Israel’s debt to Rafael, IAI and Elbit mushrooms to over $5 billion
The Finance Ministry is examining a framework to settle the record debt to Israel’s three largest defense companies, as the Defense Ministry seeks an additional $8.3 billion for 2026.
Finance Ministry examines a framework to settle debts to Rafael, IAI and Elbit as the Defense Ministry seeks another $8 billion for 2026.
The Finance Ministry has begun examining a framework for settling the state's debts to the three major defense companies, Rafael, Israel Aerospace Industries (IAI) and Elbit Systems, the total of which has surged in recent weeks to an unprecedented NIS 17 billion ($5.67 billion).
The bulk of the debt is owed to Rafael and stems from frequent orders placed by the Defense Ministry to meet the IDF's operational needs. However, in the absence of an agreement on the 2026 defense budget, the ministry has been unable to settle its obligations. In effect, the defense companies are providing the government with an off-budget line of credit while also being forced to bear the associated financing costs.
The exceptional and unresolved debt burden has already taken a toll on IAI. During the second quarter of the year, the company recorded negative cash flow of approximately $800 million despite strong business performance and a record order backlog.
Criticism of the state's mounting debt to the defense industries has also come from Rafael CEO Yoav Turgeman. Late last month, he told Calcalist: "This is an issue that requires an urgent solution, and it warrants intervention by the Minister of Finance. The State of Israel is our largest customer, and when it fails to pay us, we are forced to take out loans."
Michal Abadi-Boiangiu, the Accountant General at the Finance Ministry, is leading the formulation of a framework for settling the debt with the defense industries. The effort comes as the Knesset Finance Committee is scheduled to discuss changes to the 2026 budget tomorrow, including the transfer of approximately NIS 15 billion ($5 billion) from reserve funds to the defense budget.
An agreement on the NIS 15 billion ($5 billion) transfer was reached in June as part of a framework devised by the National Security Council and approved by Prime Minister Benjamin Netanyahu. The transfer would bring the defense budget to NIS 158 billion ($52.67 billion).
Decisions on whether to transfer an additional NIS 25 billion ($8.33 billion), which the defense establishment is demanding for the current year, are expected to be made next month and in November, subject to actual military expenditures.
The defense budget increase expected to be approved tomorrow is likely to be allocated primarily to the IDF's ongoing operational costs, including payments to reservists. Contrary to the army's 2026 plans, which envisioned maintaining a force of approximately 40,000 reservists at any given time, the actual number is now nearly 60,000.
The higher number of reservists reflects operational demands, including the maintenance of security zones in Gaza, Lebanon and Syria.
Government officials said that small and medium-sized businesses are receiving timely and regular payments from the Defense Ministry, while the large defense companies have so far been able to absorb the outstanding debt, partly because of their substantial revenues from global arms sales.
Meanwhile, the Accountant General and MAFAT, the Defense Ministry's Directorate of Defense Research and Development, have selected Adir Capital and SLING Capital to establish two defense-tech venture capital funds backed by state guarantees.
The funds are designed to inject private capital into defense startups, particularly companies operating in areas that require substantial investment and involve high manufacturing risks. The initiative is intended to expand Israel's defense manufacturing base and strengthen its technological independence.
Defense Ministry officials told Calcalist that the state guarantee provided to each fund will amount to approximately NIS 100 million ($33.3 million).
