Israel's Defense Industry Faces Record Debt, Government Seeks Solution

Israel's Ministry of Finance is exploring a plan to address the state's mounting debt to its three main defense industries: Rafael, Israel Aerospace Industries (IAI), and Elbit Systems. This debt has surged in recent weeks to an unprecedented 17 billion shekels (approximately $4.6 billion USD). The majority of this debt is owed to Rafael, stemming from frequent orders placed by the Ministry of Defense due to the IDF's operational needs. However, a lack of finalized budget agreements for 2026 has prevented the Ministry of Defense from settling these obligations. The defense industries are effectively providing an extra-budgetary credit line and are bearing the financing costs.

This unresolved debt has already impacted IAI, which reported a negative cash flow of approximately $800 million in the second quarter, despite strong business performance and a record order backlog. Yoav Turgeman, CEO of Rafael, has also voiced criticism, stating that the issue requires urgent resolution and ministerial intervention, as the state's non-payment forces the company to take out loans. Michal Abadi-Boiang'o, the Accountant General at the Ministry of Finance, is leading the effort to formulate a commercial settlement.

Meanwhile, the Knesset Finance Committee is scheduled to discuss approving changes to the 2026 budget, including the transfer of approximately 15 billion shekels from reserves to the defense budget. This allocation, agreed upon in June following a National Security Council proposal approved by Prime Minister Benjamin Netanyahu, would bring the total defense budget to 158 billion shekels. Further decisions on an additional 25 billion shekels requested by the defense establishment for the current year are expected in the coming months, contingent on actual military expenditures.

These additional funds are primarily intended to cover the IDF's ongoing expenses, including payments to reservists. The actual number of reservists currently serving is closer to 60,000, exceeding the army's 2026 plans of 40,000, due to increased operational demands in Gaza, Lebanon, and Syria. While smaller and medium-sized defense firms receive timely payments, the larger companies can currently absorb the debt due to substantial global arms sales revenue.

In a related development, the Accountant General and the Ministry of Defense's Directorate of Defense Research and Development (DDR&D) have selected Adir Capital and SLING CAPITAL to establish two state-backed venture capital funds for defense technology. These funds aim to inject private capital into defense startups, particularly in high-production and high-risk sectors, to expand Israel's defense manufacturing base and technological independence. The state will provide a guarantee of approximately 100 million shekels for each fund.