4,881 1,468 13,407 9,696 Net Financial Transactions Direct investment ...... 2,254 438 -5,211 -6,946 -3,071 Portfolio investment ...... 195 8,820 10,855 7,578 781 Other investments ...... -3,716 -840 1,267 4,989 11,284 Financial derivatives ...... -30 12 -297 -458 -421 Change in reserves assets ...... 11,913 4,535 -179 4,357 7,395 Financial Transactions Balance ...... 10,616 12,965 6,435 9,519 15,968 Statistical discrepancies(2) ...... 3,094 4,689 1,123 -353 1,992

(1) Many of the Balance of Payments figures are based on temporary estimations and are therefore subject to significant adjustments over time. (2) Including unclassified financial transactions and financial transfers. Source: Central Bureau of Statistics.

D-50 Foreign Trade Export growth plays a signiﬁcant part in Israel’s overall economic growth and demonstrates the increasing competitiveness of the Israeli economy. Export of goods2 and services have exhibited strong growth, increasing each year between 2003 and 2015, with the only exception being 2009 when industrial exports were affected by the global economic crisis. Goods and services exports increased by 18.2% from 2009 to 2010, and increased 14.9%, 1.3% and 1.5% annually from 2011 to 2013, respectively, to a level of $97.155 billion in 2013. Exports of goods and services in 2014 stood at $98.712 billion, a 1.6% increase from the total of 2013 which stood at $97.155 billion. Imports of goods and services in 2014 stood at $93.715 billion, a 1.9% increase from the total of 2013 which stood at $91.92 billion. Asia is becoming increasingly important as a destination for Israeli exports as the percentage of Israeli exports to the region has grown from 14% to 20% of total exports between 2005 and 2014. The countries that contributed the most to the growth are (in order of signiﬁcance): China (excluding Hong Kong), Malaysia, India and Vietnam. In the last decade, the Government has allocated an increasing amount of resources through its different agencies to facilitating trade with countries in Asia, including negotiating a free trade agreement with India.

Trade Liberalization Since 1990, Israel has undertaken several unilateral steps to further enhance market liberalization. A principal feature of the Government’s trade liberalization program, which began in 1991, consists of the elimination of certain non-tariff barriers designed to protect local manufacturers (with the exception of fresh agricultural produce) and the gradual decrease of custom tariffs. In 2014, average customs duties on imports subject to customs duties were approximately 1%, down from an average of 25% or higher in 1991. This reduction in average customs duties on imports is complemented by a reform in the standardization area where most mandatory standards are replaced with international standards combined with facilitation of imports processes.

2 Israeli trade data commonly excludes diamonds. This is due to the fact that the Israeli added value in the diamonds industry is low compared to the average added value in industrial goods, as well as the high volume and prices of diamonds.

D-51 Table No. 18

Exports of Goods by Major Groups (In Millions of Dollars, F.O.B.)

2010 2011 2012 2013 2014 Agriculture(1) Seasonal crops ...... 715 712 674 728 646 Fruits ...... 420 434 473 535 486 Other ...... 231 236 227 233 237 Total ...... 1,365 1,382 1,373 1,495 1,369 Industrial (excl. polished diamonds) Mining and quarrying ...... 168 214 220 212 283 Food, beverages and tobacco ...... 692 840 841 838 821 Textiles, clothing and leather ...... 1,059 1,011 952 920 839 Wood, furniture, cork, paper and printing . . . 501 574 544 413 422 Chemicals and reﬁned petroleum ...... 9,174 11,588 10,604 12,306 11,687 Pharmaceutical products ...... 6,626 7,291 6,845 6,318 6,514 Rubber and plastics ...... 1,623 2,730 1,830 1,969 2,079 Basic metal products ...... 968 1,069 935 746 699 Metal manufacturing assembly, machinery and equipment ...... 4,134 4,806 4,956 4,996 5,761 Electronic components and computers, medical and optical equipment ...... 11,214 11,781 11,852 12,639 12,519 Electrical equipment ...... 1,244 1,349 1,562 1,375 1,401 Transport equipment ...... 2,379 2,385 2,181 2,449 2,621 Jewelry ...... 435 475 460 525 641 Other non-metallic mineral products ...... 258 303 330 355 406 Miscellaneous ...... 119 135 116 126 120 Total ...... 42,814 48,431 46,782 48,746 49,506 Diamonds(1) ...... 16,402 20,657 17,472 19,018 — Diamonds (net)(2) Polished ...... 5,872 7,489 5,622 6,294 6,308 Rough ...... 3,064 3,535 2,741 2,910 3,065 Total ...... 8,936 11,023 8,362 9,204 9,347 Total(2) ...... 50,948 58,165 54,032 56,971 57,695 Other goods(2) ...... 1334 3 Returned goods ...... -71 -37 -63 -104 -105 Total (net)(2)(3) ...... 50,878 58,131 53,972 56,871 57,593

(1) Gross exports. No available data for 2014. (2) Net exports equal total gross exports less goods returned to Israeli exporters. (3) Excludes trade with the West Bank and Gaza. Source: Central Bureau of Statistics.

D-52 Table No. 19

Imports of Goods by Major Groups (In Millions of Dollars, C.I.F.)

2010 2011 2012 2013 2014 Consumer Goods Transportation equipment ...... 1,281 1,339 1,174 1,543 1,982 Furniture and electrical equipment ...... 2,928 3,468 2,913 2,995 3,061 Other ...... 266 297 298 333 341 Durable goods (total) ...... 4,476 5,103 4,384 4,871 5,384 Food, beverages and medicines ...... 2,130 2,476 2,615 2,804 2,965 Clothing and footwear ...... 1,408 1,675 1,759 1,889 2,079 Household utensils ...... 632 683 644 705 768 Other ...... 1,092 1,223 1,137 1,228 1,349 Non-durable goods (total) ...... 5,261 6,057 6,155 6,636 7,161 Total ...... 9,737 11,160 10,540 11,507 12,545 Production Inputs (excl. diamonds) Agriculture ...... 676 892 959 1,002 1,100 Raw food products ...... 2,135 2,625 2,368 2,367 2,290 Fabrics ...... 691 709 663 651 666 Wood and related products ...... 501 547 509 593 605 Chemical products ...... 3,914 4,564 5,104 4,642 4,761 Rubber and plastics ...... 2,027 2,390 2,346 2,410 2,518 Paper-making material ...... 834 877 764 776 781 Iron and steel ...... 1,803 2,461 2,177 2,127 2,121 Precious metals ...... 164 168 146 157 157 Non-ferrous metals ...... 777 924 803 850 817 Machines and electronics ...... 7,889 9,192 9,976 9,842 10,058 Other industries ...... 1,578 1,874 1,941 1,940 2,088 Fuels ...... 10,456 13,650 16,090 14,560 12,770 Total ...... 33,444 40,873 43,847 41,917 40,731 Diamonds (net) ...... 7,999 10,157 7,552 8,270 8,584 Investment Goods Machinery and equipment ...... 4,486 7,268 6,903 5,726 5,890 Transport vehicles(1) ...... 2,822 3,296 3,058 3,154 3,425 Ships and aircraft ...... 272 102 488 614 346 Total ...... 7,580 10,667 10,449 9,493 9,661 Other goods ...... 47 63 60 69 67 Returned goods ...... -102 -173 -177 -154 -144 Total (net)(2)(3) ...... 58,705 72,747 72,270 71,102 71,444

(1) Net imports equal total gross imports less goods returned to the suppliers. (2) Excludes trade with the West Bank and Gaza. Note: Due to changes in classiﬁcation, there are updates to ﬁgures reported in previous years. Source: Central Bureau of Statistics.

D-53 Table No. 20

Exports of Goods by Region (In Millions of Dollars, F.O.B., Except Percentages)(1)

2010 2011 2012 2013 2014 Americas ...... 21,599 37.0% 22,694 33.5% 20,985 33.2% 20,821 31.2% 21,740 35.7% USA...... 18,488 31.7% 19,432 28.7% 17,562 27.8% 17,492 26.2% 18,564 30.5% Other America . . 3,111 5.3% 3,262 4.8% 3,423 5.4% 3,329 5.0% 3,176 5.2% Europe ...... 18,856 32.3% 23,545 34.7% 21444 34.0% 24,020 36.0% 24,546 40.3% EU...... 15,348 26.3% 18,772 27.7% 17,129 27.1% 18,286 27.4% 1,573 2.6% EFTA...... 1,114 1.9% 1,514 2.2% 1,222 1.9% 1,451 2.2% 1,506 2.5% Other Europe . . 2,394 4.1% 3,260 4.8% 3,092 4.9% 4,283 6.4% 2,979 4.9% Asia ...... 13,808 23.6% 16,459 24.3% 15,888 25.2% 16,726 25.0% 9,756 16% Africa ...... 1452 2.5% 1,842 2.7% 1,548 2.5% 1,495 2.2% 1,016 1.7% Oceania ...... 576 1.0% 654 1.0% 738 1.2% 650 1.0% 656 1.1% Other ...... 2,125 3.6% 2,608 3.8% 2,543 4.0% 3,077 6.4% 3,220 5.3% Total ...... 58,416 100.0% 67,802 100.0% 63,145 100.0% 66,788 100.0% 60,934 100.0%

(1) Gross exports (including diamonds returned by importers abroad and other returns to exporters in Israel). Source: Central Bureau of Statistics.

Table No. 21

Imports of Goods by Region (In Millions of Dollars, C.I.F., Except Percentages)(1)

2010 2011 2012 2013 2014 Americas ...... 7,955 13.4% 10,147 13.8% 10,737 14.7% 9,618 13.4% 9,858 16.1% USA...... 6,701 11.3% 8,707 11.8% 9399 12.9% 8,153 11.3% 8,560 14.0% Other America . . 1,254 2.1% 1,440 2.0% 1,338 1.8% 1,465 2.0% 1,298 2.1% Europe ...... 26,504 44.8% 32,986 44.9% 32,523 44.5% 32,5080 45.2% 33,310 54.6% EU...... 20,409 34.5% 25,434 34.6% 25,123 34.4% 24,414 33.9% 2,046 3.4% EFTA...... 3,347 5.7% 4,101 5.6% 4,170 5.7% 4,532 6.3% 5,367 8.8% Other Europe . . 2,747 4.6% 3,452 4.7% 3,230 4.4% 3,561 4.9% 5,148 8.4% Asia ...... 13,327 22.5% 16,318 22.2% 15,151 20.7% 15,160 21.1% 5,192 8.5% Africa ...... 567 1.0% 395 0.5% 336 0.5% 292 0.4% 311 0.5% Oceania ...... 144 0.2% 165 0.2% 142 0.2% 123 0.2% 136 0.2% Other ...... 10,703 18.1% 13,525 18.4% 14,234 19.5% 14,3013 19.9% 12,238 20.0% Total ...... 59,200 100.0% 73,504 100.0% 73,121 100.0% 72,000 100.0% 61,045 100.0%

(1) Gross imports (including un-worked diamonds returned to suppliers abroad and other returns to exporters abroad). Source: Central Bureau of Statistics.

D-54 Table No. 22

Merchandise Trade Indices (Base Year: 2010 = 100)

2010 2011 2012 2013 2014 Indices of Physical Volume Exports ...... 100 100.6 98.1 101.6 105.7 Imports ...... 100 109.1 110.8 110.2 112.5 Indices of Prices Exports(1)(2) ...... 100 107 108.7 109.75 103.1 Imports(1)(2) ...... 100 113.8 109.5 109.3 107 Terms of Trade ...... 100 94.1 99.3 100.4 96.4

(1) Gross imports (including un-worked diamonds returned to suppliers abroad and other returns to exporters abroad). (2) Excluding ships and aircraft. Sources: Ministry of Finance (based on data from Central Bureau of Statistics).

Anti-Money Laundering Law In August 2000, the Knesset enacted the Prohibition on Money Laundering Law (the ‘‘PMLL’’) which established the Israel Money Laundering Prohibition Authority (‘‘IMPA’’). The PMLL, which came into effect in January 2002, makes money laundering a criminal offense in Israel punishable by imprisonment and large fines. The PMLL requires various financial institutions (including banks, portfolio managers, insurance companies and agents, members of the TASE, provident funds and companies managing provident funds, providers of currency services, and the postal bank) to identify their clients before performing a financial transaction, to report certain financial transactions to the IMPA, and to maintain records of such transactions. The IMPA is charged with, among others things, collecting, processing and disseminating reports of money laundering to the proper authorities. Effective May 2002, the PMLL requires two types of reports: (1) reports on transactions above a certain amount and of a certain type (i.e., currency transaction reports) and (2) reports on unusual activities (i.e., unusual activity reports). In 2014, the IMPA received approximately 1,552,463 currency transaction reports and approximately 60,585 unusual activity reports. The 2014 reports have resulted in several files being disseminated to the Israeli police and to the Israeli Security Agency, as well as several referrals to foreign financial intelligence units. The Israeli police have initiated numerous money laundering and terror financing investigations that have led to several indictments. In 2006, the Committee of Ministers of the Council of Europe accepted Israel as an ‘‘active observer’’ participating in the anti-money laundering/counter financing of terrorism (‘‘AML/CFT’’) evaluation process by the Council’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (‘‘Moneyval’’). In 2013, Israel received voting rights in Moneyval, a regional body that conducts mutual evaluations of its members in accordance with the AML/CFT methodology of the Financial Action Task Force (‘‘FATF’’). In 2007, Moneyval conducted a third round evaluation of Israel’s AML/CFT regime based on the Forty Recommendations (2003) and the Nine Special Recommendations on Terrorist Financing (2001) of the FATF. In accordance with Moneyval’s procedural rules, Israel was additionally evaluated against the two Directives of the European Commission (91/308/EEC and 2001/97/EC). The resulting evaluation report found Israel’s AML/CFT system to be overall sustainable, though some gaps were identified including with respect to the effectiveness of the confiscation regime. The report noted that IMPA performs in an organized and professional manner resulting in a quality output and that Israeli law enforcement units are organized and have the appropriate resources and abilities to conduct effective investigations. The report further noted that the legal and organizational framework of the Israeli border control is comprehensive, with the Israeli customs adequately targeting asset detection and supporting the AML/CFT law enforcement efforts.

D-55 In 2009, Moneyval adopted Israel’s first year progress report, demonstrating international recognition of Israel’s AML/CFT enforcement efforts and its compliance with international standards. In December 2011, Moneyval adopted Israel’s second progress report, noting considerable progress in remedying certain previously identified deficiencies. In November 2011, Israel hosted Moneyval’s annual typologies meeting which focused on trade based money laundering in cash intensive economies, postponement of financial transactions, and monitoring of bank accounts. During 2013, Moneyval conducted its fourth round evaluation of Israel. The Mutual Evaluation Report was adopted by Moneyval’s plenary on December 12, 2013. As noted in the report, Israel has taken significant steps to remedy the deficiencies identified in the 2008 evaluation. The report specified that Israel has undergone a cultural change in recent years with regard to combating money laundering and that appropriate measures to prevent and combat AML/CFT were taken as a high priority by all law enforcement agencies. Nevertheless, the report noted a number of legislative amendments related to designated non-financial businesses and professions and currency service providers that required approval by the Knesset to bring them into force and effect. Therefore, Moneyval’s plenary required that Israel report to the plenary in December 2014 on the progress with regard to the legislative amendments. In December 2014, Israel submitted an expedited follow-up report that detailed the enactment of the following legislative amendments: • Prohibition of Money Laundering Law (Amendment No. 13), 2014 (enacted on July 30, 2014); • Prohibition of Money Laundering (Identification, Reporting and Record-Keeping Obligations of Money Services Providers to Prevent Money Laundering and the Financing of Terrorism) Order, 2014 (enacted on May 12, 2014); • Prohibition of Money Laundering (Identification, Reporting and Record-Keeping Obligations of Dealers in Precious Stones to Prevent Money Laundering and the Financing of Terrorism) Order, 2014 (enacted on July 15, 2014); and • Prohibition of Money Laundering (Identification, Reporting and Record-Keeping Obligations of Business Service Providers to Prevent Money Laundering and the Financing of Terrorism) Order, 2014 (enacted on December 2, 2014). Following the legislative amendments, Israel’s expedited follow-up report was adopted by Moneyval’s plenary on December 9, 2014. Israel expects to submit its next follow-up report in December 2015. Compliance with AML/CFT requirements does not lie with any single authority in Israel. All national agencies active in the AML/CFT areas cooperate with each other, exchange information and conduct joint investigations. Emblematic of this shared responsibility is the establishment of an Intelligence Fusion Center, a joint intelligence body bringing together individuals with different professional backgrounds, such as intellectual property experts, and officials from the Tax Authority and the IMPA. The respective licensing and supervising authorities of financial institutions are responsible for AML/CFT compliance as a matter of prudential supervision. Licensing procedures in the financial market are broadly in line with the relevant EU legislation and FATF Recommendations, as are the arrangements for AML supervision for banking corporations, portfolio managers, insurers, provident funds, currency service providers, the postal bank and stock exchange members. In addition to the abovementioned legislative amendments, additional amendments to the PMLL and related legislation are pending, including: reducing the monetary thresholds and abolishing the distinctions between the types of property used in money laundering under Section 4 of the PMLL; providing IMPA the authority to exchange information with other government agencies and with financial regulators; reducing the threshold amount that triggers a cross border reporting obligation to NIS 50,000; adopting a confiscation regime, modeled on the UK’s Proceeds of Crime Act 2002, with ‘‘criminal lifestyle’’ and civil recovery provisions; and providing authorities with improved criminal and administrative measures to prevent the activities and financing of terrorist organizations.

D-56 Foreign Exchange Controls and International Reserves In recent years, net external (debt instrument) assets (external assets minus external debt) have increased dramatically, reaching a record level of $99.5 billion at the end of 2014. Foreign currency reserves grew from $29.2 billion at the end of 2006 to $86.1 billion at the end of 2014. All activities and transactions in foreign currency between resident individuals, businesses and nonresidents have been permitted since January 2003. The Bank of Israel and the Ministry of Finance took several measures in 2011 to facilitate the achievement of monetary and foreign exchange policy goals, which include increasing transparency and investor confidence, improving analytical abilities with respect to transactions in the foreign exchange market, and reducing short-term investments by foreign investors. Measures from 2011 included: • The cancellation of a tax exemption for foreign residents on interest income on Makam and short-term government bonds with maturities of less than one year. • The cancellation of a tax exemption for foreign residents on capital gains from Makam and short-term government bonds with maturities of less than one year. • Reporting requirements for certain intraday transactions. Israeli residents and non-residents are required to report on intraday transactions in foreign exchange swaps and forward contracts totaling $10 million or more per day. Reporting persons or entities are required to provide details regarding these transactions and holdings in these assets and NIS/USD options. Non-residents are required to report on intraday transactions in Makam and short-term government bond transactions totaling NIS 10 million or more per day. Non-residents are also required to provide details regarding these transactions and holdings in these assets. Reporting is required by Israeli residents and non-residents who are not financial intermediaries and by financial intermediaries acting on behalf of others or on behalf of themselves. A January 2011 directive that required banking corporations in Israel to meet a 10% reserve requirement for foreign exchange swap transactions and shekel-based forward contracts entered into by non-residents was canceled at the end of October 2014.

Table No. 23

External Assets and Liabilities (Debt Instruments) (End-year Balances in Millions of USD)

2010 2011 2012 2013 2014 External Debt Public sector ...... 40,156 36,188 31,612 29,634 30,123 Private sector ...... 41,843 42,659 44,958 47,607 46,097 Banking system ...... 29,859 30,449 25,458 24,018 19,943 Total ...... 111,858 109,296 102,028 101,259 96,163 External Assets Public sector ...... 71,362 75,314 76,323 83,434 88,844 Private sector ...... 75,205 73,794 70,629 74,769 77,197 Banking system ...... 21,640 21,029 22,541 24,868 29,656 Total ...... 168,207 170,137 169,493 183,071 195,697 Net External Debt ...... -56,349 -60,841 -67,465 -81,812 -99,534

Source: Bank of Israel.

