Israel-Hamas war can threaten economies in Egypt, Lebanon, Jordan

Economic crises are rippling through the countries bordering Israel, raising the possibility of a chain reaction from the war with Hamas that further worsens the financial health and political stability of Egypt, Jordan and Lebanon and creates problems well beyond.

Each of the three countries is up against differing economic pressures that led the International Monetary Fund (IMF) to warn in a September report that they could lose their "socio-political stability".

That warning came shortly before Hamas attacked Israel on October 7, triggering a war that could easily cause economic chaos. The possible fallout is starting to be recognised by world leaders and policy analysts.

For a Biden administration committed to stopping the Israel-Hamas war from widening, the conflict could amplify the economic strains and possibly cause governments to collapse. If the chaos went unchecked, it could spread across a region vital for global oil supplies. This will have reverberations around the globe.

“The more unstable things are economically, the easier it is for bad actors in the region to stir the pot," said Christopher Swift, an international lawyer and a former Treasury Department official.

Economic fiasco

World Bank chief Ajay Banga warned at a conference in Saudi Arabia this week that the war puts economic development at a “dangerous juncture”.

Charles Michel, president of the European Council, has told the IMF that they needed to do more to support the Egyptian government, which he said is under pressure due to the possibility of migrants arriving from Hamas-controlled Gaza as well as people fleeing a civil war in Sudan.

Egyptian President Abdel Fattah el-Sissi refuses to take in Palestinian refugees, fearing that Israel wants to force a permanent expulsion of Palestinians and nullify Palestinian demands for statehood.

Already, more than a million people have been displaced within Gaza. The threat of the war's escalation looms with clashes along the Lebanon-Israel border between the Israeli military and Hezbollah.

“Any sudden blow to the el-Sissi regime from the outside, whether it's an economic blow, or whether it's the sudden migration of a lot of people out of Gaza into the Sinai could have destabilizing effects,” said Swift. 

Swift said that while el-Sissi's regime is heavily dependent on US economic and military assistance, it's increasingly going to be popular opinion within Egypt that determines his actions.

Egyptian mess

In April, the IMF concluded that Egypt's financing needs for the year were equal in size to 35 per cent of its gross domestic product. On October 5, Moody's downgraded Egyptian debt that was already at junk status.

The downgrade came as past efforts have failed to help Egypt's economy, which was saddled with about $160 billion in debt as of the end of last year.

Mirette F Mabrouk, director of the Middle East Institute's Egypt Studies programme, said: “Egypt is in the worst economic crisis I can remember in at least five decades.” The war has only complicated the situation.

One major potential setback for Egypt stemming from the Israel-Hamas war would be the loss of tourists seeking to explore the pyramids and history. Tourism is one of Egypt's leading economic sectors.

Nearby Jordan is struggling due to slower economic growth and less foreign investment, according to the IMF. Its debt outlook is healthier than Egypt's, but its unemployment rate is in the double digits, according to financial data provider FactSet.

Lebanon crisis

The size of the Lebanese economy shrank by more than half from 2019 to 2021, according to the World Bank. Lebanon's currency, which since 1997 had been pegged to the US dollar at 1,500 Lebanese pounds to the dollar, now trades around 90,000 pounds to the dollar.

While many businesses have taken to charging in dollars, public employees who still get their wages in lira have seen their purchasing power crash, with many now relying on remittances from relatives abroad to stay afloat.

International donors including the United States and Qatar subsidize the salaries of Lebanese soldiers.

Before the Israel-Hamas war, some officials had pointed to Lebanon's rebounding tourism industry as an economic lifeline. But since the conflict has threatened to envelop Lebanon, foreign embassies have warned their citizens to leave and airlines have axed flights to the country.

Paul Salem, president of the Middle East Institute in Washington, said that “if tensions spread to the Gulf, this conflict will have the potential to severely impact international markets and struggling economies and populations around the globe”.

(With agency inputs)