How Israel’s war on Gaza is bleeding Egypt’s economy

Already facing a deep crisis, Egypt’s economy appears poised to take a hit from Israel’s war on Gaza and the spiralling tensions in the Red Sea, analysts have said.

Currently on “life support”, Egypt’s deteriorating economy suffers from growing public debt now at more than 90 percent of its gross domestic product (GDP), capital flight and the currency’s fall against the US dollar.

Now, those challenges are being compounded by the war, as it edges closer and closer to Egypt’s border, with a large chunk of Gaza’s population pushed into Rafah, after four months of displacement as a result of Israel’s relentless attacks. Tourism and the Suez Canal are two of Egypt’s major sources of foreign exchange.

Bleak outlook for tourism

Egypt’s pyramids, museums, resorts and monuments attract visitors from all over the world and have long made tourism a major source of national income. In 2022, roughly three million Egyptians worked in the tourism industry.

Before Israel’s war on Gaza erupted, Egypt’s tourism sector was already struggling to recover from COVID-19. But it appeared to be rebounding. The Gaza war and the Red Sea crisis could batter revenue prospects from this industry. According to S&P Global Ratings, Egypt’s tourism revenues are set to experience a 10-30 percent fall from last year, which could cost the country 4-11 percent of its foreign exchange reserves and shrink GDP.

“The conflict’s proximity to the Sinai peninsula has led to a sharp decline in tourism, which brought in…$13.63bn in revenue during the 2022-23 fiscal year,” Amr Salah Mohamed​, an adjunct lecturer at George Mason University, told Al Jazeera.

“Although the full extent of the damage to Egyptian tourism from the ongoing conflict is difficult to quantify so far, early indications, such as a 25 percent drop in early November bookings, suggest a substantial downturn that is likely to continue if the conflict persists,” he added.

Drop in Suez Canal revenue

Since November, Egypt has been grappling with the economic impact of Houthi missile and drone attacks against Israel-linked commercial vessels in the Red Sea, which has been the Houthis’ response to Israel’s war on Gaza.

A consequence of these strikes along the shortest trade route linking Asia to Europe through the Suez Canal has been many shipping companies rerouting their vessels around the Cape of Good Hope.

In the 2022-23 fiscal year, the Suez Canal brought in $9.4bn of revenue for Egypt. In the first 11 days of this year, revenue from the Suez Canal plummeted by 40 percent compared with the same period in the previous year.

That damage has only increased since then. Egyptian authorities said revenue in January from the Suez Canal had fallen 50 percent since the start of the year, compared with 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 defence establishment ordered the temporary halting of extractions from the Tamar gas field, located 25km (15 miles) from Israel’s southern coastal city of Ashdod.

Egypt is home to the Eastern Mediterranean’s only two gas liquefaction facilities. Israel exports its gas – including from Tamar – to Egypt, where it is turned into LNG and exported to other markets, in particular, Europe.

Because of the war, Egypt’s re-exports of gas fell by more than 50 percent in the fourth quarter of 2023 compared with that same period in 2022. This dynamic has highlighted Egypt’s economic dependence on Israel, which constitutes a huge vulnerability for Cairo at a time when tension is high in the region due to the Gaza war.

Potential influx of refugees

The fate of the 1.4 million Palestinians taking shelter in Rafah is also a source of unease in Egypt.

The government of President Abdel Fattah el-Sisi wants to prevent the influx of displaced Palestinians into the Sinai peninsula to escape Israel’s destruction across Gaza. There are already nine million refugees in Egypt, and Cairo has made clear it will not support any move that could amount to the permanent displacement of Palestinians from Gaza, which many experts fear is Israel’s game plan.

Security concerns over the presence of Palestinian fighters in Sinai, and the effects of their planned attacks against Israel on relations between Cairo and Tel Aviv, are a factor for Egypt. Economic challenges also help explain why Egypt views any forcible expulsion of Palestinians from Gaza into the Sinai as crossing a red line. Since Sudan’s conflict erupted 10 months ago, 450,000 Sudanese refugees have crossed Egypt’s southern border, which has already strained Egypt’s troubled economy.

Against this backdrop, Egypt has begun constructing a wall two miles west of the Egypt-Gaza border, potentially to forestall such a scenario. “There are those of us who fear that Israelis will destroy the existing Egyptian border fence so that they can push Gazans into Sinai,” said Patrick Theros, the former US ambassador to Qatar, in an interview with Al Jazeera.

“Egypt is building a second border wall lightly inside Egyptian territory to serve as a deterrent to the Israelis. Given Netanyahu’s desperate need to stay in power and avoid going to jail, the deterrent may not work,” he said, referring to Israeli Prime Minister Benjamin Netanyahu, whose popularity is at a record low domestically. Many analysts have argued that he needs the war to continue to avoid being removed from office. Netanyahu faces corruption cases.

“Washington’s irrational refusal to stop him may encourage Netanyahu to extend the fighting into 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 the Egyptian Finance Minister Mohamed Maait in Washington to pledge US support for the Egyptian economy and reforms.

At the same time, there were discussions about augmenting Egypt’s $3bn loan with the International Monetary Fund (IMF) to help it cope with the war in Gaza and the Red Sea security crisis. The main elements of the economic reform package include the Egyptian government selling stakes in dozens of state-owned enterprises, subsidy reductions, moving towards a flexible exchange rate, and making the military’s role in the national economy more transparent.

Yet, analysts caution, the war in Gaza and the Red Sea security crisis coming in the aftermath of the geopolitical shocks caused by Russia’s invasion of Ukraine two years ago will probably make Egyptian officials more reluctant to implement some economic reforms.

In an interview with Al Jazeera, Ryan Bohl, a Middle East and North African analyst at the risk intelligence company RANE, said the IMF would need to be considerate of the multiple pressures facing Egyptian policymakers when making demands of them.