D-57 Table No. 24

Foreign Currency Reserves at the Bank of Israel (Annual Average, Millions of Dollars)(1) 2010 2011 2012 2013 2014 69,265 73,052 74,000 76,896 84,071

(1) Excludes the Allocation of Special Drawing Rights by the IMF to member countries and the balance of the Israel’s reserve tranche in the IMF. Source: Bank of Israel. Foreign Exchange Rates The Bank of Israel Law, Section 4(3), stipulates that a function of the Bank of Israel is to support the orderly activity of the foreign currency market in Israel. In August 2009, the Bank of Israel announced that it would act in the foreign exchange market in the event of unusual movements in the exchange rate or abnormalities in the foreign exchange market that do not reﬂect economic fundamentals (see ‘‘The Financial System — Bank of Israel,’’ below). From August 2011 through March 2013, the Bank of Israel did not intervene in the foreign exchange market but, in April 2013, the Bank of Israel intervened in the foreign exchange market and, in May 2013, the Monetary Committee of the Bank of Israel announced a multiyear foreign exchange purchase plan which aimed to offset the effect of the natural gas production on the exchange rate. Under the multiyear plan, the Bank of Israel will purchase foreign currency in line with the Bank of Israel’s assessment of the effect of natural gas production on the balance of payments. During 2013 and 2014, the Bank of Israel purchased a total of $2.1 billion and $3.5 billion, respectively, as part of this plan and announced plans to purchase $3.1 billion in 2015.

Foreign Investment The volume of foreign direct investment in Israel totaled $6.7 billion in 2014, compared to $12.4 billion during 2013. From 2010 to 2014, the total volume of net foreign direct investment in Israel was approximately $12.5 billion. The volume of corresponding overseas direct investments by Israelis totaled approximately $3.7 billion in 2014, compared to approximately $5.5 billion in 2013.

Table No. 25

Nonresident Investment in Israel and Resident Investment Abroad (Net Transactions in Millions of USD) 2010 2011 2012 2013 2014 Nonresident investment ...... 19,000 4,881 1,468 13,408 9,697 By investment type Direct Investment ...... 6,335 8,728 8,468 12,449 6,738 Portfolio Investment ...... 8,985 -5,370 -3,323 1,770 9,555 Other Investment ...... 3,680 1,523 -3,677 -811 -6,596 Resident Investment abroad ...... 29,505 17,845 7,903 22,925 25,666 By investment type Direct Investment ...... 8,656 9,166 3,257 5,502 3,667 Portfolio Investment ...... 9,181 3,450 7,531 9,348 10,337 Other investment ...... -214 683 -2,408 4,176 4,687 Reserve assets ...... 11,912 4,534 -180 4,357 7,396 Financial derivatives ...... -30 12 -297 -458 -421 Net ﬁnancial account ...... -10,505 -12,964 -6,435 -9,517 -15,969

Source: Central Bureau of Statistics and Bank of Israel calculations.

D-58 Table No. 26

Average Exchange Rates (NIS per Currency Unit)

2010 2011 2012 2013 2014 U.S. dollar ...... 3.733 3.578 3.856 3.611 3.578 British pound sterling ...... 5.771 5.736 6.111 5.650 5.888 Euro ...... 4.953 4.978 4.955 4.797 4.748 Japanese yen (per 100 yen) ...... 4.259 4.492 4.835 3.708 3.383

D-59 THE FINANCIAL SYSTEM

Bank of Israel The Bank of Israel, established in 1954, is the country’s central bank and functions independently of the Government. It is responsible for formulating and implementing Israel’s monetary policy. The Bank of Israel also manages foreign exchange reserves, supports the orderly activity of the foreign currency market in Israel, regulates the Israeli payment and clearing systems, supervises and regulates Israel’s banking system, and issues bank notes and coins. The Governor of the Bank of Israel, who is appointed by the President of the State after receiving the recommendation of the Government, acts as an economic advisor to the Government. The current Governor of the Bank of Israel is Dr. Karnit Flug, appointed in November 2013, after having served as Deputy Governor and as Director of the Research Department in the Bank. In March 2010, the Knesset enacted a new Bank of Israel Law, which came into effect on June 1, 2010. According to the law, the central objective of the Bank of Israel is to maintain price stability. The range of price stability is determined by the Government, in consultation with the Governor of the Bank of Israel. Since 2003, the Government’s target range for inflation has been 1% − 3% per annum. Additional objectives of the Bank of Israel are to support the stability and orderly activity of the Israeli financial system and to support other objectives of the Government’s economic policy, especially growth, employment and reducing social gaps, provided that the support does not prejudice the attainment of price stability over the course of time. The Bank of Israel is autonomous in its actions, including determining its policy tools and their uses. To attain its objectives and discharge its functions, the Bank of Israel may: issue its own securities; perform, on the stock exchange or in another regulated market or off-market, an action or transaction of any kind that is customary in the capital, money and foreign currency markets, including in the derivatives market, all of which apply to securities, currency, gold or any other asset or instrument as are customary in such markets (provided the purchase or sale of Government debentures whose maturity date exceeds thirteen months from the purchase or sale date, as the case may be, with the exception of repurchase transactions in such debentures, shall be executed in consultation with the Minister of Finance and in such manner that does not materially prejudice the ability to raise local debt to finance the Government’s activity); receive deposits from banking corporations; grant credit to banking corporations; under exceptional circumstances, grant credit to financial entities that are not banking corporations and; take any other action the Bank of Israel deems necessary. As stipulated in the Bank of Israel Law, the Bank of Israel is not allowed to finance budget deficits or to lend money to the Government to finance its expenditures, including via direct purchase of Government debentures at issuance, except for temporary advances to bridge a gap in the Government’s cash flow in executing its budget (provided that the outstanding amount of such temporary advances at any time does not exceed NIS 10 billion and will not be extended for more than 150 days per year). The amount of such permissible temporary advances is updated on January 1 of each year, most recently on January 1, 2015, based on year-over-year changes in the CPI. The Bank of Israel is the sole banker of the Government in its banking activity in Israeli currency. The Government may, however, obtain certain services (as agreed in a memorandum of understanding dated March 9, 2010 between the Government and the Bank of Israel) from others, provided this is done only to manage the Government’s debt and fiscal activity. The Bank of Israel is subject to internal limitations on the amount of investments it may make in a single country or financial institution. The majority of the Bank of Israel’s reserves are held in debt securities issued by foreign sovereign issuers. As of October 2011, monetary policy and decisions on actions required to achieve the Bank of Israel’s objectives are determined by the Monetary Committee of the Bank of Israel as mandated by The Bank of Israel Law, 2010. The Monetary Committee is composed of three members representing the Bank of Israel (the Governor of the Bank of Israel, as chairperson, the Deputy Governor, and a member of the Bank of Israel staff who is appointed by the Governor) and three members representing the public, all of whom are appointed by the Government.

D-60 An administrative council, whose duties are to supervise the orderly and efficient management of the Bank of Israel, was also appointed in late 2011. The administrative council is composed of the Governor, the Deputy Governor and ﬁve members appointed by the Government as representatives of the public. The Government also appoints one of the public representatives as the chairperson of the council.

Monetary Policy Monetary Framework. From the establishment of the State of Israel in 1948 and until the end of 1991, the monetary framework in Israel was based on the exchange rate, with interest rate policy and other monetary instruments, including foreign exchange control, used to support the exchange rate regime. Following a number of years of volatile foreign exchange flows, at the end of 1991, the Bank of Israel and the Ministry of Finance began publicly announcing annual inflation targets, with the intention of reducing inflation gradually from the 15% − 20% range that had prevailed since the Economic Stabilization Program was introduced in 1985 to the low single-digit levels typical in developed countries. At that time, Israel was one of the first emerging market economies to adopt the inflation-targeting approach to monetary policy as a tool in reducing inflation. Initially, strict inflation targeting was compromised by retention of an upward sloping exchange rate target zone but, when inflation significantly exceeded its target in 1994, the Bank of Israel implemented more restrictive monetary measures to prevent inflation from reverting to its pre-1992 levels. The Bank of Israel’s tight monetary policy since 1994 and the effective abandonment of exchange rate management in 1997 were the key factors in attaining the current stable inflation environment in Israel. Between 1998 and 2003, the inflation target range was brought down gradually and has been set at the current range of 1 − 3% since 2003. From 2003 until 2008, actual inflation averaged 1.9%, at the middle of the target range, with considerable year-to-year variation due primarily to short-term effects of exchange rate pass-through and foreign price shocks, especially in the food and energy sectors. Since 2008, monetary policy has been conducted against the backdrop of the global financial crisis which began in the summer of 2007 and worsened during 2008. Prior to September 2008, domestic economic activity was robust although expectations of a recession were spawned by concerns over the worsening of the financial situation abroad, mainly in the United States. The Bank of Israel preemptively reduced the interest rate at the beginning of 2008 but, as expectations for deterioration of the Israeli economy did not materialize and inflationary pressures increased, during the third quarter of 2008 the Bank of Israel raised the monetary interest rate back to its previous level of 4.25%. In addition, in view of sharp local currency appreciation due in large part to repatriation of foreign investments by Israelis, in March 2008 the Bank of Israel began to implement a plan to increase its foreign exchange reserves by direct purchases in the foreign currency market. Starting in September 2008, in view of the escalating global crisis and growing signs of a major downturn in real activity, all of the considerations employed in interest rate decisions supported sharp reductions in the rate, which was cut to 2.5% at the end of 2008, followed by further cuts to the historically low level of 0.5% by April of 2009. In retrospect, the acute phase of the effects of the global financial crisis on the real economy in Israel lasted only two quarters, during the fourth quarter of 2008 and the first quarter of 2009, when real GDP growth was zero, but this was not known in real time; only toward the end of 2009 did concern of continued severe recession abate. The six years that followed may be described by a combination of various key trends as follows: (1) Steady and significant improvement in key labor market indicators, including higher labor force participation rates and lower unemployment with muted real wage increases. (2) A continued and sharp increase in housing prices, in part due to a shortage of apartments relative to the rate of increase of new families and to the low level of returns on financial investments during the 2008 financial crisis and thereafter. Starting from a cyclical nadir, prices of apartments increased in excess of 80% from 2007 through 2014. (3) A neutral fiscal stance with slight declines in the government debt-to-GDP ratio. (4) A current account surplus in all years except 2012 when the curtailment of the supply of natural gas from Egypt following the 2011 Arab Spring generated a sharp but temporary rise in energy costs. (5) A trend of local currency appreciation (nominal effective terms), with temporary episodes of depreciation in 2012 and 2014.

D-61 A number of important additional features may be grouped into three sub-periods: mid-2009 to mid-2011, a period of strong real GDP growth along with relatively high inflation; mid-2011 through 2013, a period of slower GDP growth — approximately 3% — and inflation within the target range; and 2014 to the present, a period of stable GDP growth of approximately 3% with sharply declining inflation. For the sub-period mid-2009 to mid-2011, real GDP growth averaged 5% and inflation increased to over 4% in 2011, due primarily to increases in world prices of energy and food. The Bank of Israel followed the conventional approach in reacting to such exogenous supply side shocks, that is, by increasing the key policy rate only when there were indications that the initial shock to the price level may lead to inflationary dynamics, such as increases in measures of expected future inflation and increased wage demands. In light of the resumption of strong real growth by mid-2009, the Bank of Israel increased its rate gradually from the exceptionally low level of 0.5% to 1% by December 2009, to 2% by December 2010, reaching a peak of 3.25% in mid-2011, in reaction to the increased inflation. Various measures of expected inflation indicated that these rates remained firmly anchored within the inflation target range. Despite a widening gap between short term interest rates in Israel and those in the major financial centers, the shekel did not appreciate during 2011, perhaps due to the increasingly uncertain geopolitical situation in neighboring countries and the related effect on Israel’s energy costs. Starting in mid-2011, real GDP growth dropped sharply to just above 3%, impacted by the continued lack of recovery by Israel’s major trading partners and the prolonged Eurozone crisis, but Israel’s growth consistently exceeded the growth of major advanced economies. Unemployment continued its downward trend, implying a slowdown in productivity growth, similar to the productivity slowdown in the United States and some other advanced countries. Inflation returned to the target range by the end of 2011 as energy and commodity prices abroad stabilized. In light of the slowdowns in both inflation and growth, the Bank of Israel reduced its key interest rate several times beginning in September 2011 from a level of 3.25% to a level of 1.75% by January 2013, maintaining a 1.75% level until mid-May of 2013. Another key feature of the mid-2011 to mid-2013 period was the development of Israel’s natural gas findings and the start of local production of natural gas from the Tamar reservoir in April 2013. Along with renewed current account surpluses even prior to reductions in oil imports, the shekel began to strengthen in mid-2012. The Bank conducted intermittent foreign exchange intervention to partially offset forces for local currency appreciation. From January through May of 2013, the effective exchange rate of the shekel appreciated by about 5%, raising some concern about the profitability of exports. Accordingly, on May 13, 2013, the Bank of Israel announced a reduction of its key policy rate to 1.5% and introduced its plan to commence a program of foreign currency purchases intended to offset the reduction in demand for foreign exchange resulting from the substitution of imported fuel made possible by the local gas production. Additionally, near the end of May 2013, the Bank of Israel announced that it would further reduce the interest rate to 1.25%, effective June 2013. The measures undertaken in May 2013 succeeded in slowing the rapid appreciation of the shekel. In view of the risks embodied in the rapid rise in house prices and the expansion of housing credit, the Bank of Israel implemented macro-prudential measures, with regards to banks’ mortgage loans, to support financial stability. These measures included: redefining housing credit extended to organized consumer purchasing groups as credit extended to the construction industry instead of households’ mortgages, requiring banks to meet stricter credit standards; increasing the capital provision requirement against high loan-to-value mortgages; requiring the re-examination of risk management in the housing credit portfolio; demanding a higher capital provision against floating-interest loans; in 2011, limiting mortgages at variable rates of interest to one third of the total housing loan granted to a borrower and; in 2012, limiting loan to value ratio of mortgages. The key development affecting monetary policy since the second half of 2013 has been the significant drop in actual inflation and inflation expectations, along with a corresponding drop in short term interest rates, as well as a decrease in longer term interest rates. These developments in the inflation environment are consistent with developments in the Eurozone and somewhat less so in the United States. In 2014, actual CPI inflation was negative at -0.2; excluding the housing component, CPI inflation was even lower at -2%. While a significant part of the drop in measured inflation was attributable to world prices of commodities, especially

D-62 the very sharp drop in oil prices during the second half of 2014, other causes of the overall CPI inflation drop remains at this stage unclear. In this respect, developments in Israel are quite similar to those in the major advanced economies. On the real side, GDP growth remains steady at around 3%, and various labor market indicators show steadily continuing improvement. The current account surplus grew from $4.5 billion in 2012 to $8 billion in 2013 and to $11.4 billion in 2014. From mid-2013 to mid-2014, the shekel continued to appreciate in effective terms. In the third quarter of 2014, there was a sharp depreciation caused by temporary increased domestic and geopolitical uncertainty and interest rate reductions at the end of July and at the end of August by the Bank of Israel. In August 2014, the Bank of Israel reduced the key policy rate to a new historical low of 0.25%. In the middle of the fourth quarter of 2014, the shekel began to appreciate once more and actual inflation was below expectations, so the Bank of Israel reduced the key policy rate in March 2015 to 0.10%, nearing the so-called ‘‘zero lower bound’’ on nominal rates. After the acute phase of the global financial crisis which occurred during the fourth quarter of 2008 and the first quarter of 2009, measurements of economic developments in Israel have been strong compared to other advanced economies. Real output growth and labor market developments show continued strength relative to other countries. Fiscal policy has been sound with the government debt-to-GDP ratio declining slightly once again in 2014. The balance of payments continues to be in surplus, in part because of natural gas discoveries. Israel’s main areas of concern continue to be the appreciation in housing prices and related social pressures as young families find it increasingly difficult to afford housing. Additionally, monetary policy in Israel, like elsewhere, faces increasing operational difficulty due to the low key policy rate. So far, however, these difficulties have remained at manageable levels. Implementation of Monetary Policy. The Bank of Israel’s principal instruments of monetary control are auctioned time deposits for banks, sales of Makam, and a discount window facility. Auctions for interest-bearing deposits are currently the main tools for implementing monetary policy and are similar to reverse repurchase agreements. The interest rates received by the banks are determined in such auctions. Maturities are overnight or one week. The auction of overnight funds and deposits of various maturities and the rates of interest determined in connection therewith are the key determinants of very short-term interest rates in Israel. The Bank of Israel utilizes the daily auctions primarily to offset flows, to and from the monetary base, of governmental activities and foreign exchange market intervention. In the past, when the banking system was in a fundamental liquidity deficit, the Bank of Israel injected liquidity using monetary collateralized loans which were allocated to the banking system by periodic auctions of a predetermined amount and were used in a manner similar to repurchase agreements. Since the resumption of foreign exchange intervention at the start of the global financial crisis (March 2008), the banking system has been in a fundamental liquidity surplus so the Bank of Israel has been absorbing liquidity rather than injecting it. The Bank of Israel may also absorb liquidity by selling Makam, formally a liability of the Government but issued by the Bank of Israel for monetary purposes. Unlike Bank of Israel’s other monetary instruments, these securities are traded in the secondary market and are accessible by the investing public. Since the mid-1990s, the Bank of Israel expanded the use of Makam issuances as a monetary instrument to absorb excess liquidity in the banking system. Since March 2007, the Makam market has enabled the Bank of Israel to actively increase liquidity in the banking system by reducing the issuance of Makam. The discount window facility enables banks to obtain, at any time during the day, overnight loans to fill temporary funding needs (against suitable collateral) at a premium above the key policy rate or deposit excess funds at a rate below the key policy rate. The key function of the discount window is to establish a rate ‘‘corridor’’ within which the rate on auctioned deposits is determined. This function is similar to the system used by the European Central Bank and a number of other central banks. In 2008, the Bank of Israel resumed foreign exchange intervention after a ten year hiatus. Although the objectives of this intervention vary depending on the circumstances, objectives include increasing the level of foreign exchange reserves in the early stage of intervention, limiting the effect of the substitution of domestic natural gas for imported oil on the exchange rate in the past two years, and occasionally limiting local currency appreciation when the Bank determines that the exchange rate is not in line with macroeconomic fundamentals.

D-63 Following the reduction of the key policy rate to a near-zero level and in light of the possibility that the Monetary Policy Committee may deem further monetary expansion necessary, the Bank of Israel has considered, but not implemented, unconventional monetary policy measures similar to those already undertaken by central banks in other advanced economies.

Table No. 27

Selected Interest Rates(1)

Short Term Credit to the Public in Local Currency Average Interest on Daily Yield to Maturity Line of Term Commercial Bank Deposits at of 12-month Credit(2) Credit(2) the Bank of Israel(3) SROs(2)(4) Treasury Bills 2010 ...... 9.2% 4.5% 1.6% 1.0% 2.2% 2011...... 10.5% 5.5% 2.9% 2.1% 3.0% 2012 ...... 10.1% 5.1% 2.3% 1.6% 2.2% 2013 ...... 8.8% 4.3% 1.4% 0.8% 1.3% 2014 ...... 8.2% 3.7% 0.6% 0.3% 0.5%

(1) Percent per annum of effective interest rate. (2) Until March 2013, the data reﬂects the net balance of the 7 largest commercial banks. From April 2013, the data reﬂects the gross balance of all banking corporations registered in Israel. (3) The interest rate on daily deposits auctioned by the Bank of Israel. (4) Self-renewing overnight local currency interest-bearing bank deposits (‘‘SROs’’), excluding large negotiable SROs. Source: Bank of Israel. Table No. 28

Monetary Indicators (Percentage Change over Previous Period)(1)

2010 2011 2012 2013 2014 Monetary Aggregates(2) M1 (in millions of NIS annual average)(3) ..... 111,039 115,431 121,236 136,714 167,751 M2 (in millions of NIS annual average)(4) ..... 521,016 574,134 590,433 612,988 670,952 M1...... 12.1% 4.0% 5.0% 12.8% 22.7% M2...... 9.2% 10.2% 2.8% 3.8% 9.5% Public Sector Injection/GDP(5) ...... 0.2% -0.2% -0.9% -1.0% 0.1% Bank Of Israel Injection/GDP(6) ...... -3.8% -0.8% 1.0% -0.2% -1.3% Nominal Interest Rates SROs(7) ...... 1.0% 2.1% 1.6% 0.8% 0.3% Unrestricted Credit in Local Currency(2)(7) ..... 5.0% 6.0% 5.6% 4.5% 3.9% U.S. $Interest Rate (average, three month LIBID) ...... 0.2% 0.2% 0.3% 0.1% 0.1% NIS/U.S.$(during period) ...... -4.9% 4.7% 0.1% -7.2% 12.3% Real Yield To Maturity On 5 Year Indexed Government Bonds ...... 1.0% 0.0% 0.7% 0.3% -0.2% Nominal Yield On Equities (during period)(8) . . . 12.6% -22.1% 4.6% 15.3% 11.5% Nominal GDP ...... 7.3% 6.2% 7.3% 5.8% 3.6%

(1) Certain data herein are calculated based on annual averages and certain other data herein are calculated based on year-end ﬁgures. (2) Includes mortgage banks.

