Analysts say Egypt's economy is already in deep crisis and is likely to take a hit from Israel's war on Gaza and rising tensions in the Red Sea.
Egypt's deteriorating economy, currently on “life support”, is suffering from growing public debt, now at over 90 percent of gross domestic product (GDP), capital flight and the currency's decline against the US dollar.
Now those challenges are being compounded by the war as it moves ever closer to the Egyptian border, pushing much of Gaza's population into Rafah after four months of displacement by Israel's relentless attacks. Tourism and the Suez Canal are two of Egypt's most important sources of foreign currency.
Gloomy prospects for tourism
Egypt's pyramids, museums, resorts and monuments attract visitors from around the world, making tourism a long-standing source of income for the country. In 2022, around three million Egyptians worked in the tourism industry.
Before Israel's war on Gaza broke out, Egypt's tourism sector was already struggling to recover from COVID-19. But it seemed to be recovering. The Gaza war and the Red Sea crisis could affect this industry's revenue prospects. According to S&P Global Ratings, Egypt's tourism revenue is expected to fall by 10 to 30 percent compared to last year, which could cost the country 4 to 11 percent of its foreign exchange reserves and shrink 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 fiscal year,” said Amr Salah Mohamed, an associate lecturer at George Mason University, said Al Jazeera.
“Although the full extent of the damage to Egyptian tourism from the ongoing conflict remains difficult to quantify, early indications, such as a 25 percent drop in bookings in early November, point to a significant decline that is likely to continue as the Conflict continues,” he added.
Decline in revenue from the Suez Canal
Since November, Egypt has been grappling with the economic impact of Houthi rocket and drone attacks on Israeli-linked merchant ships in the Red Sea, which were the Houthis' response to Israel's war on Gaza.
One consequence of these attacks along the shortest trade route connecting Asia to Europe via the Suez Canal was that many shipping companies rerouted their ships around the Cape of Good Hope.
In the 2022/23 financial year, the Suez Canal brought Egypt $9.4 billion in revenue. In the first 11 days of this year, revenue from the Suez Canal fell 40 percent compared to the same period last year.
This damage has only increased since then. Egyptian authorities said revenue from the Suez Canal fell 50 percent year-to-date in January compared to the same period in 2023.
Problems in the gas sector
Egypt's gas industry has also suffered greatly since October 7th. Two days after the Hamas-led invasion of southern Israel, Israel's Defense Ministry ordered a temporary halt to production from the Tamar gas field, located 25 km (15 miles) from Israel's southern coastal city of Ashdod.
Egypt is home to the only two gas liquefaction plants in the Eastern Mediterranean. Israel exports its gas – including from Tamar – to Egypt, where it is converted into LNG and exported to other markets, particularly Europe.
Due to the war, Egyptian gas re-exports fell by more than 50 percent in the fourth quarter of 2023 compared to the same period in 2022. This dynamic has highlighted Egypt's economic dependence on Israel, which is a significant problem that puts Cairo at enormous risk at a time when tensions in the region are high due to the Gaza war.
Possible refugee influx
The fate of the 1.4 million Palestinians seeking refuge in Rafah is also causing concern in Egypt.
The government of President Abdel Fattah el-Sisi wants to prevent the influx of displaced Palestinians into the Sinai Peninsula in order to avoid Israel's destruction of the entire Gaza Strip. There are already nine million refugees in Egypt, and Cairo has made clear that it will not support any move that could amount to the permanent expulsion of Palestinians from Gaza, which many experts believe is Israel's plan.
Security concerns about the presence of Palestinian fighters in Sinai and the impact of their planned attacks on Israel on relations between Cairo and Tel Aviv are a factor for Egypt. Economic challenges also explain why Egypt sees any violent expulsion of Palestinians from Gaza into Sinai as crossing a red line. Since the conflict in Sudan erupted 10 months ago, 450,000 Sudanese refugees have crossed Egypt's southern border, already putting a strain on Egypt's struggling economy.
With this in mind, Egypt has begun building a wall two miles west of the Egypt-Gaza border, perhaps to forestall such a scenario. “There are those of us who fear that the Israelis will destroy the existing Egyptian border fence so that they can push Gazans into Sinai,” Patrick Theros, the former U.S. ambassador to Qatar, said in an interview with Al Jazeera.
“Egypt is building a second border wall slightly on Egyptian territory to deter the Israelis. “Given Netanyahu's desperate need to stay in power and avoid going to prison, deterrence may not work,” he said, referring to the Israeli one Prime Minister Benjamin Netanyahu, whose domestic popularity is at a record low. Many analysts have argued that he needs the war to continue to prevent himself from being removed from office. Netanyahu faces corruption cases.
“Washington’s irrational refusal to stop him could embolden Netanyahu to expand fighting into Sinai, even if it ends the peace treaty with Egypt,” Theros said.
Managing expectations for economic reform
Last month, US Treasury Secretary Janet Yellen met with Egyptian Finance Minister Mohamed Maait in Washington to pledge US support for Egypt's economy and reforms.
At the same time, there were discussions about increasing Egypt's $3 billion loan with the International Monetary Fund (IMF) to help the country deal with the war in Gaza and the Red Sea security crisis. Key elements of the economic reform package include the Egyptian government's sale of shares in dozens of state-owned companies, subsidy cuts, the introduction of a flexible exchange rate and more transparency about the military's role in the national economy.
Still, analysts warn, the war in Gaza and the security crisis on the Red Sea as a result of the geopolitical shocks caused by Russia's invasion of Ukraine two years ago will likely lead Egyptian officials to implement some economic reforms become more reserved.
In an interview with Al Jazeera, Ryan Bohl, a Middle East and North Africa analyst at risk intelligence firm RANE, said the IMF must take into account the multiple pressures facing Egypt's policymakers when making demands on them.
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