Already facing a deep crisis, the Egyptian economy appears poised to suffer the consequences of Israel’s war against Gaza and rising tensions in the Red Sea, analysts say.
Currently on life support, Egypt’s declining economy is suffering from a growing public debt which now reaches more than 90 percent of its gross domestic product (GDP), capital flight and a falling currency. compared to the US dollar.
Today, these challenges are compounded by the war, as it moves ever closer to the Egyptian border, with much of Gaza’s population pushed towards Rafah, after four months of displacement due to incessant attacks. of Israel. Tourism and the Suez Canal are two of Egypt’s main foreign exchange earners.
Gloomy outlook for tourism
Egypt’s pyramids, museums, resorts and monuments attract visitors from around the world and have long made tourism a major source of national revenue. In 2022, around three million Egyptians worked in the tourism sector.
Before Israel’s war on Gaza broke out, Egypt’s tourism sector was already struggling to recover from COVID-19. But it seems that the situation is on the rebound. The war in Gaza and the Red Sea crisis could harm the industry’s revenue prospects. According to S&P Global Ratings, Egypt’s tourism revenue is expected to see a decline of 10 to 30 percent compared to last year, which could cost the country 4 to 11 percent of its foreign exchange reserves and reduce its GDP.
“The proximity of the conflict to the Sinai Peninsula has led to a sharp decline in tourism, which brought in… $13.63 billion in revenue in the 2022-23 financial year,” Amr Salah Mohamed told Tel Aviv Tribune , lecturer at George Mason University. .
“Although the extent of the damage caused to Egyptian tourism by the ongoing conflict is difficult to quantify so far, early indications, such as a 25 percent drop in bookings in early November, suggest a significant slowdown that is likely to continue if the conflict persists,” he added.
Fall in revenue from the Suez Canal
Since November, Egypt has grappled with the economic impact of Houthi missile and drone attacks on Israeli-linked commercial ships in the Red Sea, which constitute the Houthis’ response to Israel’s war on Gaza.
As a result of these strikes along the shortest trade route connecting Asia to Europe via the Suez Canal, many shipping companies have redirected their ships around the Cape of Good Hope.
In the 2022-23 fiscal year, the Suez Canal brought $9.4 billion in revenue to Egypt. In the first 11 days of this year, Suez Canal revenues fell 40 percent compared to the same period the previous year.
This damage has only increased since then. Egyptian authorities said that as of January, revenues from the Suez Canal had fallen by 50% since the start of the year, compared to the same period in 2023.
Gas sector problems
Since October 7, Egypt’s gas economy has also suffered greatly. Two days after the Hamas-led incursion into southern Israel, the Israeli defense establishment ordered a temporary halt to extraction from the Tamar gas field, located 25 km from the coastal city of Ashdod, in southern Israel.
Egypt is home to the only two gas liquefaction facilities in the Eastern Mediterranean. Israel exports its gas – notably from Tamar – to Egypt, where it is transformed into LNG and exported to other markets, notably Europe.
Due to the war, Egypt’s gas re-exports fell by more than 50% in the fourth quarter of 2023 compared to the same period of 2022. This dynamic highlighted Egypt’s economic dependence on towards Israel, which constitutes a huge vulnerability for Cairo at any given moment. period when tension is high in the region due to the war in Gaza.
Potential influx of refugees
The fate of the 1.4 million Palestinian refugees in Rafah is also a source of concern in Egypt.
The government of President Abdel Fattah al-Sisi wants to prevent the influx of displaced Palestinians to the Sinai Peninsula to escape Israel’s destruction of Gaza. There are already nine million refugees in Egypt, and Cairo has made clear that it will not support any measures that would amount to the permanent displacement of Palestinians from Gaza, which many experts fear is the plan of action for ‘Israel.
Security concerns over the presence of Palestinian fighters in the Sinai and the effects of their planned attacks on Israel on relations between Cairo and Tel Aviv are a factor for Egypt. The economic challenges also help explain why Egypt views any forced expulsion of Palestinians from Gaza to Sinai as crossing a red line. Since the conflict in Sudan erupted ten months ago, 450,000 Sudanese refugees have crossed Egypt’s southern border, already straining Egypt’s struggling economy.
In this context, Egypt has started building a wall three kilometers west of the Egypt-Gaza border, potentially to prevent such a scenario. “Some of us fear that the Israelis will destroy the existing Egyptian border fence so they can push the Gazans into Sinai,” Patrick Theros, former US ambassador to Qatar, said in an interview with Tel Aviv Tribune.
“Egypt is building a second border wall slightly inside Egyptian territory to serve as a deterrent against the Israelis. Given Netanyahu’s desperate need to stay in power and avoid going to prison, deterrence may not work,” he said, referring to Israeli Prime Minister Benjamin Netanyahu, whose popularity is at further down the country. Many analysts believe he needs the war to continue to avoid being removed from office. Netanyahu faces corruption cases.
“Washington’s irrational refusal to stop him could encourage Netanyahu to expand the fighting to Sinai, even if it ends the peace treaty with Egypt,” Theros said.
Managing expectations for economic reforms
Last month, US Treasury Secretary Janet Yellen met with Egyptian Finance Minister Mohamed Maait in Washington to pledge support for Egypt’s economy and reforms.
At the same time, discussions were held on increasing Egypt’s $3 billion loan from the International Monetary Fund (IMF) to help it deal with the war in Gaza and the sea security crisis. Red. Key elements of the economic reform program include the Egyptian government’s sale of stakes in dozens of state-owned companies, reductions in subsidies, a move toward a flexible exchange rate, and greater transparency of the military’s role. in the national economy.
Yet, analysts warn, the war in Gaza and the security crisis in the Red Sea, which follow geopolitical shocks caused by Russia’s invasion of Ukraine two years ago, will likely make Egyptian officials more reluctant to implement certain economic reforms.
In an interview with Tel Aviv Tribune, Ryan Bohl, Middle East and North Africa analyst at risk intelligence firm RANE, said the IMF should consider the multiple pressures facing Egyptian decision-makers when he makes requests of them.