D-64 (3) Currency in circulation plus demand deposits. (4) M1 plus treasury bills and interest-bearing local currency deposits with maturities shorter than 12 months. (5) Contributions to monetary expansion. (6) Includes swap transactions, with respect to the redemption of government bonds held by the Bank of Israel. (7) Until March 2013, the data reﬂects the net balance in the 7 largest commercial banks. From April 2013, the data reﬂects the gross balance in all banking corporations registered in Israel. (8) Includes convertible securities and warrants. The data has been adjusted for dividend distribution and stock split. Source: Bank of Israel.

Banking System Profile of the Banking System. The banking system is well regulated in accordance with international standards and practices set by the Basel Committee for Banking Supervision. Banking licenses are issued by the Governor of the Bank of Israel, and banks are supervised by the Banking Supervision Department (‘‘BSD’’) of the Bank of Israel. Israel has a highly developed and concentrated banking system. At the end of 2014, there were 22 banking corporations registered in Israel, including 15 commercial banks, 1 financial institution, 2 joint-service companies and 4 foreign banks. The five largest banking groups — Bank Leumi Le-Israel B.M., Bank Hapoalim B.M., Israel Discount Bank Ltd., Mizrahi Tefahot Bank Ltd. and The First International Bank of Israel Ltd. — constitute approximately 93% of the banking market in Israel. The two largest banking groups (Leumi and Hapoalim) comprise almost 60% of the banking industry. There are only three small commercial banks that are unaffiliated with banking groups. In addition, there are four branches of foreign banks that operate on a smaller scale — Citibank N.A., HSBC Bank PLC, Barclays Bank PLC and State Bank of India. Other major European foreign banks operate from offices in Israel and engage in activities in the capital markets and render advisory services that do not require a banking license according to the banking laws. The total assets of the five major Israeli banking groups rose by 6.5% and reached NIS 1,327.2 billion year-end 2014, compared with NIS 1,245.7 billion year-end 2013. Banking group assets denominated in foreign currencies rose by 19.3% in 2014 due to the depreciation of the NIS primarily against the U.S. Dollar, compared to the 2013 appreciation of the NIS that caused a decline of 7.6% in bank assets denominated in foreign currencies in 2013. The activity in local currency continues to expand and amounted to NIS 1,034.4 billion year-end 2014, a 3.4% rise from year-end 2013. Equity capital amounted to NIS 92.4 billion year-end 2014 and increase of 8.1% during 2014. Controlling Structure in Banks. Banks can be controlled by a core controlling group, or the holding of a bank can be widely dispersed among a broad shareholder base. On March 19, 2012, an amendment to the Banking Ordinance Act, 1941 and to the Banking (Licensing) Law, 5741 − 1981 took effect, primarily allowing for the accommodation of a bank ownership structure without a controlling shareholders group, which became an alternative ownership structure since the enactment of the Amendment to the Banking (Licensing) Law, 1981 (i.e., the ‘‘Marani Amendment’’) in 2004. The 2012 Amendment modified the rules for the operation of a bank without a controlling shareholder group. Because of the possibility for a bank to transition between one shareholder structure to another, there emerged a need to clarify the principles for the transition procedure. Therefore, the Bank of Israel issued a principle document to the public, addressing the conditions for dispersing a controlling shareholder interest. In December 2013, the Knesset enacted the Law for the Promotion of Competition and Reduction of Concentration, 5774 − 2013 that, among other matters, sets restrictions on significant cross-sectorial holdings and control of real companies together with a banking corporation that constitutes a significant financial entity, as defined in this law. This law provides a transition period for pre-existing holders of controlling means. Main regulatory issues. The BSD is the primary regulator of Israeli banks. The BSD is headed by the Supervisor of Banks, who is appointed by the Governor of Israel. Two committees operate alongside the

D-65 Supervisor of Banks: (1) the Licenses Committee, which advises the Governor of the Bank of Israel and the Supervisor of Banks in connection with establishing banking corporations, licensing bank branches, reviewing changes of control in banks, and ensuring the stability of banks where mismanagement has been found; and (2) the Advisory Committee, which advises on matters relating to the issuance of new banking business regulations. In recent years, the BSD has enhanced its supervision over the banking system and tightened regulation to meet the evolving and challenging risk environment that faces the Israeli banking system. In 2014, the BSD continued the ongoing process of implementing the recommendations of the Financial Sector Assessment Program (‘‘FSAP’’) which was conducted by an IMF delegation at the end of 2011. The delegation found the Israeli banking system to be generally robust and banking sector regulation and supervision to be stringent and generally in line with international standards. In the framework of adopting the FSAP recommendation, the BSD continues to implement the best practices regarding stress testing and to improve stress testing techniques. The BSD has performed several types of stress tests on the Israeli banking system. These include stress tests on the banks’ mortgage portfolios and the housing market, using a uniform stress scenario, and a severe domestic stress scenario with emphasis on construction and real estate and on highly leveraged credit, which also captures certain types of concentration risk. Accordingly, scenarios that incorporate both domestic and overseas crises were examined. The BSD continues to develop liquidity stress test scenarios and methodology. The following delineate the main regulatory changes in 2014 and the first part of 2015: • Basel regulations — BSD continues to implement regulations pertaining to risk management area and risk-based capital and liquidity requirements to conform with the standards set by Basel Committee. BSD promulgated a directive that implements the Basel III standard for the Liquidity Coverage Ratio. Effective January 2018, all Israeli banks will be required to have a leverage ratio (as defined in Basel III) of 5% and, for banks with assets totaling 20% or more of the banking system’s assets, to have a leverage ratio of 6%. • Cyber risk — In light of the increase in cyber-threats, the escalation in the complexity and sophistication of cyber-attacks, and the unique nature and characteristics of the cyber arena, as well as the Israeli financial system being a potential target of attacks due to the geopolitical environment, in March 2015 the Supervisor of Banks published a specific directive pertaining to cyber-defense management. This principle-based directive delineates the need for a holistic approach for dealing with cyber threats and risks. Banks will be required to undertake internal governance measures, including ongoing involvement of the Board of Directors and Senior Management; to appoint a designated senior official in charge of the cyber-defense array; and to develop a cyber-defense framework. This directive articulates the strategies and framework for managing cyber-risks, the principles of cyber-risk management and cyber-defense management, including cyber-control guidelines. This directive is compatible with other directives which deal with risk management, including ‘‘Proper Conduct of Banking Business’’ No. 350 on ‘‘Operational Risk Management.’’ • Credit risk — BSD has been acting to strengthen certain aspects of credit risk management. In this context, in 2014 the Supervisor of Banks published a revised directive on ‘‘A banking corporation’s business with related parties,’’ and in 2015 published additional guidelines regarding leveraged lending, financing equity transactions and syndication loans. • Cross-Border risk — Cross-border risk is the risk associated with the international operations of banks (in this case Israeli banks) due to actions taken by foreign governments, including tax evasion and compliance with laws, rules and regulations. In response to a proactive campaign of the United States to recover Americans’ unpaid tax from foreign jurisdictions, Israeli banks were prompted to retool their computer and reporting systems and to institute a revised customer due diligence process in this area. Due to increased risk associated with the cross-border activities of Israeli banks in recent years, the Supervisor of Banks introduced two major guidelines. First, in April 2014, the Supervisor of Banks published guidelines to the Israeli banks to undertake measures to prepare for the implementation of the Foreign Accounts Tax Compliance Act (‘‘FATCA’’). These measures include implementing governance procedures (policies, appointing task force, reporting, etc.), communicating to clients information on FATCA and its

D-66 potential implications and a bank’s right to refuse to open an account for a non-cooperative client (or refuse to provide banking services to an existing non-cooperative client). By the end of June 2014, Israel signed an agreement on FATCA with the United States. Second, in March 2015, the Supervisor of Banks published enhanced cross-border risk management requirements. Enhanced measures are incumbent upon a bank’s Board of Directors, including revision of cross-border operations policies with emphasis on the tax compliance of the bank’s clients to foreign jurisdictions laws, rules and regulations. A bank’s senior management is expected to comply with the bank’s controls and procedures to manage the risks from a bank’s international activities, especially those stemming from tax compliance. Senior management should adopt a risk-based approach, which will include the classification of high-risk clients, the implementation of tax declaration procedures and the foregoing of bank secrecy by the bank’s client. A bank will be vested with the authority to refuse the opening or the maintaining of a bank account whose owner does not cooperate with the bank on issues that derive from cross-border risks. Extraordinary issues pertaining to U.S. tax investigations of Israeli banks. In 2011, the Swiss authorities announced that several banks, among them three Israeli banks operating in Switzerland, Bank Leumi Switzerland (presently, Leumi Private Bank), Bank Hapoalim (Switzerland) and United Mizrahi Bank Switzerland, were under investigation by the United States regarding suspicions of assisting American taxpayers to evade U.S. taxes. On August 29, 2013, the Swiss Federal Department of Finance and the U.S. Department of Justice signed an agreement named the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks (‘‘NPA’’) that creates a formula for calculating penalties to be paid by Swiss banks that opt in. The three Israeli banks mentioned above are not eligible to opt into the NPA. Other Israeli banks, in particular, Israel Discount Bank and the First International Bank of Israel, have not been notified of any investigative actions by the United States and have not joined the NPA. With regard to the three banks under investigation: • Bank Leumi Le-Israel B.M. — In December 2014, Leumi Group signed a Deferred Prosecution Agreement with the United States and reached a Consent Order with the New York Department of Financial Services (NYDFS). Leumi Group admitted that from 2000 to 2010, Leumi Group had willingly assisted U.S. taxpayers, who were customers of the Bank, in the preparation and submission of false tax returns to U.S. tax authorities, thereby violating U.S. tax law. Under the agreement, Leumi Group paid an aggregate amount of USD 270 million: USD 71 million as recovery of unpaid taxes by U.S. customers, USD 157 million as recovery for Bank Leumi Switzerland in respect to accounts it maintained (using the ‘‘Swiss Formula’’), and a monetary penalty of USD 41.2 million in relation to the Leumi Group. Under the Consent Order, the Leumi Group paid a civil monetary penalty of USD 130 million and is obliged to comply with several conditions. In 2014, the Securities & Exchange Commission (SEC) opened an investigation of a suspected breach by Leumi Group of U.S. securities laws. As a result of these investigations, the bank included an expense of NIS 396 million in its 2012 financial statements with respect to the expense that was likely to be incurred by Group Leumi as a result of the investigations. The 2013 financial statements included an additional expense of about NIS 236 million, and the 2014 financial statements included an expense of some NIS 1,026 million. In total, the Bank included an aggregate of NIS 1,658 million in its financial statements in connection with the investigations. As of May 2015, further examinations on the aforesaid events are being carried out by the Supervisor of Banks and by the committee that was appointed by the Attorney-General of the State of Israel. • Bank Hapoalim B.M. — In response to the investigation, the bank cooperated with U.S. authorities by submitting statistical data without disclosing specific account information. The U.S. Department of Justice (DOJ) and NYDFS requested information regarding the banking activities of the Bank Group in relation to its American clients and, on March 5, 2015, the NYDFS issued a document disclosure order referring to its investigation of the Bank Group’s activity with American clients. The bank does not have further information regarding the investigation or the manner in which the DOJ or NYDFS seek to inspect the matters of the Bank and the other entities in the Bank Group. The Supervisor of Banks in Israel, upon reviewing the circumstances and based on conservative accounting, ordered the Bank to set aside a provision for the investigation, and a provision of

D-67 NIS 196 million was allocated in its annual financial statement of 2014. In accordance with the directive of the Supervisor, the amount of the provision was calculated on the basis of an estimated sum that Bank Hapoalim (Switzerland) would probably have paid to the U.S. authorities under an NPA. • Mizrahi Tefahot Bank Ltd. — At the request of authorities in Switzerland, since September 2011 Mizrahi Bank Switzerland, which is among the Swiss banks under investigation, has provided statistical information about its business with U.S. clients to U.S. authorities. In August 2013, the DOJ informed Mizrahi Bank Switzerland that an investigation into its business had been initiated. Mizrahi Bank Switzerland has expressed willingness to assist and cooperate with the United States in conformity with the DOJ Swiss Program. In August 2013, the DOJ informed the Bank that it was continuing to review back-to-back loans granted to customers in the Los Angeles branch collateralized by cash deposits in the Bank in Israel, and the Bank subsequently provided statistical information concerning such loans. In June 2014 the Bank was first informed that the DOJ was broadening the scope of its investigation to include all cross-border operations of the Bank Group with its American customers, in addition to back-to-back transactions. The Supervisor of Banks, upon reviewing the circumstances and based on conservative accounting, ordered the Bank to set aside a provision due to the ongoing investigation, and the Bank’s annual report contains a provision of NIS 95 million, estimated on the basis of theoretical assumptions. Mizrahi Bank Switzerland will be included in the DOJ Swiss Program, even though the Bank was not part of this program. Regulatory Developments in the Housing and Consumer Loan Market. In 2014, the housing prices continued the upward trend albeit at a slower pace of 5% during the year after an increase of 7.2% during 2013. This moderate increase is primarily attributed to temporarily subdued demand caused by a plan proposed in March 2014 by then-Finance Minister Yair Lapid, which would have allowed certain first-time homebuyers to be exempt from VAT on new homes. However, this proposal was not adopted, and demand increased toward the end of 2014. Mortgage loans on the balance sheet reached NIS 265 billion by the end of 2014, an increase of 7.0% over 2013 and which comprised 30.6% of the credit portfolio of the five largest Israeli banking groups as of the end of 2014. The Supervisor of Banks took steps to curtail the risks evolving from the increase in the mortgage portfolio by implementing an array of prudential measures spanning over the course of the last few years. These included limits on variable interest rate loans, LTV’s, PTI’s, risk-capital allowances and provisioning. In particular, during September 2014, the Supervisor of Banks disseminated a guideline that stipulates an increase in common equity tier 1 requirement equal to 1% of the entire housing portfolio outstanding balance. On-balance sheet retail loans excluding the above residential mortgage loans amounted to NIS 133 billion (balance sheet), an increase of 9.0% in 2014 and which comprises 15.4% of the credit portfolio of the five largest Israeli banking groups. This increase prompted heightened scrutiny from the BSD pertaining to the prudential aspect and the risks of the retail operations of the banks. Consequently, the Supervisor of Banks issued guidelines directing banking corporations to evaluate the group allowance for credit losses and verify that, beginning with 2014 reports to the public, the ratio of the qualitative adjustments to the group allowance for credit losses in respect of non-criticized credit to individuals shall not be less than 0.75% of the balance of non-criticized credit to individuals at that time. Excluded from the above is credit risk derived from debtors with respect to interest-free bank credit cards and housing loans. Performance of Israeli Banks in 2014. As to profitability, the net profit attributed to shareholders of the five largest Israeli banking groups amounted to NIS 6.4 billion in 2014 compared with NIS 7.1 billion at the end of 2013, a decrease of 9.1%, representing an after tax return on equity (ROE) of 7.3%, down from 8.7% in 2013. This decline was due to the increase in expenses related to the arrangements with overseas authorities (see ‘‘Extraordinary Issues Pertaining to U.S. Tax Investigation in Israeli Banks,’’ above), primarily Bank Leumi (NIS 1,026 million), Bank Hapoalim (NIS 196 million) and Bank Mizrahi Tefahot (NIS 95 million) which accounted for most of the decrease in profits of the Israeli banking system in 2014. In addition, Bank Hapoalim incurred a non-recurring tax expense to the Profit and Loss Sheet of NIS 400 million due to the Supervisor of Banks’ guidelines concerning accounting for the cost of computer software developed or obtained for internal use. The impact of these extraordinary expenses on the Profit and Loss Sheet was offset

D-68 by the sharp fall in the expense due to credit losses of NIS 784 million or a decrease of 37.2% during 2014. This expense continues to contract as in 2013 it declined by 37.3%. Total balance-sheet credit in the five largest Israeli banking groups grew by 4.6% during 2014 (1.3% in 2013). Credit to the business sector increased by a modest pace of 1.5% during 2014 (after declining by 2.3% in 2013). The credit to business was also affected by the competition with the non-bank credit markets that are dominated by institutional investors and insurance companies and due to the divestiture of conglomerates and cross-sectorial holdings as recommended by the Law for the Promotion of Competition and Reduction of Concentration which prompted borrowers to repay their banking loans and deleverage their assets, as well as a decrease in the demand for credit by businesses. Credit to private individuals (consumer credit including housing) amounted to NIS 398.1 million, an increase of 7.6% that constituted 46.0% of the total balance-sheet credit of the five largest Israeli banking groups (44.7% in 2013 and 41.8% in 2012). Credit risk of the business firms remains medium-high but decreased from the levels that prevailed in 2008. Balance-sheet indicators show that the credit provisioning expense for credit losses to total credit decreased from 0.41% in 2012 to 0.25% in 2013 and 0.15% by the end of 2014. In the mortgage segment, loans in arrears of 90 days and over was 1.23% as of December 2014, down from 1.49% at year-end 2013. The total non-performing loan (impaired loans and loans in arrears of 90 days and more) to total credit ratio of the five largest Israeli banking groups reached 2.2% year-end 2014, down from 2.9% at year-end 2013. Total non-performing loans to equity capital have decreased significantly in recent years and comprise only 7.3% at year-end 2014, down from 13.9% the previous year. The loan-loss reserve coverage ratio has climbed to 64.7% by the end of 2014, up from 50.5% in 2013 and 40.7% in 2012. The improvement in the above credit quality indicators are primarily attributed to the reduction of the non-performing loans in recent years. Equity capital of the five largest Israeli banking groups amounted to NIS 92.4 billion year-end 2014, an increase of 8.1% during 2014, primarily due to retained earnings and capital planning as the banking groups continue to bolster their capital positions. Core capital tier 1 ratio, in accordance with the Basel III interim rules (effective from January 1, 2014), reached 9.3% at the end of 2014, similar to that of 2013; however, the latter was calculated in accordance with the more lenient Basel II rules. The leverage ratio, as defined by Basel II rules, reached 6.96% by the end of 2014, up from 6.86% from 2013. The Israeli banks implement the standardized approach for credit risk which is of a conservative nature, as is evident in the high risk-weighted assets ratio (RWA/total assets) which includes off-balance sheet items of 63.4% for year-end 2014, higher than most internationally active banks, many of which have adopted the advanced approaches for credit risk. Issues in Anti-Money Laundering and Combating Financial Terrorism. The Anti-Money Laundering Law was enacted in August 2000, and the sections pertaining to the obligations imposed on financial entities took effect on February 17, 2002. In January 2001, the Governor of the Bank of Israel issued the Prohibition on Money Laundering Order which entered into force on February 17, 2002. The Order includes requirements regarding identification, reporting and record keeping by banking corporations. The regulation regarding the Prevention of Money Laundering and Terrorism Financing and Customer Identification (a regulation that has been in effect since 1995) has been amended in light of the declaration of principles by the Basel Committee on Banking Supervision of October 2001 on Customer Due Diligence for Banks. The regulation incorporates directives on customer acceptance policy, management, monitoring of high-risk accounts and also contains special directives on private banking and correspondent banking accounts. The BSD conducts on-site examinations on an ongoing basis to assess the compliance of banks with AML/CFT laws and directives. The Sanctions Committee, chaired by the Supervisor of Banks, is authorized to impose financial penalties on banks for AML/CFT-related infractions and has, in several cases, imposed sanctions on banks, to an aggregate amount totaling over NIS 31.3 million (as of January 2014). At the beginning of 2005, the Prohibition on Terrorist Financing Law went into effect and Israel’s system of banking regulation was modified to include combating the financing of terror. The law contains requirements regarding customer identification, reporting and recordkeeping by banking corporations and credit card companies. As later amended, the Prohibition on Money Laundering Order requires financial institutions to check the identification of parties to a transaction against a list of declared terrorists and terrorist organizations, as well as to report the type and size of transactions above NIS 5,000 whenever a transaction involves a high-risk country or territory.

D-69 Since 2010, the BSD regulates business ties between the Israeli banking system and banks operating in areas under the Palestinian Authority, including scrutiny of money transfers and counterparties’ disclosure, and prohibition of endorsement of checks. In 2011, the BSD, in conjunction with other regulatory authorities, issued a circular referring banking corporations to international lists containing names of individuals and other entities associated with Iranian nuclear proliferation efforts. In July 2014, the BSD published a Directive 418 which specifies the requirements that banking corporations must meet if they wish to allow customers to open accounts online. Face-to-face identification is executed through recorded video conference. To mitigate potential risks, some limitations were imposed on activities of such accounts. Israel’s regulatory regime with regard to AML/CFT is constantly subject to examination, review and revision to respond to new difficulties and challenges due to the increasing innovation of the offenders. This entails legislative modifications, updating regulations to strengthen risk management requirements, including specific requirements regarding the use of credit cards for illegal transactions over the internet.

