The Gaza war has exacted a devastating human toll, above all on the Palestinian civilian population of the territory. More than 25,000 Palestinians have been killed by Israeli forces and 90% of the population is displaced from their homes.
It has also caused extensive economic damage, not only to Gaza and the West Bank, but also to neighbouring countries and to Israel itself. There are powerful political and humanitarian arguments for a ceasefire, to which a strong case arising from economic self-interest can be added.
This applies not only to countries such as Jordan and Egypt, whose already vulnerable economies have been hit hard, but also to the major Gulf Arab states, which will be called upon to finance a large part of the reconstruction and recovery costs.
Neighbouring countries facing economic difficulty
Prior to the 7 October attack on Israel by Hamas and other armed factions in Gaza, the surrounding countries were facing varying degrees of economic difficulty. Lebanon remained mired in a deep financial crisis, mitigated to a small extent by increased tourism and remittances.
Syria had failed to derive any significant benefits from its readmission to the Arab League, and inflation has surged to a record level of well over 100% according to some local economists.
Jordan registered some modest improvements on the back of a revival in tourism, but its growth rate was below 3%, unemployment was over 20%, and heavy spending commitments for state salaries, subsidies and the army meant that there was little left for investment, while public debt was about 90% of GDP.
Egypt was in the throes of a severe foreign exchange crisis, with inflation hitting 40%. A strong tourism recovery and steadily increasing revenue from the Suez Canal were among the few bright spots.
Economic repercussions of Israel’s response
The Israeli economy, meanwhile, was in rude health, on course for 3% growth, with the current account in surplus, and foreign exchange reserves of $200 billion. The West Bank was struggling with the impact of increased levels of violence, but there were some positive indicators in Gaza.
The increase in Israeli work permits and the prospect of developing the Gaza Marine gas field partly reflected Israel’s gross miscalculation that Hamas would not do anything to jeopardize economic improvements, however marginal. Gazans also benefited from the regular, Israel-approved, transfers of cash from Qatar. This covered civil servants’ salaries, while freeing Hamas to use its own resources to finance the development of its military infrastructure.
The 7 October attack and Israel’s massively destructive military response have had severe economic repercussions. These effects have been aggravated by the Houthi attacks on shipping in the Red Sea, and there remains a real risk of further escalation that could inflict damage on the Gulf Arab economies, which have not yet shown any serious ill-effects from the crisis.
The Biden administration has voiced its disagreements with Israeli policy and military tactics, but there is little chance that it will exert real pressure to back this up.
The Israeli economy has been hit by the costs associated with the mobilization of army reservists, the drop in tourism, and the impairment of business sentiment. Yet the Bank of Israel still forecasts a reasonable level of real GDP growth for 2023 and 2024, and a relatively modest fiscal deficit.
The New Israeli Shekel fell sharply in the weeks after 7 October, but it has since rallied after the central bank released $30 billion of foreign exchange reserves. US military aid has provided a shield to the Israeli economy, and this is unlikely to stop.
The Biden administration has voiced its disagreements with Israeli policy and military tactics, but there is little chance that it will exert real pressure, including some form of economic sanctions, to back this up. Meanwhile, Israel has added a financial squeeze to its military onslaught, reflecting the stated intention of the dominant strand in Israeli politics to push Palestinians out of Gaza and the West Bank.
Impacts on Egypt and Jordan
Any mass movement of Palestinians into Egypt and Jordan would aggravate the already grave economic difficulties that both these countries face. The most direct financial impact on Egypt has been the drop in Suez Canal tolls and the slowdown in tourism. These two income sources accounted for about 25% of Egypt’s total current account earnings of about $100 billion in 2023.
The drop in Suez Canal revenue will cost more than $1 billion in the first quarter of 2024, and while the hit on tourism has not been as bad as in Jordan, where it is about 40% down on previous levels, Egypt had been banking on growth in this sector as one of its main sources of foreign exchange revenue.
Egypt is talking to the IMF about a new loan, but this is only likely to scratch the surface of what it needs to get through the next two years. Gulf Arab states have made clear that they are not interested in a fresh bailout, and the toxic regional political environment has blunted their appetite for investment in privatization.
Egypt and Jordan are in accord that there must be no resettlement of Gaza and West Bank Palestinians, and that they will not play a direct role in providing security and administration in Gaza.
Egypt faces a growing risk of default on parts of its $165 billion foreign debt. The recent re-election of President Abdel-Fattah el-Sisi masked deep anxiety about economic conditions (pre-dating the Gaza war) and seething anger about Gaza and about how weak Egypt’s response to the crisis has been.
Egypt and Jordan are in accord that there must be no resettlement of Gaza and West Bank Palestinians, and that they will not play a direct role in providing security and administration in Gaza. Beyond these red lines there is little sign of any constructive ideas about how to secure a lasting ceasefire.
Gulf states’ interests now at risk
The Gulf Arab powers have yet to play their hand. Qatar has been involved in mediation over hostages, while, along with the UAE and Saudi Arabia, shipping humanitarian aid that has dribbled into Gaza.
The crisis has forced governments cont.
The crisis has forced these governments to reappraise their strategy of forging closer relations with both Iran and Israel, while using their recent oil windfall to invest in securing their economic place in a post-oil era. Troublesome issues such as Palestine had slipped way down their agenda.
They now face the risk that further regional escalation of the conflict will start to affect their own vital interests. It is fanciful to expect the Gulf states to wield the oil weapon, as in 1973 (not least because the US is now an oil and gas superpower). Normalization is also a flimsy bargaining chip, whether used as a threat to cut ties with Israel or offered as an inducement by Saudi Arabia.
Nevertheless, the Gulf Arab states could surely do more to press for a comprehensive ceasefire, to engage fully in political deliberations over the future of Gaza and the West Bank, and to deploy their financial muscle in the service of reconstruction and recovery.
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