Thursday, July 25

The war has already damaged the economies of Israel’s closest neighbors

In the Red Sea, attacks by Iran-backed Houthi militants against commercial ships continue to disrupt a crucial trade route and raise shipping costs. The threat of escalation there and around flashpoints in Lebanon, Iraq, Syria, Yemen and now Iran and Pakistan intensifies every day.

Despite the staggering death toll and heartbreaking misery of violence in the Middle East, the broader economic impact so far has been mostly contained. Oil production and prices, a key driver of global economic activity and inflation, have returned to pre-crisis levels. International tourists continue to fly to other Middle Eastern countries such as Saudi Arabia, the United Arab Emirates and Qatar.

However, for Israel’s neighbors – Egypt, Lebanon and Jordan – the economic damage is already severe.

An assessment by the United Nations Development Program estimates that in just three months the Israel-Gaza war cost the three countries $10.3 billion, or 2.3 percent of their combined gross domestic product. An additional 230,000 people in these countries are expected to fall into poverty.

“Human development could regress by at least two to three years in Egypt, Jordan and Lebanon,” the analysis warns, citing refugee flows, soaring public debt and declines in trade and tourism – a vital source of revenue, foreign exchange and employment.

This conclusion echoed an update last month from the International Monetary Fund, which said it was certain to lower its forecasts for the most exposed countries when it releases its World Economic Outlook later this month.

The latest economic gut punch couldn’t come at a worse time for these countries, said Joshua Landis, director of the Center for Middle East Studies at the University of Oklahoma.

Economic activity in the Middle East and North Africa was already in decline, falling to 2% growth in 2023 from 5.6% the previous year. Lebanon has been embroiled in what the World Bank calls one of the world’s worst economic and financial crises in more than a century and a half. And Egypt is on the brink of insolvency.

Since Hamas fighters attacked Israel from Gaza on October 7, around 25,000 Palestinians have been killed by Israel, according to Gaza’s health ministry. The Strip has suffered widespread destruction and devastation. In Israel, where Hamas attacks have killed around 1,200 people, according to officials, and resulted in 240 people being taken hostage, life has been turned upside down, with hundreds of thousands of citizens called into military service and 200,000 displaced from the areas border.

In Jordan, Lebanon and Egypt, uncertainty over the course of the war is eroding consumer and business confidence, which is likely to reduce spending and investment, IMF analysts wrote.

Egypt, the Arab world’s most populous country, has not yet recovered from the rising cost of essential imports such as grain and fuel, a collapse in tourism revenue and a drop in foreign investment caused by the coronavirus pandemic and the war in Ukraine.

Generous government spending on flashy megaprojects and weapons has driven up Egypt’s debt. As central banks around the world raised interest rates to curb inflation, debt payments ballooned. Rising prices in Egypt continue to undermine the purchasing power of families and the expansion plans of businesses.

“Nobody wants to invest, but Egypt is too big to fail,” Landis said, explaining that the United States and the IMF are unlikely let the country default on its $165 billion in foreign loans given its strategic and political importance.

The decline in maritime traffic crossing the Red Sea from the Suez Canal is the latest blow. Between January and August, Egypt took in an average of $862 million a month from the canal, which represents 11% of global maritime trade.

James Swanston, emerging markets economist at Capital Economics, said that according to the head of the Suez Canal Authority, traffic is down 30% this month compared to December and revenues are 40% weaker than 2023 levels .

“That’s the biggest spillover effect,” he said.

For these three struggling economies, the decline in tourism is particularly alarming. Tourism in Egypt, Lebanon and Jordan accounted for 35% to nearly 50% of their combined exports of goods and services in 2019, according to the IMF.

As of early January, confirmed tickets for international arrivals in the Middle East region for the first half of this year were 20% higher than last year, according to ForwardKeys, a data analytics firm that tracks global air travel bookings.

But the closer the fighting, the greater the drop in travellers. Tourism in Israel has largely evaporated, further hammering an economy shattered by full-scale war.

In Jordan, airline bookings fell by 18%. In Lebanon, where Israeli troops are fighting Hezbollah militants along the border, bookings fell by 25%.

“Fears of further regional escalation cast a shadow over travel prospects in the region,” Olivier Ponti, vice president of insights at ForwardKeys.

In Lebanon, travel and tourism previously contributed a fifth of the country’s annual gross domestic product.

“The number one site in Lebanon is Baalbek,” said Hussein Abdallah, general manager of Lebanon Tours and Travels in Beirut. The vast 2,000-year-old Roman ruins are so spectacular that visitors have suggested that djinn built a palace there for the Queen of Sheba or that aliens built it as an intergalactic landing pad.

Now, Abdallah said, “it is completely empty.”

Mr Abdallah said as of October 7 his bookings were down 90% compared to last year. “If the situation continues like this,” he said, “many tour operators in Beirut will go out of business.”

Travel to Egypt also decreased in October, November and December. Mr. Landis of the Middle East Center in Oklahoma said his brother also canceled a planned trip along the Nile, choosing instead to vacation in India.

Khaled Ibrahim, a consultant at Amisol Travel Egypt and a member of the Middle East Travel Alliance, said cancellations started arriving after the attacks began. Like other tour operators, it offered discounts to popular destinations such as Sharm el-Sheik, on the southern tip of the Sinai Peninsula, and occupancy reached about 80% of normal.

He is less optimistic about saving the remainder of what is considered the prime tourist season. “I can say that this winter, from January to April, will be quite busy,” Ibrahim said from Medina in Saudi Arabia, where he was leading a tour. “Maybe business drops to 50%.”

Jim Tankersley contributed reporting from Davos, Switzerland.