Table No. 29

Assets, Liabilities and Equity Capital of the Five Major Banking Groups(1) (in NIS million)

2010 2011 2012 2013 2014 Assets In local currency(2) ...... 820,362 897,576 955,681 1,000,193 1,034,389 In foreign currency ...... 248,896 278,919 265,705 245,476 292,792 Total assets ...... 1,069,258 1,176,495 1,221,386 1,245,669 1,327,181

Liabilities and equity capital In local currency(3) ...... 767,052 840,656 897,893 927,496 958,043 In foreign currency ...... 302,206 335,839 323,493 318,173 369,138 Total liabilities and equity capital ...... 1,069,258 1,176,495 1,221,386 1,245,669 1,327,181

Equity capital ...... 70,848 72,576 79,838 85,451 92,396

(1) The division into local and foreign currency for 2010 was adjusted according to the published financial statement for that year. (2) Including non-financial items. (3) Including non-financial items, minority interests and equity. Source: Banking Groups’ Financial statements to the public.

Capital Markets Israel Securities Authority. The Israel Securities Authority (‘‘ISA’’) was established under the Securities Law, 1968, and its mandate is to protect the interests of the investing public in Israel. The ISA has a wide range of responsibilities and powers. Within the framework of this mandate the ISA is charged with, among other things: • Issuing permits to publish prospectuses for public securities offerings of corporate issuers, as well prospectuses for mutual fund units sold to the public; • Examining corporate disclosure filings, including current reports, quarterly and annual periodic financial statements, filings concerning related-party transactions in connection with private placements, tender offer disclosures, etc.; • Regulating and supervising the activities of the mutual fund industry including on-going monitoring of mutual fund filings; • Overseeing the fair, orderly and efficient activity of secondary markets;

D-70 • Licensing and supervising portfolio managers, investment advisers and investment marketing agents, including thorough compliance reviews and disciplinary complaints against these investment professionals for adjudication by a disciplinary committee; • Investigating violations under the Securities Law, the Joint Investment Trust Law, 1994, the Regulation of Investment Advice and Investment Portfolio Management Law, 1995 and violations of other laws related to the aforesaid laws; and • Supervision over compliance of portfolio managers and non-bank members of the TASE, in accordance with the Prohibition of Money Laundering Law, 2000. The ISA drafts and initiates virtually all primary and secondary legislation pertaining to securities laws in Israel. In addition, it cooperates with government authorities in formulating policies and laws pertaining to capital market activity. The ISA also collaborates with the Institute of Certified Public Accountants in Israel in operating and financing the Israel Accounting Standards Board, which is charged with setting accounting standards for Israeli companies. The Minister of Finance appoints the chairman of the ISA and its commissioners. ISA commissioners are selected from the public, the civil service and the Bank of Israel. The ISA plenum meets on a monthly basis. The ISA also performs its functions through permanent and ad hoc committees which facilitate the formulation and implementation of ISA policies. The ISA is not dependent on government financing; its budget is funded entirely by annual fees payable by entities regulated under the Securities Law and the Joint Investment Trust Law. The ISA’s budget is approved by the Minister of Finance and the Knesset Finance Committee. The ISA monitors a variety of ongoing disclosure reports, such as periodic reports that include financial statements, director’s reports on the status of the company’s affairs, additional information reports, quarterly financial reports, and immediate reports, which are filed immediately after the occurrence of certain events that could have a material effect on the company or on the price of its securities. These reporting requirements are enforceable by Israeli courts upon the petition of the ISA, which also has certain powers to direct the TASE to suspend trading of a company’s securities. The TASE. The TASE is the only stock exchange and the only public market for trading securities in Israel. The TASE is highly regulated, both internally and externally, by the ISA. Internal regulations include circuit breakers and a 45-minute halting of trade in a company’s securities on a day that the company publishes price-sensitive information, to ensure that the information can be widely disseminated. The TASE has a computerized trading system with real-time information. The TASE’s rules govern membership, registration of securities, conditions for suspending trading and obligations of listed companies. All shares, convertible securities, treasury bills, government, corporate and structured bonds, exchange-traded notes, covered warrants and derivatives are traded via Tel-Aviv Continuous Trading (‘‘TACT’’), the TASE’s fully automated trading system. The TASE has 26 members (seven of which are foreign members, including one remote member) and, as of December 31, 2014, 473 companies had equity securities (excluding exchange-traded notes) listed on the TASE. The Dual Listing Law, which took effect in October 2000, enables companies listed in the United States or in England to dual-list on the TASE with no additional regulatory requirements under Israeli law. As of December 31, 2014, there were 47 companies cross-listed on the TASE and foreign exchanges. Market Performance. The TA-25 index, which is composed of the 25 largest Israeli public companies measured by market capitalization, decreased by 1.6% in 2014 in U.S. dollars terms, partially due to the 12% appreciation of the dollar against the NIS, after an increase of 20.6% in 2013. Average daily trading volume was $339 million — 5% higher than the 2013 average. In local currency (Shekel), the TA-25 index gained 10% in 2014, following an increase of 12% for 2013. 2014 opened on a positive note, continuing a rally which started in September 2013. The TA-25 index gained 7% until April 7, 2014, at which time the trend reversed and the market retreated 3.5% until August 24, 2014. The downward trend can be attributed to the economic slowdown starting the second quarter of 2014 and Operation Protective Edge in July and August of 2014. The market experienced an upswing for the remainder of 2014, spurred by falling interest rates which reached a low of 0.25%, culminating in a 7% increase in the TA-25 index in the final four months of 2014.

D-71 The price increase in the TA-25 index stemmed primarily from the shares of Teva, which contributed 6.5%, and from Bezeq and Nice, which collectively contributed an additional 4%. On December 7, 2014, the TA-25 index reached a record high of 1493.85 points — approximately 8% greater than the previous record high from December 2013. The General Index of shares and convertible securities (which is comprised of all shares and convertible securities tradable on the TASE) increased by 11.5% in 2014, after increasing 15.3% in 2013 and increasing 4.5% in 2012 (in Shekel terms in each case). As of December 31, 2014, the total market value of all listed equity securities (excluding exchange-traded notes) was $200.6 billion, compared with $203.3 billion in 2013. The average daily trading for equity securities (including exchange-traded notes) increased to $339 million during 2013, compared with $324 million in 2013. In 2014, foreign residents acquired net $1.3 billion of TASE-listed shares, following net $1.5 billion acquired in 2013. Total corporate debt capital (excluding structures and depository receipts) raised $16.1 billion in 2014, 59% higher than the sum raised in 2013 of approximately $10.1 billion. 2014 highlights include: • Eight companies raised a total of $900 million in initial public bond offerings, as compared to one company raising $95 million in 2013. New issuers included five foreign real estate companies specializing in commercial real estate in New York. • Six ‘‘mega’’ ($300 million and up) bond offerings were completed for a total sum of $3 billion, accounting for 34% of the total raised in public corporate bond offerings. This is in contrast to three mega-offerings in 2013 totaling $1 billion, which comprised 15% of the total raised in public corporate bond offerings. The increase indicates a growing concentration of the primary market. • The weight of investment high-grade bond offerings was 87% of the total raised in 2014, somewhat higher than 84% in 2013. • The weight of CPI-linked bond offerings decreased from 77% of the total raised in public corporate bond offerings in 2013 to 47% in 2014, during which $4.3 billion was raised. At the same time, non-linked bond offerings increased from $1.7 billion in 2013 to $4.8 billion in 2014, of which $3.9 billion was raised through fixed interest rate bonds. During 2014, prices increased for both government bonds and corporate bonds. Corporate bonds posted modest gains of 1.5%, and government bonds enjoyed higher increases, with non-linked fixed interest bonds increasing 8%. By comparison, in 2013 government bonds posted gains of 4% with corporate bonds posting higher gains of 9%, lead by CPI-linked bonds. Government Bonds. The government bond market in Israel is highly developed, and government bonds account for the vast majority of publicly issued debt securities. In 2006, a broad reform in the government bonds market was implemented, with the appointment of 19 primary dealers in the government bonds market. The 2006 reform helped to increase the liquidity and transparency of the Israeli capital markets, encouraged the entry of international investors into the market, upgraded the trading and clearing systems used in the market and promoted the development of diverse derivative fixed income instruments. The scope of net capital raised by the Ministry of Finance in 2014 was USD 0.6 billion as opposed to a net USD 5.8 billion in 2013. Institutional Investors. In recent years, the role of institutional investors in the Israeli capital markets increased significantly. The principal types of institutional investors in the Israeli market are pension funds, provident funds, severance pay funds (special funds established to hold assets set aside by employers for the payment of severance obligations owed to their employees), advanced study funds, mutual funds and a variety of life insurance savings plans. As of December 31, 2014, assets held by pension funds totaled $110.0 billion, assets held by provident funds and severance pay funds totaled $46.0 billion, assets held by life insurance savings plans totaled $78.7 billion, and assets held by mutual funds totaled $48.5 billion. Public offerings and private placements to institutional investors (via the TACT Institutional platform) of corporate bonds, which were temporarily curtailed following the 2008 financial crisis, resumed in 2009, increased in 2010, and remained steady in 2011 and 2012. In 2014, the trading of private placements on the TACT Institutional platform was opened to institutional investors abroad following a decision by the ISA. The amount raised by bonds via the TACT Institutional platform increased from $0.6 billion in 2013 to $5.8 billion in 2014.

D-72 In 2014, approximately $5.8 billion was raised in private placements to institutional investors (compared to $0.6 billion in 2013), of which $3.7 billion was raised from foreign institutional investors, the highest amount since 2007. Of the total raised, $4.9 billion was raised in four large private placements of foreign currency-linked bonds listed on the TACT Institutional platform.

Gold Reserves The State has not maintained gold reserves since 1992.

PUBLIC FINANCE

General The Government budget covers the expenditures and revenues of the central government only and does not include the accounts of the National Insurance Institute, the National Institutions, local authorities, the Bank of Israel, or surpluses and deﬁcits of Government authorities.

The Budget Process The Government’s fiscal year ends on December 31. The annual budget preparation process generally begins in April of each year when the Budget Department of the Ministry of Finance coordinates discussions regarding the budget with the various ministries. During August and September of each year, the details of the budget are finalized within the Government. A proposed budget bill, together with all necessary supporting information, must be submitted to the Knesset for its approval no later than 60 days before the end of the year. Upon submission of its annual budget to the Knesset, the Government is required by law to include a three-year projected budget (containing less detail than the annual budget) which is deemed non-binding and is not subject to the Knesset’s approval. Following review of the proposed annual budget by the Finance Committee of the Knesset, together with the relevant ministers and other officials, the Knesset votes on the approval of the annual budget into law. In April 2009, a proposal for the submission of a two-year budget (‘‘biennial budget’’) and economic program was introduced to the Knesset, covering the years 2009 and 2010. The biennial budget and economic program were submitted in July 2009. Following the implementation of the biennial budget for 2009 − 2010, the Ministry of Finance decided to once again prepare a biennial budget, for the years 2013 and 2014 which was approved in May 2013. On November 11, 2014, the 2015 budget proposal was approved in first reading by the Knesset, but the budget did not pass into law following the decision made by the Knesset to dissolve itself and hold early elections in March 2015. Because the 2015 budget has not yet been passed into law and preparation for the 2016 budget should have already commenced, the Government has proposed a change in the law that would allow the approval of 2015 and 2016 budgets as biennial.

Limits on Expenditure and Deficit Reduction The Deficit Reduction and Budgetary Expenditure Limitation Law, which sets two limitations on the deficit level and the growth rate of government expenditures, is integral to maintaining Israel’s fiscal stability. The Expenditure Law has contributed to a decline in the debt/GDP ratio, which serves as a key indicator of economic stability. In response to persistent budget deficits, the Knesset passed the Deficit Reduction Law in 1992. As a result of the global financial crisis and shrinking tax revenues, in 2009 the Government submitted a five-year plan to the Knesset aiming to mitigate the effects of the deficit. This plan set the budget deficit target at 6% of GDP in 2009, 5.5% in 2010, 3% in 2011, 2% in 2012, 1.5% in 2013 and 1% from 2014 and onwards (the increase of the deficit target for 2009 and 2010 mainly reflects the operation of automatic stabilizers). In July 2012, a six year plan for 2013 − 2019 was approved by the Government. This plan set the budget deficit target at 3% of GDP in 2013, 2.75% in 2014, 2.5% in 2015, 2% in 2016 and 2017 and 1.5% from 2019 and onwards. This plan was revised in May 2013 to 4.65% for 2013 and 3% for 2014 in light of the late approval of the 2013 − 2014 budget.

D-73 In the framework of certain amendments to the Deficit Reduction Law, the Knesset approved additional restrictions on government expenditures. Pursuant to these restrictions, aggregate government expenditures were not allowed to increase by more than 1% compared to the previous year (indexed to the CPI) in each of 2005 and 2006 and by more than 1.7% (indexed to the CPI) from 2007 and onwards. Under the restrictions, upward revision of expenditures was subject to preserving the annual deficit target. In May 2010, the Knesset, in accordance with the Government proposal, amended the Deficit Reduction and Budgetary Expenditure Limitation Law. Under the new amendment, real growth of government expenditures will equal a ratio of 60% (the medium-term target) divided by the last known debt/GDP ratio, multiplied by the average GDP growth rates during the ten previous years for which GDP data from the Central Bureau of Statistics is available. Therefore, the growth rate of government expenditures will be a derivative of the difference between the debt target and long-term growth rate. In March 2014, another amendment to the law was made. Under this amendment, real growth of government expenditures will not exceed the average population growth rate in the last three years plus the ratio of the medium-term debt target (50%) and current debt-to-GDP ratio. The increase in expenditure resulting from the new rule allows a consistent increase in expenditure per capita. Nonetheless, the new expenditure ceiling will continue to be subject to the declining budget deficit target set at 1.5% of GDP from 2019 and onwards. If the increase in the expenditure rate (calculated according to the new expenditure ceiling) leads to a deviation from the deficit target, the expenditure growth rate will be reduced accordingly, or government revenues increased. The Expenditure Law sets an expenditure ceiling that relies on actual figures as opposed to forecasts, thereby increasing the simplicity, transparency and credibility of the Government’s fiscal policy. Absent approval by the Knesset, Government ministries may not spend in excess of their respective budgets. However, budgeted amounts not spent by the Government in a given year may, upon notice to the Finance Committee of the Knesset and with the approval of the Minister of Finance, be carried over to the following year. The deficit target established pursuant to the Deficit Reduction Law refers to the budget as proposed by the Government, rather than actual expenditures and revenues. Therefore, no adjustment to government expenditures is required by law if the actual deficit misses the deficit target due to either government revenues or actual GDP that were different than had been anticipated. The Government finances its deficits mainly through a combination of local currency and foreign currency debt, and some proceeds from privatization. For each year from 2009 through 2014, the total budget deficit, excluding net allocation of credit, as a percentage of GDP was 4.8%, 3.5%, 3.1%, 3.9%, 3.2% and 2.8% respectively. In 2009,3 the deficit was 5.1%, approximately 0.9% lower than the target. In 2010, the deficit was 3.8%, approximately 1.7% lower than the target. In 2011, the deficit was 3.3%, approximately 0.3% above the target. In 2012, the deficit was 4.2%, approximately 2.2% above the target. The deviation from the deficit target in 2012 was mainly due to lower than expected revenues as well as a small increase in overall expenditure above the budget forecast (approximately 1% above forecast). In 2013, the deficit was 3.2%, approximately 1.1% lower than the target, with the deviation from the deficit target being attributable to two factors: higher than expected revenues (approximately 0.5% above forecast) and lower than planned expenditures (approximately 0.6% above forecast). In 2014 the deficit was 2.8%, approximately 0.2% lower than the target; the deviation is attributable mostly to a higher than expected growth rate in 2014, despite Operation Protective Edge in July and August 2014.

3 The 2008 United Nations System of National Accounts, or SNA2008, is the method used for the measuring of GDP. The SNA method was adopted by the Central Bureau of Statistics in 2013. The 1993 version of the United Nations Systems of National Accounts, or SNA1993, was assumed in deﬁcit targets until 2014. SNA2008 is assumed in all actual deﬁcits noted herein. Inconsistencies may exist due to the differences between SNA2008 and SNA1993.

D-74 The following table sets forth the Government deficit and its financing. Domestic expenditures constitute all expenditures by the Government made in Israel. Domestic revenues constitute all taxes collected in Israel. The Government accounts for domestic expenditures and revenues as a method of measuring the influence of the Government on the domestic economy. Table 30 presents the gross budget figures, including revenue-dependent expenditures and contributions from the budget to National Insurance Institute.

Table No. 30

The Budget Deﬁcit and Its Financing (In Millions of NIS at Current Prices)

Actual 2010 Actual 2011 Actual 2012 Actual 2013 Actual 2014 Surplus (Deficit) to be Financed... -23,982 -23,138 -33,965 -28,536 -25,458 Surplus (Deficit) Excluding Net Credit ...... -30,156 -28,657 -38,981 -33,546 -29,925 Adjustments needed to cash basis . . 733 -1,327 1,594 1,539 192 Revenues Excluding Principle .... 222,447 240,311 247,181 269,556 283,583 Total tax revenue excl. VAT on Security imports ...... 195,165 211,513 218,090 240,576 254,618 Income and Purchase tax ...... 93,280 103,304 107,218 120,167 125,122 Customs and VAT excl. VAT on Defense imports ...... 96,737 102,979 105,424 114,475 123,478 Fees ...... 5,148 5,230 5,448 5,934 6,018 VAT on Defense imports ...... 1,030 1,133 1,190 1,383 1,487 Interest and principal collections . . 2,083 1,934 1,704 1,475 1,272 Loans from the Social Security . . 11,750 14,000 13,950 14,150 14,500 Grants ...... 9,095 8,227 8,872 8,328 8,524 Other Revenues ...... 3,325 3,503 3,376 3,645 3,183 Expenditures excluding credit .... 253,335 267,641 287,756 304,641 313,700 Ministries excluding credit ...... 210,800 222,872 240,107 256,382 264,092 Government administration ...... 35,829 36,870 40,488 43,633 45,075 Social services ...... 97,717 104,674 112,886 120,060 123,964 Economic services ...... 16,419 19,748 20,375 26,010 23,836 Defense ...... 58,352 59,038 62,418 64,562 68,464 Other ...... 2,483 2,542 3,939 2,117 2,753 Interest and principal payments, National Insurance Institute(1) . . . 42,535 44,769 47,650 48,259 49,608 Net Credit ...... 6,174 5,519 5,016 5,010 4,467 Total Income ...... 6,825 5,911 5,573 5,271 4,904 Total Expenditure ...... 652 392 557 261 437 Total financing ...... 15,216 18,797 36,940 36,134 19,884 Net Foreign Loans ...... -669 18 -1,599 428 853 Foreign Borrowings ...... 12,162 5,300 11,468 12,262 11,659 Foreign Loan Repayments ...... 12,830 5,281 13,067 11,834 10,806 Net Domestic Loans ...... 11,130 12,249 37,730 34,480 17,498 Domestic Borrowings ...... 70,107 86,685 113,314 107,205 95,167 Domestic Loan Repayments ...... 58,977 74,436 75,585 72,725 77,669 Net capital income ...... 4,754 6,529 809 1,226 1,533 Cash Balance of the Government (at the end of period)(2) Deposits in NIS ...... 10,162 8,272 7,944 14,156 3,378 Deposits in foreign currency ...... 2,526 2,988 7,292 7,520 18,149 Total ...... 12,688 11,260 15,236 21,676 21,527

D-75 (1) Interest payments and commissions are net of amounts attributable to indexation of NIS-linked Government bonds and that portion of the interest payments on NIS loans attributable to inﬂation for the year of payment. These amounts are included in the capital expenditures portion of the budget as domestic loan repayments. (2) Cash balances do not include social security reserves. Sources: Ministry of Finance and Bank of Israel.

