An International Monetary Fund report published Wednesday forecast that Israel's economy will shrink 1.5% in 2002, but would grow by 1.8% in 2003.

The IMF's World Economic Outlook report, published ahead of the organization's annual convention that begins in Washington on Friday, forecast 6.2% inflation for Israel in 2002, dropping to 3% in 2003 and unemployment of 10.7% this year rising to 10.9% in 2003.

Among the developed nations, the IMF forecast negative growth in 2002 for only three countries: Israel, Iceland and Japan.

The IMF report also forecast that Israel's balance of payment deficit in 2002 would hit 1.9% of gross domestic production, dropping back to 1.8% in 2003.

The IMF stressed that the security situation in the Middle East would continue to weigh on the growth of Israel and its neighbors. "Security fears added to the pressures already apparent in 2001, following the global slowdown and problems in the information technologies market," the report stated.

The IMF also notes that the shekel has declined significantly since the end of 2001 and an increase in exports based on the devaluation of the shekel and the global economic upturn will play a significant part in Israel's economic recovery in 2003, especially if the geo-political situation improves.