Socioeconomic Policy In June 2011, a number of small protests began over issues relating to living standards, initially in response to the rising prices of Israeli staple food items such as cottage cheese, and quickly spreading to a variety of related issues, such as the decline in doctors’ wages, which lead to a national doctors’ strike. During the summer of 2011, numerous large scale protests ensued over housing and food costs, government services and the cost of living for the middle class. These large-scale protests enjoyed widespread social backing and culminated in the largest demonstration in the country’s history, with over 400,000 participants. Protest marches in Tel Aviv were followed by the creation of a tent encampment along the popular Rothschild Boulevard, a trend that spread to other cities in Israel. To address the protestors’ grievances, in August 2011, the Prime Minister appointed the Trajtenberg Committee to examine Israel’s socioeconomic issues and propose measures to improve living standards. The Trajtenberg Committee published its recommendations in September 2011. The Trajtenberg Committee’s recommendations are consistent with the Government’s goal of maintaining fiscally prudent policies, as spending increases are offset by additional revenue-raising measures. The main recommendations of the committee are divided into the four categories below: 1. Tax policy • Cancelling the direct tax reduction scheme (individual and corporate) • Raising the maximum marginal tax rate from 44% to 48% • Lowering income taxes from 23% to 21% for incomes between NIS 8,000 − 14,000 per month • Raising the corporate tax rate from 23% to 25% • Raising the capital gains tax from 20% to 25% • Reducing the duty free cigarette allowance • Introducing a tax allowance for fathers • Cancelling the increase in fuel taxes 2. Cost of living and competitive markets • Advancing competitiveness and efficiency in government regulation, antitrust enforcement, the banking sector, transportation, seaports, cement, fuel stations, and liquefied petroleum gas • Reducing customs duties and standardization of non-tariff barriers on imports 3. Social services • Reducing the burden of education costs, including through providing publicly subsidized education from the age of three, day care centers, and afternoon educational programs • Improving public transport service and accessibility • Raising the labor participation rate 4. Housing and real-estate • Increasing construction of new dwellings • Encouraging urban renewal and acceleration of planning • Promoting platforms of affordable housing, such as long term rent, small apartments and introducing criteria for entitlement • Increasing rent assistance significantly, as an alternative to inefficient public housing

D-76 Since October 2011, many of the above recommendations have been adopted by the Government, with the majority of the recommendations regarding tax policy and competitive markets having been introduced into law in December 2011. In the Government’s economic plan for 2011 and 2012, the two main objectives of socioeconomic policy consisted of increasing economic growth and reducing inequality. The main socioeconomic policy objectives underlying the 2013 − 2014 budget and the related economic plan proposal consist of (1) placing working individuals at the forefront of the Israeli economy; (2) raising the growth rate; and (3) raising the participation rate in the labor market and reducing social gaps. Although not ﬁnalized, the policy proposed by the Ministry of Finance is expected to include measures to: (1) increase competition within sectors and to reduce the cost of living; (2) stop the upsurge in housing prices by increasing supply through proposed plans such as the evacuation of military bases for housing purposes, urban renewal, support for industrialization of construction, and agreements with local authorities for large housing developments, and by reducing demand through proposed plans such as an increase in purchase taxes; and (3) further promote the integration of weaker populations in the economy.

Taxation and Tax Revenues In 2014, the total tax burden (including government taxes, social security contributions, local authorities’ taxes and VAT on defense imports) was 31.2% of GDP, compared to 30.6% in 2013, 29.7% in 2012 and 30.9% in 2011. Israel maintains a progressive personal income tax system with a top rate of 50%, supplemented (up to a ceiling) by an 18.75% health and social security tax (including employer contribution) and a 26.5% corporate tax rate, as of December 31, 2014. Indirect taxes consist primarily of an 18% VAT rate. In addition, there are high sales taxes on cars, alcohol, fuel, and cigarettes. As part of the Government’s policy to integrate Israel into the global economy, customs duties have been lowered. While imports from the EU and the United States are duty-free, customs duties are applied on selected imports from countries which have no trade agreements with Israel. Israel has signed free trade agreements with the United States, EU, EFTA, Canada, Turkey, Mexico and the MERCOSUR countries, which lowered customs duties on imports from such countries. In 1995, Israel and the United States ratified a double taxation treaty which remains effective. This treaty governs the income taxation of residents of the United States and Israel who conduct business or otherwise derive income in the other country, subject to the treaty’s jurisdiction. The treaty provides for, among other things, reduced rates of withholding tax on certain non-business income, such as dividends, interest and royalties that is sourced in Israel and derived by a resident of the United States. The treaty provides rules for the avoidance of double taxation through a foreign tax credit mechanism and allows for the resolution of disputes arising under the treaty through a mutual agreement procedure involving the governing taxing authorities. Starting in January 2003, Israel began implementing several comprehensive multi-year reforms to the direct-tax system. The reforms provided for the gradual reduction of the corporate tax rate from 36% in 2003 to 24% in 2011, and the top personal income tax rate from 50% in 2003 to 45% in 2011. In 2012, this policy was reversed in order to increase revenues: The corporate tax rate was increased to 25% (and further increased to 26.5% in January 2014), and the top personal income tax rate increased to 48%, with an additional 2% surtax on high income that includes income tax and tax on capital income that exceeds NIS 800,000 per year. Israel does not have local taxes on the income of individuals or corporations, nor does it have excess-profits or alternative minimum taxes. Real estate transactions are generally taxed on a real-profits basis, as well as by a turnover tax which varies according to the value of the transaction. Local authorities charge municipal tax on real property according to the size of the property, its location and use.

D-77 Table No. 31

General Government Taxes (In Billions of NIS at Current Prices and in % of GDP)(1)

Actual 2011 Actual 2012 Actual 2013 Actual 2014 Forecast 2015 Central Government ...... 211.5 218.1 240.6 254.6 261.8 Social Security ...... 48.8 50.3 53.4 56.1 58.7 Local Authorities and others .... 25.0 26.2 27.0 28.3 29.5 Total ...... 285.3 294.6 321.0 339.0 350.0 Total (in % of GDP) ...... 30.9 29.7 30.6 31.2 30.8

(1) Including social security contributions, local authorities’ taxes and VAT on defense imports. Source: Ministry of Finance.

Government Budget Proposal for 2015 − 2016 On October 8, 2014, the Government approved the budget and economic plan proposal for 2015. The budget proposal included several measures to increase fiscal stability: subjecting the National Jewish Fund to the Budget Foundations law, streamlining government offices, reducing tax loopholes and issuing shares of Government Companies. On November 11, 2014, the 2015 budget proposal was approved in first reading by the Knesset, but the budget did not pass into law following the decision made by the Knesset to dissolve itself and hold early elections in March 2015. The budget for 2015 has not yet been approved by the new Government or new Knesset. The budget for the years 2015 and 2016 is expected to be a biennial budget and a bill to allow the budgets to be one biennial budget is currently in the approval process. The Government is expected to approve a biennial budget for 2015 − 2016 by the end of July 2015 and pass it into law by November 19, 2015. Because the budget has not yet been approved for 2015 − 2016, the Government has been operating on the basis of the 2013 − 2014 budget since the beginning of 2015. Each month, the Government is allowed to operate within a budget of no more than one-twelfth of the 2013 − 2014 budget (in real terms). The monthly budget is first used for legally-binding obligations such as wages and bills, and then on critical issues and ministries’ ongoing operations. This budgetary system helps the Government to have maximum possible budgetary flexibility in decisions regarding the implementation of new policies and projects. The 2013 − 2014 budget included several measures to increase fiscal stability. Due to fiscal weakening in Israel, the budget included a series of steps for restoring fiscal health, including reducing the budget deficit to 3% of GDP in 2014 and adjusting Government commitments to the expenditure ceiling as provided by law. The budget also included significant measures to improve taxation revenue, including tax rate increases with respect to the corporate tax, personal income tax (this increase was cancelled in the end of 2013 due to lower than expected deficit), taxation on real estate and luxury items. The budget and economic plan also included a variety of reforms aimed at dealing with the challenges facing the Israeli economy and society. Additional reforms were endorsed independently of the budget process. In accordance with the major objectives of the 2013 − 2014 budget and economic plan proposal, the three primary goals for the economy were as follows: (1) implementing a responsible fiscal policy that strengthens the stability of the economy; (2) increasing per capita growth, expanding employment and improving the productivity of the economy; and (3) increasing competitiveness, reducing the cost of living and improving the efficiency of the public sector.

Local Authorities4 Local authorities in Israel include 76 municipalities, 125 local councils, 54 regional councils, and two industrial councils. The local authorities are obligated by law to provide a number of basic social services.

4 Local authority data presented herein are as of December 31, 2013, the most recent date as of which such data is available.

D-78 Local authorities generally finance the provision of such services through local taxes (primarily property taxes) and through transfer payments from the Government. In addition, under certain circumstances, local authorities may finance a portion of their activities through borrowing, while less financially sound local authorities may receive supplementary grants from the Ministry of the Interior. As of December 31, 2013, the total outstanding debt of the local authorities was approximately NIS 14 billion. Transfer payments from the Government are allocated among all local authorities based on fixed criteria and for specific purposes, such as social services or education. The Government currently retains the power to approve changes in the levels of taxes imposed by local authorities. The aggregate deficit of all local authorities in 2013 was approximately NIS 4.2 billion. Government transfers to local authorities in 2013 totaled approximately NIS 19.6 billion.

Social Security System National Insurance Law. Under Israel’s National Insurance Law, the National Insurance Institute of Israel (NIOI), an independent institution, provides a wide range of social security benefits, including old age pension benefits, unemployment insurance, long-term disability payments, workers’ compensation benefits, maternity support benefits and child support payments. In 2013, total expenditures by NIOI were NIS 69.3 billion, as compared with NIS 66.8 billion in 2012 (these expenditures include payments made to NIOI from non-contributory benefits). NIOI funds its expenditures using the proceeds of social security taxes paid by employers and employees, in addition to fees paid by the self-employed, unemployed, students and retirees; transfer payments from the Government pursuant to the National Insurance Law; and interest income on deposits deriving from surpluses from previous years. NIOI also receives separate funds for non-contributory NIOI benefit payments, including payments to new immigrants and other payments not covered by social insurance programs. In 2013, the Government’s transfer payments to NIOI totaled NIS 21.2 billion and the Government’s share of NIOI’s provision for non-contributory payments totaled NIS 8.85 billion. In 2014, the Government’s transfer payments to NIOI totaled NIS 19.8 billion, and the Government’s share of NIOI’s provision for non-contributory payments totaled NIS 9.5 billion. The estimated aggregate amount of Government transfer payments to NIOI in the proposed 2015 budget was NIS 30.2 billion, compared to an actual total Government transfer of NIS 29.3 billion in 2014. Healthcare. Israel has an advanced medical system, with four public health insurance organizations (also known as healthcare funds) and a ratio of one doctor for approximately every 300 people. A healthcare tax, which varies based on gross salary and averages 4.2% of an individual’s gross salary, funds a portion of the healthcare system, with the remainder funded by the Government. In 1995, the Government enacted legislation in order to enhance efficiency in the healthcare market. The law expanded the flexibility, authority and responsibility of the healthcare funds and provided them with incentives to make their services more efficient. The law also promoted the reduction of systematic redundancies and the introduction of bookkeeping arrangements among the healthcare funds. A significant share of the suppliers in the healthcare market is still Government-owned, including half of the general hospital system. In 2009, the Government enacted legislation transferring the responsibility for healthcare cases involving traffic accidents from private mandatory insurance to the health insurance organizations. In 2010, the Government improved the allocation of the healthcare budget between health insurance organizations, reducing the risk of adverse selection of patients and providing an incentive for health insurance organizations to develop more services in periphery areas. In addition, dental care for children was added to the national healthcare services in order to enhance dental health and decrease the share of private health expenditures in total expenditures on health. In 2011, the major employers and the Israeli Medical Association signed a new collective agreement. In the agreement, the Medical Association approved the introduction of an electronic attendance system, differential salaries and grants incentivizing physicians to work in peripheral areas as well as an increase in the number of experts working in hospitals during evening hours. In 2012, the Government decided to transfer responsibility for mental health services to the healthcare funds, starting July 2015. The Government further decided to fund and assist the development of psychiatric ambulatory facilities by the healthcare funds in order to insure proper facilities for the transfer of responsibility in 2015. The deployment of the new facilities commenced in early 2013. The OECD published in 2012 a review of the quality of the Israeli healthcare system, highlighting its high performance with regard

D-79 to the quality and accessibility of healthcare services, management of chronic diseases and cost containment, while pointing out weaknesses in the quality of hospital services. Israel has also received high ratings in health outcomes in the OECD Indicators. The public healthcare expenditures in 2014 were NIS 49 billion and included government administration, hospitals and research, public clinics and preventative medicine expenditures, among others. National expenditures on health has increased in recent years from 7.3% in 2010 to 7.6% in 2013, primarily due to the expansion of private expenditures which grew from 2.6% of the GDP in 2010 to 3% in 2013. Public expenditures remained constant at 4.5% of GDP.

Pension Funds Pension funds, together with life insurance policies and provident funds, are the principal instruments in Israel for the investment and accumulation of retirement savings and provision for retirement income. Most employees who participate in a pension fund do so pursuant to an agreement between the pension fund, the employer (or a representative organization for such employer) and the representative organization for such employee. These agreements require that the employer and the employee each make contributions to the pension fund. At retirement age, or at the time of another insurable event, the employee, or the employee’s survivors, becomes entitled to receive pension payments. There are generally two types of pension funds in Israel: an older defined benefits pension fund and a newer defined contribution pension fund. In March 1995, in response to large and rising actuarial deficits of Israel’s pension funds, the Government adopted a new pension policy, including a comprehensive recovery plan for existing pension funds. The primary elements of the recovery plan were: (i) then-existing pension funds would be closed to new participants, but existing participants would continue to be covered under the existing plans for the life of such plans, subject to certain limitations on the future accumulation of benefits; (ii) the Minister of Finance was empowered by the Government to draft recovery plans for pension funds that were in actuarial deficit, according to the principles established by the Government; (iii) the Minister of Finance, at his discretion, was authorized to continue to issue special Government bonds to pension funds in actuarial deficit for an interim period; and (iv) new members enrolling in pension programs would join newer, actuarially balanced funds that would operate separately and independently from existing funds, while benefits payable by the new pension funds would be subject to automatic reductions, to the extent necessary, to eliminate any actuarial funding deficit of such new funds. In May 2003, as part of a general economic recovery plan, the Knesset approved a recovery plan for the older pension funds to solve the problems of the active members and pensioners of the pension funds with actuarial deficits and to ensure continued payments to pensioners and those who will reach retirement age. As of December 2014, Government obligations under the recovery plan stood at NIS 115.5 billion over the next 30 years. In 2014, the Government transferred NIS 3.2 billion from the State’s budget to the older pension funds that had actuarial deficits. The funds will make up the remainder of the deficit by adjusting members’ benefits. Measures taken to adjust members’ benefits include government-mandated uniform regulations for all funds, a uniform method of calculating wages for the purpose of calculating pension benefits, increased employee and employer contribution rates, and an increase in the retirement age to limit the actuarial deficit and improve fund management. In addition, the Government ceased issuing certain types of designated government bonds in which the older pension funds were heavily invested, and removed restrictions on both older and newer funds that required a high percentage of assets to be invested in designated government bonds. As of December 31, 2014, long-term investments totaled NIS 922.6 billion, of which NIS 187.9 billion was invested in new pension funds, NIS 240.0 billion was invested in old pension funds, NIS 306.1 billion was invested in life insurance policies and NIS 188.6 billion in provident funds.

D-80 PUBLIC DEBT

General Public sector debt (‘‘public debt’’) in Israel consists of the consolidated local currency and foreign currency debt of the public sector. The public debt as of December 31, 2014 was NIS 729.5 billion, out of which NIS 715.8 billion was central government debt. The deﬁnition of net public debt was revised in 2011 to exclude the holdings and debt issuances of the Bank of Israel. Therefore, both the foreign currency reserves, held and managed by the Bank of Israel, and the Bank of Israel’s short-term bills are no longer included in net public debt statistics. Net public debt as of December 31, 2014 was NIS 689.3 billion (63.4% of GDP), comprising NIS 578.3 billion in local currency debt and NIS 110.99 billion in foreign currency debt. In 2013, the net public debt stood at NIS 657.7 billion (62.7% of GDP). The main factors that contributed to the increase in net public debt in 2014 were the depreciation of the NIS versus the U.S. Dollar and the government deﬁcit (2.8%). In 2004, following four years of increases, the ratio of net public debt-to-GDP declined until 2009 when the ratio increased temporarily, then continued to decline through 2013, with the 2013 having the lowest ratio in the past three decades.

Table No. 32

Government & Public Debt (In Billions of NIS at End of Year Prices)

Year 2010 2011 2012 2013 2014 Central Government ...... 608.2 633.0 666.8 696.3 715.8 (As percent of GDP) ...... (69.8%) (68.5%) (67.2%) (66.4%) (65.9%) Other Public Agencies(1) ...... 12.3 12.3 12.9 12.9 13.7 (As percent of GDP) ...... (1.5%) (1.4%) (1.3%) (1.2%) (1.2%) Total ...... 620.5 645.3 679.7 709.2 729.5 (As percent of GDP) ...... (71.3%) (69.9%) (68.5%) (67.6%) (67.1%)

(1) Including the debt of the local authorities, except the local authorities’ debt to the central Government. Source: Bank of Israel; Ministry of Finance.

Table No. 33

Net Public Debt(1) (In Billions of NIS at Current Prices)

Year 2010 2011 2012 2013 2014 Local Currency(2) ...... 458.9 482.6 519.9 557.3 578.3 Foreign Currency(3)(4) ...... 103.5 109.8 105.1 100.4 111.0 Total ...... 562.4 592.4 625.1 657.7 689.3

(1) Net public debt includes the debt of the local authorities, except the local authorities’ debt to the central Government. (2) In 2014, domestic net public debt increased in real terms (at end-of-year 2013 constant prices) by 3.77%, to NIS 579.42 billion. (3) External public debt equals the Government’s foreign currency liabilities. (4) Foreign currency debt, for this purpose, does not include nonresidents’ holdings of NIS-denominated Government bonds issued in the domestic market and includes residents’ holdings of foreign currency-denominated Government bonds issued in the global market. Source: Bank of Israel.

D-81 Table No. 34

Ratio of Net Public Debt to GDP (Percent of Annual GDP at Current Prices)

Year 2010 2011 2012 2013 2014 Local Currency ...... 52.7% 52.2% 52.4% 53.1% 53.2% Foreign Currency(1) ...... 11.9% 11.9% 10.6% 9.6% 10.2% Total ...... 64.6% 64.1% 63.0% 62.7% 63.4%

(1) Foreign currency public debt equals the Government’s foreign-currency denominated liabilities. Source: Bank of Israel; Central Bureau of Statistics.

Central Government Debt Central government debt increased in 2014 by 2.8% to NIS 715.8 billion, compared to NIS 696.3 billion in 2013. The majority of the nominal increase in government debt was due to positive net funding and 12% depreciation of the NIS against the USD. In contrast, a slight decrease in the CPI contributed to lower government debt. As indicated in Table 35 below, total central government debt comprises the outstanding amounts of tradable local currency debt, non-tradable local currency debt and foreign currency debt.

Table No. 35

Central Government Debt (In Billions of NIS)

Segment Description 2010 2011 2012 2013 2014 Tradable Local Currency Debt . . Floating Rate 42.7 31.6 33.8 38.9 43.3 Fixed Rate 170.4 191.4 207.7 213.4 209.6 CPI Linked 145.4 155.4 170.1 180.7 176.7 Total 358.5 378.4 411.6 433.1 429.6 Non-Tradable Local Currency Debt(1) ...... Pension 97.0 94.0 96.6 109.3 124.4 Insurance 38.6 40.7 42.8 45.8 47.6 Other 8.4 8.5 8.4 8.2 8.1 Total 144.0 143.2 147.8 163.3 180.1 Foreign Currency Debt ...... Israel Bonds 27.7 28.3 24.5 19.3 18.6 Sovereign bonds 27.0 30.7 33.4 36.5 43.3 Other (including loan facilities) 6.6 6.3 6.1 5.3 3.9 Bonds guaranteed by the USA 44.4 46.0 43.4 38.8 40.3 Total 105.7 111.4 107.4 99.9 106.1 Total Government Debt ..... 608.2 633.0 666.8 696.3 715.8

(1) All non-tradable local currency debt is CPI-linked. Source: Ministry of Finance.

D-82 Debt-to-GDP Ratio The debt-to-GDP ratio is a key indicator in determining the credit rating and ﬁnancial stability of the State. In 2014, the public debt-to-GDP ratio continued its downward trajectory, ending the year at 67.1%, a 0.5% decrease from 2013.

Table No. 36

Debt-to-GDP Ratio (In Percentages)

2010 2011 2012 2013 2014 Total gross government debt as percent of GDP ...... 69.8% 68.5% 67.2% 66.4% 65.9% Total gross public debt as percent of GDP . . 71.3% 69.9% 68.5% 67.6% 67.1%

Source: Bank of Israel; Ministry of Finance; Central Bureau of Statistics.

Maturity of Debt The average time to maturity (ATM) of central government debt was 7.4 years at the end of 2014, compared to 7.1 years at the end of 2013. This increase represents a continuing trend of increasing the ATM of central government debt in recent years.

Table No. 37

Maturity of Debt — Average Time to Maturity (In Years)

2010 2011 2012 2013 2014 Domestic Debt ...... 6.1 6.3 6.7 7.0 7.4 Foreign Debt ...... 6.9 6.3 6.2 7.2 7.1 Total Debt ...... 6.3 6.3 6.6 7.1 7.4

Source: Ministry of Finance.

Domestic Government Debt Domestic government debt comprises tradable and non-tradable debt. As of December 31, 2014, domestic government debt stood at NIS 609.7 billion, out of which NIS 429.6 billion were tradable debt, compared to NIS 180.1 billion in non-tradable debt. This reﬂects a 2.2% increase in total domestic government debt compared to 2013.

External Government Debt As of December 31, 2014, the Government’s external debt stood at NIS 106.1 billion (approximately $27.3 billion).

D-83 Table No. 38

Composition of External Government Debt (In Billions of USD)

2010 2011 2012 2013 2014 U.S. Loan Guarantees ...... 12.5 12.0 11.6 11.2 10.4 Sovereign Issuances ...... 7.6 8.0 8.9 10.5 11.1 Israel Bond Organization ...... 7.8 7.4 6.6 5.6 4.8 Other ...... 1.9 1.6 1.6 1.5 1.0 Total External Debt ...... 29.8 29.0 28.7 28.8 27.3

Source: Ministry of Finance.

Domestic Public Debt Domestic net public debt is deﬁned in the consolidated balance sheet of the Government and the Bank of Israel as: gross domestic government debt plus the debt of local authorities, less the liabilities of private sector debtors to the public sector and government deposits in the Bank of Israel. The net public debt includes debt of local authorities, but excludes their debt to the Government. In 2014, the domestic net public debt was NIS 578.3 billion, as compared with NIS 557.3 billion in 2013. The domestic public debt is comprised of transferable and non-transferable debt, which is raised through the issuance of shekel-denominated bonds. Non-transferable debt is issued to institutional investors in Israel under set terms based on long-standing arrangements. In recent years, the size and share of non-transferable debt as a portion of the total domestic debt have decreased, mainly due to the reduction of pension fund-designated bond issuances (see ‘‘Public Finance — Pension Funds,’’ above). In recent years, the Ministry of Finance has taken some major steps to increase the transferability and liquidity of its bonds. Between 1995 and 2014, the CPI-linked component in the overall domestic transferable debt decreased from 81% to 41%, and the USD-linked component decreased from 10.1% to 0%. Correspondingly, the Ministry of Finance reduced the number of bond series it issues and increased the average size per issue. As a result, the number of traded bond series fell sharply, from 215 in 1995 to only 30 at the end of 2014 and the average series size increased, from NIS 0.7 billion to NIS 13.4 billion over the same period.

Table No. 39

Annual Local Currency Government Debt Issuances (Gross Proceeds in Billions of NIS)

2010 2011 2012 2013 2014 Total Issuances Tradable ...... 61.2 78.5 97 82 64 Non-Tradable ...... 8.9 8.2 16 25 31 Total ...... 70.1 86.7 113 107 95

Source: Ministry of Finance. External Public Debt Unless otherwise specified, and only for the purpose of the statistical data presented herein, Israel’s gross external debt is defined, in line with the IMF’s definition, as all external liabilities to nonresidents required to be paid in both local and foreign currency by the public sector, the private sector and the banking system (not including mortgage banks, investment finance banks and financial institutions). For the purpose of this definition, the public sector includes the government, the Bank of Israel and the national institutions. The data presented does not include currency swap transactions.

D-84 The net external debt is deﬁned as the public and private sectors’ external debt, less foreign (debt instrument) assets of both sectors.

Table No. 40

Net External Debt (In Billions of USD)

2010 2011 2012 2013 2014 Net External Debt ...... -56.3 -60.8 -67.5 -81.8 -99.5 As percent of GDP ...... -23.0% -25.1% -25.4% -27.1% -35.6%

Source: Bank of Israel; Central Bureau of Statistics. The Government is the principal borrower of external public debt. In 2014, the public sector’s share of gross external debt amounted to 31.3%, compared to 29.3% in 2013, 31.0% in 2012, 33.1% in 2011 and 35.9% in 2010. The share of the public sector gross external debt as a percentage of the total government debt amounted to 16.1% in 2014, compared to 14.5% in 2013, 17.4% in 2012, 21.4% in 2011 and 23.0% in 2010 (in each case, at year-end). Total public sector external debt in 2014 amounted to $30.1, compared to $29.6 billion in 2013, $31.6 billion in 2012, $36.2 billion in 2011 and $40.2 billion in 2010. The total public sector external assets for the aforementioned years, starting with 2014, amounted to $88.8 billion, $83.4 billion, $76.3 billion, $75.3 billion and $71.4 billion, respectively. The net external debt of the public sector is deﬁned as the public sector’s external debt less foreign assets of the public sector. The net external debt levels in recent years represent a sharp decrease from a peak of 55% in 1985.

Table No. 41

Public Sector External Debt (In Billions of USD)

2010 2011 2012 2013 2014 External Public Debt ...... 40.2 36.2 31.6 29.6 30.1 Public Sector External Assets . 71.4 75.3 76.3 83.4 88.8 Net External Public Debt (as percent of GDP) ...... -31.2 (-12.7%) -39.1 (-16.2%) -44.7 (-16.8%) -53.8 (-17.8%) -58.7 (-21.0%)

Source: Bank of Israel; Central Bureau of Statistics.

Government External Debt As of December 31, 2014, approximately 79% of Israel’s governmental external debt was denominated in USD, 19% in Euro and 2% in other currencies. Over the last decade, Israel has made a major shift away from its classic external borrowing vehicle, the State of Israel Bonds Organization (‘‘Israel Bonds’’), in favor of public Sovereign issuances. Nonetheless, Israel Bonds remains a reliable and important source of ﬁnancing for the State, particularly under adverse circumstances, due to the special characteristics of the investors, individuals and institutions, including the worldwide Jewish community that has an interest in Israel. Israel Bonds raises capital through the following four organizations: Development Corporation for Israel, Israel Bonds International, Development Company for Israel (UK) Ltd and Canada-Israel Securities Limited. Bonds and notes issued through Israel Bonds are not transferable (except pursuant to certain exceptions). The State expects to continue issuing bonds through Israel Bonds in the future. As of December 31, 2014, the outstanding balance of bonds and notes

D-85 issued through Israel Bonds was $4.8 billion, representing approximately 17% of Israel’s governmental external debt. In 2014, the total funds raised through Israel Bonds amounted to $1.35 billion, a 3% decrease from the $1.39 billion raised in 2013.

Table No. 42

Total Funds Raised by Israel Bonds (In Billions of USD)

2010 2011 2012 2013 2014 Funds raised ...... 1.255 1.06 1.22 1.39 1.35

Source: Ministry of Finance. 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 that have averaged approximately $3 billion per year since 1987. In 1992, the United States approved up to $10 billion in loan guarantees during U.S. fiscal years 1993 through 1998 to help Israel absorb the influx of immigrants over this period. Israel completed its financings under this program in January 1998. In April 2003, the United States approved up to $9 billion in additional loan guarantees for Israel to be issued during U.S. government fiscal years 2003 through 2005, with an option to extend the program an additional year. In the years 2005, 2006 and 2012 the United States approved Israel’s request to extend the $9 billion program which, as of the last extension, is currently set to expire on September 30, 2015 with all unused guarantee amounts available for use until September 30, 2016. Israel has not issued any notes under the $9 billion loan guarantee program since November 2004, and $3.8 billion in U.S. loan guarantees (subject to the reductions described below) remains available. The $9 billion loan guarantee program aims to support Israel’s comprehensive economic program and to create conditions for high and sustainable growth. The amount of guarantees that may be issued to Israel under the loan guarantee program may be reduced by an amount equal to the amount extended or estimated to have been extended by Israel for activities that the President of the United States determines as inconsistent with the objectives and understandings reached between the United States and Israel regarding the implementation of the loan guarantee program. Under the program, the United States issues guarantees with respect to all payments of principal and interest on certain bonds issued by Israel. The proceeds of the guaranteed loans may be used to refinance existing debt. The Government has made certain commitments with respect to its comprehensive economic plan in connection with the loan guarantee program. During 2014, the Government borrowed a total of approximately $3.4 billion in foreign currency debt, with €1.5 billion through a Euro Bond offering and $1.35 billion through Israel Bonds. Between January and April 30, 2015, the Government raised $454.5 million in bond sales through Israel Bonds.

Derivatives and Hedging Transactions Israel has never utilized and currently does not anticipate utilizing derivative instruments for speculative purposes. As of December 31, 2014, the total debt denominated in foreign currency amounted to NIS 106.1 billion, which comprised 14.8% of total government debt. In addition, the mix of foreign currency debt is characterized by the dominance of USD-denominated debt. As of December 31, 2014, 79% of foreign currency debt was USD-denominated, 19% was denominated in Euro and the remainder was in other currencies. Israel carries out hedging transactions, short-term USD-NIS forward transactions and long-term swap transactions. USD-NIS swap transactions enable the reduction of exposure to foreign currency risk, and EUR-USD transactions enable diversiﬁcation of such exposure. As of December 31, 2014, the composition of Israel’s hedged debt portfolio was as follows: 70% USD, 20% Euro, 8% NIS and 2% in other currencies.

D-86 Table No. 43

Foreign and Local Currency Debt (In Billions of NIS Except for Percentages)

As of December 31, 2014 As of December 31, 2013 Amount Percentage Amount Percentage Foreign Currency Debt ...... 106.1 15% 99.9 14% Tradable Local Currency Debt ...... 429.6 60% 433.1 62% Non-Tradable Local Currency Debt ...... 180.1 25% 163.3 24% Total ...... 715.8 100% 696.3 100%

Source: Ministry of Finance. Hedging transactions enable the reduction of market risk (currency risk) but expose Israel to credit risk, particularly counterparty risk. Credit risk is managed within the framework of shelf agreements by the International Swap and Derivative Association (ISDA). ISDA regulates the legal processes for the transfer of guarantees. In accordance with ISDA’s Credit Support Annex, a margin call is carried out according to the fair value of the transaction (mark-to-market) and the threshold is set forth in the agreement. As of December 31, 2014, Israel’s stock of swap transactions amounted to $2.8 billion, of which EUR-USD transactions amounted to $0.3 billion. USD-NIS transactions amounted to $2.4 billion, and USD-CPI linked NIS transactions amounted to $0.15 billion. As of December 31, 2014, the mark-to-market value of all transactions stood at $144 million.

Change in Credit Rating During 2014, the only change in Israel’s foreign currency credit rating came from Fitch Ratings, which revised Israel’s Long-Term Foreign-Currency IDR to Stable, from Positive, while affirming Israel’s rating. Both S&P’s and Moody’s Investor Services’ ratings remained unchanged.

Table No. 44

Outstanding Public Sector External Debt (End-year Balances in Millions of USD)

2010 2011 2012 2013 2014 Public sector external debt(1) Foreign governments and international institutions ...... 2,602 2,450 2,415 2,313 2,035 Negotiable bonds guaranteed by the U.S. government ...... 12,495 12,209 11,721 11,314 10,681 Negotiable bonds − unguaranteed ...... 17,117 13,778 10,474 9,687 12,414 State of Israel bonds ...... 7,658 7,421 6,804 6,118 4,830 Other ...... 284 331 198 202 163 Total ...... 40,156 36,189 31,612 29,634 30,123 Total public sector external assets ...... 71,362 75,314 76,323 83,434 88,844 Net public sector external debt ...... -31,206 -39,125 -44,711 -53,800 -58,721

(1) Includes accrued interest. Source: Ministry of Finance and Bank of Israel calculations.

D-87 Table No. 45

Forward Amortization of External Debt — Principal Payments (In Millions of USD)(1)

2020 2015 2016 2017 2018 2019 onwards Public sector ...... 4,209 2,377 1,383 1,006 1,690 15,032 Foreign governments and international institutions ...... 137 92 84 72 51 1,590 Negotiable bonds guaranteed by the U.S. government ...... 234 222 210 201 192 4,922 Negotiable bonds − unguaranteed . . 2,003 866 435 435 1,081 7,601 State of Israel bonds ...... 1,822 1,187 643 288 356 808 Other ...... 12 10 10 10 10 111 Private sector ...... 3,732 5,448 6,135 6,980 4,416 4,746 Financial loans ...... 2,034 2,713 3,391 3,391 2,034 0 Bonds ...... 128 643 128 972 812 4,746 Equity-holders’ loans ...... 1,570 2,093 2,617 2,617 1,570 0 Total direct credit external liabilities (Debt Instruments) .. 7,941 7,825 7,517 7,985 6,106 19,777

(1) Based on the debt balance as of the end of the period preceding the forecasted payments. Excludes trade credit and banking system data. The data do not include accrued interest. Source: Ministry of Finance and Bank of Israel calculations.

Table No. 46

Forward Amortization of External Debt — Interest Payments (In Millions of USD)(1)

2020 2015 2016 2017 2018 2019 onwards Public sector ...... 1,335 1,222 1,151 1,133 1,108 6,429 Foreign governments and international institutions ...... 14 1297520 Negotiable bonds guaranteed by the U.S. government ...... 883 896 907 917 925 5,399 Negotiable bonds − unguaranteed . . 204 191 167 167 150 897 State of Israel bonds ...... 228 119 63 38 22 91 Other ...... 6655422 Private sector ...... 605 552 494 441 326 1,949 Financial loans ...... 164 139 107 66 25 0 Bonds ...... 393 372 357 356 294 1,949 Equity-holders’ loans ...... 48 41 31 19 7 0 Total direct credit external liabilities (Debt Instruments) .. 1,940 1,774 1,645 1,574 1,434 8,378

(1) Based on the debt balance as of the end of the period preceding the forecasted payments. Excludes trade credit and banking system data. Source: Ministry of Finance and Bank of Israel calculations.

D-88 Table No. 47

Foreign Currency Debt of the Government of Israel (Debt Outstanding as of December 31, 2014)

MM $ USD CAD EURO GBP CHF Total State of Israel bonds ...... 4,357 409 8 3 — 4,777 Loans from foreign Governments . . 452 — 552 — 2 1,006 Tradable bonds guaranteed by the U.S. Governments ...... 10,368 — — — — 10,368 Sovereign bonds − unguaranteed . . . 6,298 — 4,677 158 — 11,133 Total ...... 21,475 409 5,237 161 2 27,284

Source: Ministry of Finance.

Table No. 48

Outstanding Public Sector External Debt (In Millions of Dollars, as of Year-End)

2010 2011 2012 2013 2014 Public sector external debt(1) Foreign governments and international institutions ...... 2,602 2,450 2,415 2,313 2,036 Negotiable bonds guaranteed by the U.S. government ...... 12,495 11,606 10,840 11,314 11,066 Negotiable bonds − unguaranteed ...... 17,117 13,778 10,554 9,687 12,421 State of Israel bonds ...... 7,797 7,918 7,243 6,246 5,586 Other ...... 284 331 198 202 163 Total ...... 40,295 36,083 31,250 29,762 31,272 Total public sector external assets ...... 71,362 75,314 76,323 83,434 88,844 Net public sector external debt ...... -31,067 -39,231 -45,072 -53,672 -57,572

(1) Includes accrued interest. Source: Accountant General’s Office, Ministry of Finance.

D-89 Table No. 49

Forward Amortization of Public and Private Sector External Debt — Principal Payments (In Millions of Dollars)(1)

2020 2015 2016 2017 2018 2019 onwards Public sector ...... 4,209 2,377 1,383 1,006 1,690 15,032 Foreign governments and international institutions ...... 137 92 84 72 51 1,590 Negotiable bonds guaranteed by the U.S. government ...... 234 222 210 201 192 4,922 Negotiable bonds − unguaranteed . . 2,003 866 435 435 1,081 7,601 State of Israel bonds ...... 1,822 1,187 643 288 356 808 Other ...... 12 10 10 10 10 111 Private sector ...... 3,732 5,448 6,135 6,980 4,416 4,746 Financial loans ...... 2,034 2,713 3,391 3,391 2,034 Bonds ...... 128 643 128 972 812 4,746 Equity-holders’ loans ...... 1,570 2,093 2,617 2,617 1,570 Total direct credit external liabilities (Debt Instruments) .. 7,941 7,825 7,517 7,985 6,106 19,777

(1) Based on the debt balance as of the end of the period preceding the forecasted payments. Excludes trade credit and banking system data. Data does not include accrued interest.

Table No. 50

Forward Amortization of Public and Private Sector External Debt — Interest Payments (In Millions of Dollars)(1)

2020 2015 2016 2017 2018 2019 onwards Public sector ...... 1,335 1,222 1,151 1,133 1,108 6,429 Foreign governments and international institutions ...... 14 1297520 Negotiable bonds guaranteed by the U.S. government ...... 883 896 907 917 925 5,399 Negotiable bonds − unguaranteed . . 204 191 167 167 150 897 State of Israel bonds ...... 228 119 63 38 22 91 Other ...... 6655422 Private sector ...... 605 552 494 441 326 1,949 Financial loans ...... 164 139 107 66 25 Bonds ...... 393 372 357 356 294 1,949 Equity-holders’ loans ...... 48 41 31 19 7 Total direct credit external liabilities (Debt Instruments) .. 1,940 1,774 1,645 1,574 1,434 8,378

(1) Based on the debt balance as of the end of the period preceding the forecasted payments. Source: Accountant General’s Office, Ministry of Finance.

D-90 State Guarantees In certain cases, the Government may issue ﬁnancial guarantees to secure third-party obligations if it determines that the issuance of such guarantees is in the best interest of the State. These guarantees generally require the payment of a fee. Each guarantee or guarantee program must be speciﬁcally approved in advance by the Finance Committee of the Knesset, and the aggregate amount of all obligations issued under such guarantees may not exceed 10% of the Government’s annual budget for the same year. Government guarantees fall into three groupings: (i) guarantees to support economic activities, including encouragement of capital investment and lending to small and medium sized enterprises; (ii) special guarantees to support government-controlled entities, including entities in the infrastructure sectors such as IEC, or to support other enterprises or activities on a case-by-case basis; and (ii) guarantees to support foreign trade, including export guarantees against foreign, political, and commercial risks made through ASHR’A — The Israel Foreign Trade Risks Insurance Corporation Ltd., a government-controlled company, or through two private export insurance companies. The guarantees, as well as fees and other receipts associated with them, are included in the national accounts. As of December 31, 2014, approximately $3.5 billion in State guarantees remained outstanding. The following table sets forth the State guarantees granted to secure third-parties’ indebtedness by category.

Table No. 51

State Guarantees (In Millions of NIS)

As of December 31, 2013 As of December 31, 2014 Effective Limit of the Category Grouping(1) Exposure Program Exposure International Trade ...... (iii) 6,346 11,733 7,282 Israel Electric Corporation Ltd...... (ii) 8,221 6,159 6,159 Pension ...... (i) 27 12 12 Small- and Medium-Sized Business Funds ...... (i) 334 476 254 Total ...... — 14,928 18,380 13,707

(1) Refers to groupings (i), (ii) and (iii) described in the ﬁrst paragraph under ‘‘State Guarantees’’ above. Source: Financial Report of the Ministry of Finance.

D-91 DEBT RECORD Israel has never defaulted on the payment of principal or interest on any of its internal or external debt obligations.

Loans from the Government of the Federal Republic of Germany

Outstanding Amount as of Interest Rate December 31, 2014 (%) Issue Date Maturity Currency (In Millions) 2.0 Nov. − Dec. 1989 Dec. 2019 EUR 17.4 2.0 Jan. 1991 Dec. 2020 EUR 21.4 2.0 Dec. 1991 Dec. 2021 EUR 25 2.0 Dec. 1992 Dec. 2022 EUR 28.6 2.0 Dec. 1993 Dec. 2023 EUR 41.4 2.0 Dec. 1994 Dec. 2024 EUR 25.5 2.0 Jun. 1995 Jun. 2025 EUR 37.5 2.0 Dec. 1996 Dec. 2026 EUR 27.6 2.0 Jan. 1998 Dec. 2027 EUR 16.6 2.0 Sep. 2000 Dec. 2030 EUR 3.5 2.0 Dec. 2001 Dec. 2030 EUR 8.1 2.0 Dec. 2003 Dec. 2030 EUR 1 2.0 Dec. 2004 Dec. 2030 EUR 1.6 2.0 Aug. 2005 Dec. 2030 EUR 1.6 2.0 Dec. 2006 Dec. 2030 EUR 2.7 2.0 Dec. 2007 Dec. 2030 EUR 1.4

Source: Ministry of Finance.

D-92 Loans from Israeli and Non-Israeli Banks

Outstanding Amount as of Interest Rate December 31, 2014 (%) Issue Date Maturity Currency (In Millions) 4.15 Sep. 1997 Jun. 2015 CHF 1.6 1.15 Sep. 1997 Jun. 2015 CHF 0.5 4.69 Oct. 1998 Jun. 2015 EUR 0.1 1.69 Oct. 1998 Jun. 2015 EUR 0.1 4.157 Dec. 2009 Dec. 2029 EUR 132.2 3.571 Jan. 2012 Jan. 2032 EUR 58.9

Source: Ministry of Finance.

International Capital Markets Issues

Outstanding Amount as of Interest Rate December 31, 2014 (%) Issue Date Maturity Currency (In Millions) 7.25 Dec. 1998 Dec. 2028 USD 250.0 6.875 Oct. 1999 Oct. 2034 GBP 100.0 3.75 Oct. 2005 Oct. 2015 EUR 750.0 5.5 Nov. 2006 Nov. 2016 USD 1,000.0 5.125 Mar. 2009 Mar. 2019 USD 1,500.0 4.625 Mar. 2010 Mar. 2020 EUR 1,500.0 4.00 Jan. 2012 Jun. 2022 USD 1,500.0 3.15 Jan. 2013 Jun. 2023 USD 1,000 4.5 2 Jan. 2013 Jan. 2043 USD 1,000 2.875 Jan. 2014 Jan. 2024 EUR 1,500

Source: Ministry of Finance.

D-93 STATE OF ISRAEL BONDS ISSUED THROUGH THE DEVELOPMENT CORPORATION FOR ISRAEL

18K REPORT FOR BONDS AS OF 12/31/2014

TOTAL OUTSTANDING ISSUE INTEREST RATE % ISSUE DATE MATURITY CURRENCY in Millions

DEVELOPMENT ISSUES DEV−7TH AMENDED ...... 4 JAN2000 − FEB 2006 JAN 2015 − FEB 2021 USD 41.93 DEV−7TH AMENDED ...... 4 JAN2000 − FEB 2006 JAN 2015 − FEB 2021 USD 45.56 DEV INT’L − 7TH AMENDED ...... 4 JAN2000 − FEB 2006 JAN 2015 − FEB 2021 USD 19.07

INSTITUTIONAL ISSUES LFRI INSTITUTIONAL PP 3RD ISSUE 3 YEARS ..... LIBORUSD06 − 0.30 − 1.30 C FEB 2012 − JUN 2012 FEB 2015 − JUN 2015 USD 46.8 LFRI INSTITUTIONAL PP 3RD ISSUE 5 YEARS ..... LIBORUSD06 − 0.60 − 1.35 C FEB 2012 − SEP 2012 FEB 2017 − SEP 2017 USD 9 LFRI INSTITUTIONAL PP 4TH ISSUE 3 YEARS ..... LIBORUSD06 − 0.75 − 0.95 C FEB 2013 − JUN 2013 FEB 2016 − JUN 2016 USD 41 LFRI INSTITUTIONAL PP 4TH ISSUE 5 YEARS ..... LIBORUSD06 − 1.00 − 1.20 C FEB 2013 − MAY 2013 FEB 2018 − MAY 2018 USD 26.5 LFRI INSTITUTIONAL PP 5TH ISSUE 3 YEARS ..... LIBORUSD06 − 0.85 − 1.00 C JUN 2013 − JUL 2014 JUN 2016 − JUL 2017 USD 46.7 LFRI INSTITUTIONAL PP 5TH ISSUE 5 YEARS ..... LIBORUSD06 − 1.20 C JUN 2013 − JUN 2018 − USD 20 LFRI INSTITUTIONAL PP 6TH ISSUE 3 YEARS ..... LIBORUSD06 − 0.75 C AUG 2014 − AUG 2017 − USD 9 INSTITUTIONAL JUBILEE PP 2ND ISSUE 5 YEA .... 2.93 − 3.10 APR 2010 − MAY 2010 APR 2015 − MAY 2015 USD 16 INSTITUTIONAL JUBILEE PP 3RD ISSUE 3 YEA .... 1.31 − 1.93 FEB 2012 − NOV 2012 FEB 2015 − NOV 2015 USD 48.6 INSTITUTIONAL JUBILEE PP 3RD ISSUE 5 YEA .... 2.47 − 3.46 JAN 2011 − OCT 2012 JAN 2016 − OCT 2017 USD 34 INSTITUTIONAL JUBILEE PP 4TH ISSUE 3 YEA .... 1.58 − 1.71 FEB 2013 − JUN 2013 FEB 2016 − JUN 2016 USD 60 INSTITUTIONAL JUBILEE PP 4TH ISSUE 5 YEA .... 2.43 − 2.74 JAN 2013 − MAY 2013 JAN 2018 − MAY 2018 USD 40.2 INSTITUTIONAL JUBILEE PP 5TH ISSUE 3 YEA .... 1.79 − 2.10 JUN 2013 − JUL 2014 JUN 2016 − JUL 2017 USD 129.1 INSTITUTIONAL JUBILEE PP 5TH ISSUE 5 YEA .... 2.76 − 3.21 JUN 2013 − JUL 2014 JUN 2018 − JUL 2019 USD 55.5 INSTITUTIONAL JUBILEE PP 6TH ISSUE 3 YEA .... 1.81 NOV 2014 − NOV 2017 − USD 10 INSTITUTIONAL JUBILEE PP 6TH ISSUE 5 YEA .... 2.95 AUG 2014 − AUG 2019 − USD 20

INSTITUTIONAL REINVESTMENT BONDS REINVESTMENT SAVINGS BOND 2ND ISS 3 YEARS (SAVINGS FREE) ...... 0.79 − 1.26 JAN 2012 − OCT 2012 JAN 2015 − OCT 2015 USD 3.32 REINVESTMENT SAVINGS BOND 1ST INTERN’L D . . 1.5 AUG 2014 − AUG 2017 − USD 0.01

JUBILEE JUBILEE − 3RD ISSUE ...... 4.15 − 5.40 JAN 2005 − AUG 2005 JAN 2015 − AUG 2015 USD 87.65 JUBILEE − 3RD D01 AMENDED ...... 4.55 − 5.35 AUG 2005 − MAR 2006 AUG 2015 − MAR 2016 USD 17.02 JUBILEE − 4TH ISSUE 10 YEARS ...... 4.70 − 5.90 MAR 2006 − JAN 2007 MAR 2016 − JAN 2017 USD 45.81 JUBILEE − 5TH ISSUE 10 YEARS ...... 4.79 − 5.50 JAN 2007 − JUL 2007 JAN 2017 − JUL 2017 USD 11.55 JUBILEE − 6TH ISSUE 5 Y CASH ...... 1.42 − 3.00 JAN 2010 − DEC 2010 JAN 2015 − DEC 2015 USD 155.59 JUBILEE − 6TH ISSUE 10 Y CASH ...... 2.85 − 3.80 AUG 2010 − DEC 2010 AUG 2020 − DEC 2020 USD 28.26 JUBILEE 7TH ISSUE 2 Y CASH ...... 0.49 − 1.19 JAN 2013 − JUN 2013 JAN 2015 − JUN 2015 USD 76.58 JUBILEE 7TH ISSUE 3 Y CASH ...... 1.16 − 1.80 JAN 2012 − JUN 2013 JAN 2015 − JUN 2016 USD 153.33 JUBILEE 7TH ISSUE 5 Y CASH ...... 1.92 − 3.27 JAN 2011 − JUN 2013 JAN 2016 − JUN 2018 USD 302.39 JUBILEE 7TH ISSUE 10 Y CASH ...... 3.14 − 4.50 JAN 2011 − JUN 2013 JAN 2021 − JUN 2023 USD 344.78 JUBILEE 8TH ISSUE 2 Y CASH ...... 1.01 − 1.35 JUN 2013 − JUL 2014 JUN 2015 − JUL 2016 USD 245.3 JUBILEE 8TH ISSUE 3 Y CASH ...... 1.35 − 1.85 JUN 2013 − JUL 2014 JUN 2016 − JUL 2017 USD 91.09 JUBILEE 8TH ISSUE 5 Y CASH ...... 2.40 − 3.00 JUN 2013 − JUL 2014 JUN 2018 − JUL 2019 USD 156.36 JUBILEE 8TH ISSUE 10 Y CASH ...... 3.80 − 4.51 JUN 2013 − JUL 2014 JUN 2023 − JUL 2024 USD 259.87 JUBILEE 9TH ISSUE 2 Y CASH ...... 0.90 − 1.16 JUL 2014 − DEC 2014 JUL 2016 − DEC 2016 USD 50.79 JUBILEE 9TH ISSUE 3 Y CASH ...... 1.47 − 1.68 JUL 2014 − DEC 2014 JUL 2017 − DEC 2017 USD 46.92 JUBILEE 9TH ISSUE 5 Y CASH ...... 2.53 − 2.85 JUL 2014 − DEC 2014 JUL 2019 − DEC 2019 USD 78.8 JUBILEE 9TH ISSUE 10 Y CASH ...... 3.51 − 3.90 JUL 2014 − DEC 2014 JUL 2024 − DEC 2024 USD 65.95 JUBILEE 1ST INTERNATIONAL ISSUE 2 YEARS .... 1.10 − 1.30 AUG 2013 − NOV 2013 AUG 2015 − NOV 2015 USD 0.33 JUBILEE 1ST INTERNATIONAL ISSUE 3 YEARS .... 1.60 − 1.75 JUL 2013 − OCT 2013 JUL 2016 − OCT 2016 USD 0.13 JUBILEE 1ST INTERNATIONAL ISSUE 5 YEARS .... 2.55 − 2.69 OCT 2013 − DEC 2013 OCT 2018 − DEC 2018 USD 0.23 JUBILEE 1ST INTERNATIONAL ISSUE 10 YEARS . . . 3.75 − 4.51 JUN 2013 − NOV 2013 JUN 2023 − NOV 2023 USD 0.7 JUBILEE 2ND INTERNATIONAL ISSUE 2 YEARS .... 1.03 − 1.35 FEB 2014 − OCT 2014 FEB 2016 − OCT 2016 USD 0.93

D-94 TOTAL OUTSTANDING ISSUE INTEREST RATE % ISSUE DATE MATURITY CURRENCY in Millions

JUBILEE 2ND INTERNATIONAL ISSUE 3 YEARS .... 1.60 − 1.80 MAR 2014 − OCT 2014 MAR 2017 − OCT 2017 USD 0.71 JUBILEE 2ND INTERNATIONAL ISSUE 5 YEARS .... 2.67 − 2.92 APR 2014 − OCT 2014 APR 2019 − OCT 2019 USD 1.1 JUBILEE 2ND INTERNATIONAL ISSUE 10 YEARS . . . 3.81 − 4.50 JAN 2014 − OCT 2014 JAN 2024 − OCT 2024 USD 1.6 JUBILEE 3RD INTERNATIONAL ISSUE 2 YEAR .... 0.92 − 0.94 DEC 2014 − DEC 2014 DEC 2016 − USD 0.05 JUBILEE 3RD INTERNATIONAL ISSUE 3 YEAR .... 1.55 DEC 2014 − DEC 2017 − USD 0 JUBILEE 3RD INTERNATIONAL ISSUE 5 YEAR .... 2.53 − 2.85 OCT 2014 − DEC 2014 OCT 2019 − DEC 2019 USD 0.17 JUBILEE 3RD INTERNATIONAL ISSUE 10 YEAR .... 3.66 − 3.67 NOV 2014 − NOV 2014 NOV 2024 − USD 0.83 MACCABEE BONDS − 6TH ISSUE 5 YEARS ...... 1.27 − 2.85 JAN 2010 − DEC 2010 JAN 2015 − DEC 2015 USD 21.21 MACCABEE BONDS − 7TH ISSUE 2 YEAR ...... 0.34 − 0.94 JAN 2013 − JUN 2013 JAN 2015 − JUN 2015 USD 2.09 MACCABEE BONDS − 7TH ISSUE 3 YEAR ...... 0.91 − 1.54 JAN 2012 − JUN 2013 JAN 2015 − JUN 2016 USD 11.59 MACCABEE BONDS − 7TH ISSUE 5 YEAR ...... 1.72 − 3.07 JAN 2011 − JUN 2013 JAN 2016 − JUN 2018 USD 55.47 MACCABEE BONDS − 7TH ISSUE 10 YEAR ...... 3.20 − 3.51 AUG 2012 − JUN 2013 AUG 2022 − JUN 2023 USD 10.56 MACCABEE BONDS − 8TH ISSUE 2 YEAR ...... 0.85 − 1.15 JUN 2013 − JUL 2014 JUN 2015 − JUL 2016 USD 7.3 MACCABEE BONDS − 8TH ISSUE 3 YEAR ...... 1.20 − 1.63 JUN 2013 − JUL 2014 JUN 2016 − JUL 2017 USD 9.84 MACCABEE BONDS − 8TH ISSUE 5 YEAR ...... 2.15 − 2.79 JUN 2013 − JUL 2014 JUN 2018 − JUL 2019 USD 24.46 MACCABEE BONDS − 8TH ISSUE 10 YEAR ...... 3.67 − 4.30 JUN 2013 − JUL 2014 JUN 2023 − JUL 2024 USD 23.52 MACCABEE BONDS − 9TH ISSUE 2 YEAR ...... 0.71 − 0.96 JUL 2014 − DEC 2014 JUL 2016 − DEC 2016 USD 2.76 MACCABEE BONDS − 9TH ISSUE 3 YEAR ...... 1.30 − 1.48 JUL 2014 − DEC 2014 JUL 2017 − DEC 2017 USD 3.73 MACCABEE BONDS − 9TH ISSUE 5 YEAR ...... 2.38 − 2.65 JUL 2014 − DEC 2014 JUL 2019 − DEC 2019 USD 14.17 MACCABEE BONDS − 9TH ISSUE 10 YEAR ...... 3.36 − 3.80 JUL 2014 − DEC 2014 JUL 2024 − DEC 2024 USD 8.08 MACCABEE BONDS 1ST INTERNATIONAL ISSUE 2 . . 1.05 AUG 2013 − AUG 2015 − USD 0.02 MACCABEE BONDS 1ST INTERNATIONAL ISSUE 3 . . 1.19 − 1.38 JUN 2013 − JUL 2013 JUN 2016 − JUL 2016 USD 0.01 MACCABEE BONDS 1ST INTERNATIONAL ISSUE 5 . . 1.96 − 2.61 JUN 2013 − OCT 2013 JUN 2018 − OCT 2018 USD 0.02 MACCABEE BONDS 2ND INTERNATIONAL ISSUE 2 . . 0.83 − 1.15 APR 2014 − SEP 2014 APR 2016 − SEP 2016 USD 0.02 MACCABEE BONDS 2ND INTERNATIONAL ISSUE 3 . . 1.55 − 1.63 MAR 2014 − APR 2014 MAR 2017 − APR 2017 USD 0.03 MACCABEE BONDS 2ND INTERNATIONAL ISSUE 5 . . 2.17 − 2.75 DEC 2013 − OCT 2014 DEC 2018 − OCT 2019 USD 0.1 MACCABEE BONDS 2ND INTERNATIONAL ISSUE 10 . 3.61 − 4.16 FEB 2014 − OCT 2014 FEB 2024 − OCT 2024 USD 0.13 MACCABEE BONDS 3RD INTERNATIONAL ISSUE 2 . . 0.75 NOV 2014 − NOV 2016 − USD 0.02 MACCABEE BONDS 3RD INTERNATIONAL ISSUE 3 . . 1.4 DEC 2014 − DEC 2017 − USD 0.01 MACCABEE BONDS 3RD INTERNATIONAL ISSUE 5 . . 2.41 − 2.45 NOV 2014 − DEC 2014 NOV 2019 − DEC 2019 USD 0.05 MACCABEE BONDS 3RD INTERNATIONAL ISSUE 10 . 3.36 − 3.57 NOV 2014 − DEC 2014 NOV 2024 − DEC 2024 USD 0.01

LIBOR FLOATING RATE ISSUES LFRI − 4TH ISSUE ...... LIBORUSD06 − 0.60 − 0.75 C JAN 2005 − MAY 2005 JAN 2015 − MAY 2015 USD 62.51 LFRI − 5TH ISSUE ...... LIBORUSD06 − 0.20 − 0.60 C MAY 2005 − MAR 2006 MAY 2015 − MAR 2016 USD 78.95 LFRI − 10TH ISSUE 2 Y FINANCING ...... LIBORUSD06 − 0.00 C JAN 2013 − JAN 2015 − USD 1.1 LFRI − 11TH ISSUE 2 Y FINANCING ...... LIBORUSD06 − 0.60 − 0.85 C FEB 2013 − JUN 2013 FEB 2015 − JUN 2015 USD 33.7 LFRI − 12TH ISSUE 2 Y FINANCING ...... LIBORUSD06 − 0.85 − 0.95 C JUN 2013 − JUL 2014 JUN 2015 − JUL 2016 USD 144.95 LFRI − 13TH ISSUE 2 Y FINANCING ...... LIBORUSD06 − 0.50 − 0.75 C JUL 2014 − DEC 2014 JUL 2016 − DEC 2016 USD 25.93 LFRI − 6TH ISSUE 10 YEARS ...... LIBORUSD06 − 0.10 − 0.20 C MAR 2006 − JAN 2007 MAR 2016 − JAN 2017 USD 26.8 LFRI − 7TH ISSUE 10 YEARS ...... LIBORUSD06 − 0.15 − 0.10 C JAN 2007 − JUL 2007 JAN 2017 − JUL 2017 USD 6.36 LFRI − 8TH ISSUE 5 Y CASH ...... LIBORUSD06 − 0.50 − 0.65 C JAN 2010 − MAR 2010 JAN 2015 − MAR 2015 USD 1.51 LFRI − 9TH ISSUE 5 Y CASH ...... LIBORUSD06 − 0.35 − 0.65 C MAR 2010 − DEC 2010 MAR 2015 − DEC 2015 USD 20.48 LFRI − 10TH ISSUE 2 Y CASH ...... LIBORUSD06 − 0.30 − 0.00 C JAN 2013 − JAN 2015 − USD 2.43 LFRI − 10TH ISSUE 3 Y CASH ...... LIBORUSD06 − 0.10 − 1.10 C JAN 2012 − JAN 2013 JAN 2015 − JAN 2016 USD 30.81 LFRI − 10TH ISSUE 5 Y CASH ...... LIBORUSD06 − 0.20 − 1.15 C JAN 2011 − JAN 2013 JAN 2016 − JAN 2018 USD 49.89 LFRI − 11TH ISSUE 2 Y CASH ...... LIBORUSD06 − 0.30 − 0.60 C JAN 2013 − JUN 2013 JAN 2015 − JUN 2015 USD 20.05 LFRI − 11TH ISSUE 3 Y CASH ...... LIBORUSD06 − 0.10 − 0.70 C JAN 2013 − JUN 2013 JAN 2016 − JUN 2016 USD 5.82 LFRI − 11TH ISSUE 5 Y CASH ...... LIBORUSD06 − 0.20 − 0.90 C JAN 2013 − JUN 2013 JAN 2018 − JUN 2018 USD 3.52 LFRI − 12TH ISSUE 2 Y CASH ...... LIBORUSD06 − 0.55 − 0.70 C JUN 2013 − JUL 2014 JUN 2015 − JUL 2016 USD 118.88 LFRI − 12TH ISSUE 3 Y CASH ...... LIBORUSD06 − 0.65 − 0.80 C JUN 2013 − JUL 2014 JUN 2016 − JUL 2017 USD 16.32 LFRI − 12TH ISSUE 5 Y CASH ...... LIBORUSD06 − 0.90 − 1.00 C JUN 2013 − JUL 2014 JUN 2018 − JUL 2019 USD 10.06 LFRI − 13TH ISSUE 2 Y CASH ...... LIBORUSD06 − 0.15 − 0.75 C JUL 2014 − DEC 2014 JUL 2016 − DEC 2016 USD 54.88 LFRI − 13TH ISSUE 3 Y CASH ...... LIBORUSD06 − 0.30 − 0.65 C JUL 2014 − DEC 2014 JUL 2017 − DEC 2017 USD 19.16 LFRI − 13TH ISSUE 5 Y CASH ...... LIBORUSD06 − 0.70 − 0.90 C JUL 2014 − DEC 2014 JUL 2019 − DEC 2019 USD 2.17

D-95 TOTAL OUTSTANDING ISSUE INTEREST RATE % ISSUE DATE MATURITY CURRENCY in Millions

LFRI 1ST INTERNATIONAL ISSUE 2 YEARS CAS . . . LIBORUSD06 − 0.60 C MAY 2013 − MAY 2015 − USD 0.38 LFRI 1ST INTERNATIONAL ISSUE 5 YEARS CAS . . . LIBORUSD06 − 0.90 C DEC 2013 − DEC 2018 − USD 10 LFRI 2ND INTERNATIONAL ISSUE 2 YEARS CAS . . . LIBORUSD06 − 0.55 C JUL 2014 − JUL 2016 − USD 0.04 LFRI 2ND INTERNATIONAL ISSUE 3 YEARS CAS . . . LIBORUSD06 − 0.70 − 0.80 C MAR 2014 − JUN 2014 MAR 2017 − JUN 2017 USD 10.05 LFRI 2ND INTERNATIONAL ISSUE 5 YEARS CAS . . . LIBORUSD06 − 0.90 C JAN 2014 − JAN 2019 − USD 25 LFRI 3RD INTERNATIONAL ISSUE 2 YEAR CASH . . . LIBORUSD06 − 0.75 C DEC 2014 − DEC 2016 − USD 20 FLOATING LIBOR FINANCING 1ST INTERN’L DO . . . LIBORUSD06 − 0.75 C AUG 2014 − SEP 2014 AUG 2016 − SEP 2016 USD 9

SAVINGS BONDS MAZEL TOV 4TH ISSUE 5 YEARS ...... 1.30 − 2.54 JAN 2011 − JUN 2013 JAN 2016 − JUN 2018 USD 35.85 MAZEL TOV − 5TH ISSUE 5 YEARS ...... 1.83 − 2.78 JUL 2013 − JUL 2014 JUL 2018 − JUL 2019 USD 16.39 MAZEL TOV − 6TH ISSUE 5 YEARS ...... 2.53 − 2.71 AUG 2014 − DEC 2014 AUG 2019 − DEC 2019 USD 8.92 MAZEL TOV − 1ST INTERNATIONAL ISSUE 5 YEAR . 1.45 − 2.28 JUN 2013 − NOV 2013 JUN 2018 − NOV 2018 USD 0.01 MAZAL TOV SAVINGS BOND 2ND INTERNATIONAL . 2.46 − 2.78 APR 2014 − OCT 2014 APR 2019 − OCT 2019 USD 0.02 MAZAL TOV SAVINGS BOND 3RD INTERNATIONAL . 2.57 − 2.71 NOV 2014 − DEC 2014 NOV 2019 − DEC 2019 USD 0.01 SAVING − 1ST ISSUE 10 YEARS ...... 4.75 − 6.05 MAR 2006 − JAN 2007 MAR 2016 − JAN 2017 USD 37.42 SAVING − 2ND ISSUE 10 YEARS ...... 4.89 − 5.62 JAN 2007 − JUL 2007 JAN 2017 − JUL 2017 USD 13.48 SAVING MAZAL TOV − 2ND ISSUE 10 YEARS ..... 4.71 − 5.07 FEB 2007 − JUL 2007 FEB 2017 − JUL 2017 USD 1.43 SAVING MAZAL TOV − 3RD ISSUE 5 YEARS ...... 1.32 − 2.74 JAN 2010 − DEC 2010 JAN 2015 − DEC 2015 USD 16.16 SABRA SAVING 4TH ISSUE 3 YEARS ...... 0.77 − 1.35 JAN 2012 − JUN 2013 JAN 2015 − JUN 2016 USD 12.05 SABRA SAVING − 5TH ISSUE 3 YEARS ...... 1.10 − 1.58 JUN 2013 − JUL 2014 JUN 2016 − JUL 2017 USD 8.89 SABRA SAVING − 6TH ISSUE 3 YEARS ...... 1.38 − 1.60 JUL 2014 − DEC 2014 JUL 2017 − DEC 2017 USD 8.11 SABRA SAVING − 1ST INTERNATIONAL ISSUE 3 Y . . 1.00 − 1.42 JUN 2013 − DEC 2013 JUN 2016 − DEC 2016 USD 0.23 SABRA SAVINGS BOND 2ND INTERNATIONAL ISS . . 1.26 − 1.60 JAN 2014 − OCT 2014 JAN 2017 − OCT 2017 USD 0.16 SABRA SAVINGS BOND 3RD INTERNATIONAL ISS . . 1.38 − 1.46 DEC 2014 − DEC 2014 DEC 2017 − USD 0.01 EMITZVAH SAVING 4TH ISSUE 5 YEARS ...... 1.30 − 1.76 SEP 2012 − JUN 2013 SEP 2017 − JUN 2018 USD 0.11 EMITZVAH SAVING 5TH ISSUE 5 YEARS ...... 1.83 − 2.78 JUL 2013 − JUL 2014 JUL 2018 − JUL 2019 USD 0.17 EMITZVAH SAVING 6TH ISSUE 5 YEARS ...... 2.53 − 2.71 AUG 2014 − DEC 2014 AUG 2019 − DEC 2019 USD 0.09

ZERO COUPON BONDS ZERO COUPON − 8TH ISSUE ...... 4.25 − 5.90 JAN 2005 − MAR 2006 JAN 2015 − MAR 2016 USD 181.01

STERLING BONDS GBP MAZEL TOV 1ST ISSUE 5 YEARS ...... 2.02 − 2.60 JUL 2010 − NOV 2010 JUL 2015 − NOV 2015 GBP 0.05 GBP MAZEL TOV 2ND ISSUE 5 YEARS ...... 1.29 − 3.00 JAN 2011 − AUG 2012 JAN 2016 − AUG 2017 GBP 0.1 GBP MAZEL TOV 3RD ISSUE 5 YEARS ...... 2.02 − 2.60 JUL 2013 − DEC 2013 JUL 2018 − DEC 2018 GBP 0.03 MAZAL TOV SAVINGS BONDS 4TH STERLING SE . . 2.66 − 3.12 JAN 2014 − OCT 2014 JAN 2019 − OCT 2019 GBP 0.06 MAZAL TOV SAVINGS BONDS 5TH STERLING SER . . 2.62 − 2.94 NOV 2014 − DEC 2014 NOV 2019 − DEC 2019 GBP 0.02 GBP SAVINGS 3RD ISSUE 2 YEARS ...... 1.12 − 1.41 JUN 2013 − DEC 2013 JUN 2015 − DEC 2015 GBP 0.16 SAVINGS BONDS 4TH STERLING SERIES 2 YEA .... 1.53 − 1.90 FEB 2014 − AUG 2014 FEB 2016 − AUG 2016 GBP 0.21 GBP JUBILEE 3RD ISSUE 2 YEARS ...... 1.30 − 1.51 JUN 2013 − DEC 2013 JUN 2015 − DEC 2015 GBP 0.89 JUBILEE BONDS 4TH STERLING SERIES 2 YEA .... 1.44 − 1.96 DEC 2013 − OCT 2014 DEC 2015 − OCT 2016 GBP 0.32 JUBILEE BONDS 5TH STERLING SERIES 2 YEAR . . . 1.72 DEC 2014 − DEC 2016 − GBP 0.02

EURO BONDS EURO SAVING − 1ST ISSUE 10 YEARS ...... 4.35 − 4.40 OCT 2006 − JAN 2007 OCT 2016 − JAN 2017 EUR 0.04 EURO SAVING − 2ND ISSUE 10 YEARS ...... 4.45 − 5.25 JAN 2007 − JUL 2007 JAN 2017 − JUL 2017 EUR 0.22 EURO SAVING − 6TH ISSUE 3 YEARS ...... 0.51 − 1.82 JAN 2012 − AUG 2012 JAN 2015 − AUG 2015 EUR 4.07 SAVINGS BONDS 8TH EURO SERIES 2 YEARS ..... 0.80 − 0.98 JUN 2014 − OCT 2014 JUN 2016 − OCT 2016 EUR 0.34 SAVINGS BONDS 8TH EURO SERIES 3 YEARS ..... 0.92 − 1.06 APR 2014 − SEP 2014 APR 2017 − SEP 2017 EUR 0.07 SAVINGS BONDS 9TH EURO SERIES 2 YEAR ..... 0.77 DEC 2014 − DEC 2016 − EUR 0.02 SAVINGS BONDS 9TH EURO SERIES 3 YEAR ..... 0.87 DEC 2014 − DEC 2017 − EUR 0.06 EURO LFRI − 6TH ISSUE 3 YEARS ...... EURIBEUR06 − 0.10 − 1.10 B JAN 2012 − AUG 2012 JAN 2015 − AUG 2015 EUR 3.78 FLOATING RATE BONDS 9TH EURO SERIES 2 YE . . . EURIBEUR06 − 0.75 B JUN 2014 − OCT 2014 JUN 2016 − OCT 2016 EUR 0.08 FLOATING RATE BONDS 9TH EURO SERIES 3 YE . . . EURIBEUR06 − 0.85 B MAR 2014 − OCT 2014 MAR 2017 − OCT 2017 EUR 0.05 FLOATING RATE BONDS 10TH EURO SERIES 3 Y . . . EURIBEUR06 − 0.85 B DEC 2014 − DEC 2017 − EUR 0.01 EURO MAZEL TOV 1ST ISSUE 5 YEARS ...... 1.42 − 1.93 JUL 2010 − DEC 2010 JUL 2015 − DEC 2015 EUR 0.06

D-96 TOTAL OUTSTANDING ISSUE INTEREST RATE % ISSUE DATE MATURITY CURRENCY in Millions

EURO MAZEL TOV 2ND ISSUE 5 YEARS ...... 1.03 − 2.95 JAN 2011 − AUG 2012 JAN 2016 − AUG 2017 EUR 0.09 MAZAL TOV SAVINGS BONDS 4TH EURO SERIES . . 1.41 − 1.70 APR 2014 − OCT 2014 APR 2019 − OCT 2019 EUR 0.06 MAZAL TOV SAVINGS BONDS 5TH EURO SERIES . . 1.38 − 1.39 NOV 2014 − DEC 2014 NOV 2019 − DEC 2019 EUR 0.01

CANADIAN ISSUES CAN SAVING − 1ST ISSUE 10 YEARS ...... 4.30 − 5.40 MAY 2006 − JAN 2007 MAY 2016 − JAN 2017 CAD 2.43 CAN SAVING − 2ND ISSUE 10 YEARS ...... 4.27 − 5.27 JAN 2007 − JUL 2007 JAN 2017 − JUL 2017 CAD 1.28 CAN MAZAL TOV − 3RD ISSUE 5 YEARS ...... 2.33 − 3.31 JAN 2010 − DEC 2010 JAN 2015 − DEC 2015 CAD 3.34 CAN MAZAL TOV − 4TH ISSUE 5 YEARS ...... 1.86 − 3.16 JAN 2011 − JUL 2014 JAN 2016 − JUL 2019 CAD 11.88 CAN MAZAL TOV − 5TH ISSUE 5 YEARS ...... 2.62 − 2.76 AUG 2014 − DEC 2014 AUG 2019 − DEC 2019 CAD 1.79 CAN SABRA BOND − 4TH ISSUE 3 YEARS ...... 1.59 − 2.63 JAN 2012 − JUL 2014 JAN 2015 − JUL 2017 CAD 8.31 CAN SABRA BOND − 5TH ISSUE 3 YEAR ...... 1.86 − 2.00 JUL 2014 − DEC 2014 JUL 2017 − DEC 2017 CAD 2.31 CFRI − 2ND ISSUE ...... PRIMECAD − 0.75 − 0.00 A JAN 2003 − APR 2006 JAN 2015 − APR 2018 CAD 4 CAN ZC − 2ND ISSUE ...... 4.85 − 5.55 JAN 2005 − MAY 2006 JAN 2015 − MAY 2016 CAD 13.83 CAN JUBILEE − 3RD ISSUE 5 YEARS ...... 2.37 − 3.64 JAN 2010 − DEC 2010 JAN 2015 − DEC 2015 CAD 12.08 CAN JUBILEE 3RD ISSUE 10 YEARS ...... 3.35 − 4.00 AUG 2010 − DEC 2010 AUG 2020 − DEC 2020 CAD 1.04 CAN JUBILEE − 4TH ISSUE 2 YEARS ...... 1.44 − 2.32 JAN 2013 − JUL 2014 JAN 2015 − JUL 2016 CAD 45.14 CAN JUBILEE − 4TH ISSUE 3 YEARS ...... 1.93 − 2.93 JAN 2012 − JUL 2014 JAN 2015 − JUL 2017 CAD 30.46 CAN JUBILEE − 4TH ISSUE 5 YEARS ...... 2.45 − 3.90 JAN 2011 − JUL 2014 JAN 2016 − JUL 2019 CAD 66.45 CAN JUBILEE − 4TH ISSUE 10 YEARS ...... 3.46 − 4.61 JAN 2011 − JUL 2014 JAN 2021 − JUL 2024 CAD 188.38 CAN JUBILEE − 5TH ISSUE 2 YEARS ...... 1.51 − 1.91 JUL 2014 − DEC 2014 JUL 2016 − DEC 2016 CAD 5.15 CAN JUBILEE − 5TH ISSUE 3 YEARS ...... 1.87 − 2.16 JUL 2014 − DEC 2014 JUL 2017 − DEC 2017 CAD 4.58 CAN JUBILEE − 5TH ISSUE 5 YEARS ...... 2.62 − 3.01 JUL 2014 − DEC 2014 JUL 2019 − DEC 2019 CAD 13.62 CAN JUBILEE − 5TH ISSUE 10 YEARS ...... 3.54 − 3.84 JUL 2014 − DEC 2014 JUL 2024 − DEC 2024 CAD 16.31 CAN MACCABEE − 3RD ISSUE 5 YEARS ...... 2.24 − 3.54 JAN 2010 − DEC 2010 JAN 2015 − DEC 2015 CAD 1.58 CAN MACCABEE 4TH ISSUE 2 YEARS ...... 1.29 − 2.07 JAN 2013 − JUL 2014 JAN 2015 − JUL 2016 CAD 3.37 CAN MACCABEE 4TH ISSUE 3 YEARS ...... 1.66 − 2.78 JAN 2012 − JUL 2014 JAN 2015 − JUL 2017 CAD 4.7 CAN MACCABEE 4TH ISSUE 5 YEARS ...... 2.30 − 3.75 JAN 2011 − JUL 2014 JAN 2016 − JUL 2019 CAD 10.02 CAN MACCABEE 4TH ISSUE 10 YEARS ...... 3.40 − 4.28 SEP 2012 − JUL 2014 SEP 2022 − JUL 2024 CAD 2.57 CAN MACCABEE 5TH ISSUE 2 YEAR ...... 1.31 − 1.71 JUL 2014 − DEC 2014 JUL 2016 − DEC 2016 CAD 0.81 CAN MACCABEE 5TH ISSUE 3 YEAR ...... 1.72 − 2.01 JUL 2014 − DEC 2014 JUL 2017 − DEC 2017 CAD 0.76 CAN MACCABEE 5TH ISSUE 5 YEAR ...... 2.42 − 2.81 JUL 2014 − DEC 2014 JUL 2019 − DEC 2019 CAD 1.63 CAN MACCABEE 5TH ISSUE 10 YEAR ...... 3.34 − 3.64 JUL 2014 − DEC 2014 JUL 2024 − DEC 2024 CAD 0.5 CAN INSTITUTIONAL JUBILEE 2ND ISSUE 5 YE . . . 3.67 MAR 2011 − MAR 2016 − CAD 0 CAN INSTITUTIONAL JUBILEE 3RD ISSUE 3 YE . . . 2.59 FEB 2014 − FEB 2017 − CAD 2.2 CAN INSTITUTIONAL JUBILEE 3RD ISSUE 5 YE . . . 3.21 − 3.40 NOV 2013 − JUL 2014 NOV 2018 − JUL 2019 CAD 8.9 CAN INSTITUTIONAL JUBILEE 4TH ISSUE 5 YE .... 3.15 AUG 2014 − AUG 2019 − CAD 1

(A) Interest rate equals Canadian Prime minus 0.75% basis points.

(B) The Euribor rate for six months rounded upward to 1⁄100%.

D-97 Tradable Local Currency Direct Debt of the Government of Israel

Outstanding Amount on December 31, 2014 Issue Date Maturity (In Millions Serial No. Serial Name Interest Rate DD/MM/YYYY DD/MM/YYYY of NIS) Floating Rate Loans 1106970 Israel Government 0 09/04/2007 31/08/2017 15,372.9 FRN 1116193 0 07/12/2009 31/05/2020 18,423.7 1127646 0 04/02/2013 30/11/2021 9,495.3 Fixed Rate Loans 9268335 Shahar 6.5 6/02/2006 31/01/2016 11,237.5 1099456 Israel Government 6.25 11/06/2006 30/10/2026 16,574.6 Fixed 1101575 5.5 26/02/2007 28/02/2017 17,999 1123272 5.5 04/04/2011 31/01/2022 17,849 1110907 6.0 06/10/2008 28/02/2019 18,028.2 1122019 4.25 01/10/2011 31/08/2016 16,690. 1126747 4.25 06/08/2012 31/03/2023 16,475.9 1127166 2.5 05/11/2012 31/05/2016 15,155.2 1126218 4 08/05/2012 31/01/2018 16,770.1 1125400 5.5 09/01/2012 31/01/2042 9,957.2 1114297 4.5 06/08/2009 30/01/2015 7,084.3 1115773 5.0 11/02/2009 31/01/2020 17,203.6 1130848 3.75 06/01/2014 31/03/2024 10,058.34 1131770 2.25 07/04/2014 31/05/2019 5,882.3 1132786 1.25 07/07/2014 31/10/2017 4,160.6 Israel Government T-Bills 1132091 0 12/05/2014 30/01/2015 1,409.4 CPI-linked Loans 9547233 Galil CPI + 5.00 23/05/2000 30/04/2015 11,881.4 9590332 CPI + 4.00 19/08/2001 31/07/2021 20,074.3 9590431 CPI + 4.00 23/08/2004 31/07/2024 12,996.5 1097708 Israel Government CPI CPI + 4.00 26/06/2006 31/05/2036 19,183.5 1124056 CPI + 2.75 07/06/2011 30/09/2022 16,690.9 1128081 CPI + 1.75 02/04/2013 29/09/2023 11,256.5 1130483 Israel Government CPI CPI + 0.1 11/11/2013 31/10/2016 8,910.3 1120583 CPI + 2.75 09/06/2010 31/08/2041 17,945.5 1108927 CPI + 3.5 01/07/2008 30/04/2018 22,630. 1114750 CPI + 3.0 08/03/2009 31/10/2019 16,626.2 1125905 CPI + 1.0 05/03/2012 30/05/2017 16,056.7

(1) Annual interest rate equals weighted average of yields to maturity of Treasury Bills (Makam) with 3 to 12 months maturity. (2) Annual interest rate equals yields to maturity of Treasury Bills (Makam) with 12 months maturity. Source: Ministry of Finance.

D-98 Non-Tradable Local Currency Direct Debt of the Government of Israel

Outstanding Amount on December 31, 2014 Series Name Interest Rate Issue Date Date of Maturity (In Millions) CPI-Linked Loans Hetz ...... CPI+4%−6.2% 1967 − 2014 2014 − 2033 47,612 Meron ...... CPI+5.5% 1987 − 2014 2014 − 2025 37,366.8 Arad ...... CPI+4.8% 1995 − 2014 2014 − 2029 85,257.5

Source: Ministry of Finance.

Various Loans of the Government of Israel

Outstanding Amount on December 31, 2014 (In Millions Name Interest Rate Issue Date Date of Maturity of NIS) Emissions and Funds(1). . 2% − 6% 1984 − 2004 (2) NIS 7,150 Compulsory Bonds .... N/A N/A N/A N/A

(1) The funds and emissions include mostly deposits at the Accountant General’s Office made by ﬁnancial institutions and other entities. (2) Most of these amounts were deposited for 17 years and are re-ﬁnanced. Some of the depositing entities are able to withdraw their funds at any time and some of the deposits (those referred to as ‘‘emissions’’) have an established maturity date. Source: Ministry of Finance.

Balance of the Government’s Floating Rate Debt by Currency (As of December 31, 2014)

Total (In Millions) United States Dollars (USD) ...... 1,000 Euro (EUR) ...... 4 Canadian Dollar (CAD) ...... 4 New Israeli Shekel (NIS) ...... 43,300

Source: Ministry of Finance.

D-99

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