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Israel-Hamas war could threaten already fragile economies in Egypt, Lebanon and Jordan

By FATIMA HUSSEIN and JOSH BOAK, Associated Press
Published: October 26, 2023, 7:33am

WASHINGTON (AP) — 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 to warn in a September report that they could lose their “sociopolitical stability.” That warning came shortly before Hamas attacked Israel on Oct. 7, triggering a war that could easily cause economic chaos that President Joe Biden and the European Union would likely need to address.

The possible fallout is now starting to be recognized 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 that is vital for global oil supplies — with 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 former Treasury Department official. “The notion that you can divorce politics from economics is a little bit myopic, and naive. Politics, economics and security go together very closely.”

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

The financial situation is serious enough that Charles Michel, president of the European Council, met with the IMF last Thursday and told officials there 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.

“Let’s support Egypt,” Michel told reporters afterward. “Egypt needs our support and we need to support Egypt.”

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. The Egyptian leader also said a mass exodus would risk bringing militants into the Sinai Peninsula.

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

“To presume that there won’t be a movement of people is naïve and premature,” said Swift. “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.”

Swift said that while el-Sissi’s regime is heavily dependent on U.S. economic and military assistance, it’s increasingly going to be popular opinion within Egypt that determines his actions, a lesson learned from the Arab Spring protests that brought down the Mubarak regime in 2011.

In April, the IMF concluded that Egypt’s financing needs for the year were equal in size to 35% of its gross domestic product. On Oct. 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 program, said, “Egypt is in the worst economic crisis I can remember in at least five decades” and that only complicates the current turmoil from the war.

“If you have this conflagration in Gaza, you need the rest of the region to be stable for everyone to take appropriate and correct action,” Mabrouk said. “You don’t need more instability in a region that is already quite unstable.”

Mabrouk said one of the most immediate signs of increasing distress is that Egypt’s central bank has in the past week imposed foreign currency restrictions on cards linked to local bank accounts.

One major potential setback for Egypt stemming from the latest Israel-Hamas War would be the loss of tourists seeking to explore the country’s ancient pyramids and history. Tourism is one of Egypt’s leading economic sectors, and along with foreign investment provides needed access to the rest of the global economy.

A representative from the Egyptian government did not respond to an Associated Press request for comment.

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.

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 U.S. 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 have been subsidizing the salaries of Lebanese army soldiers.

The country’s leaders reached a tentative agreement with the IMF in April 2022 for a bailout package but they have not implemented most of the reforms required to finalize the deal. The IMF warned in a report earlier this year that without reforms, public debt in the small, crisis-ridden country could reach nearly 550% of GDP.

Before the latest 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 — with regular small-scale clashes already taking place between militants from Hamas-allied Hezbollah and Israeli forces on the country’s southern border — foreign embassies have warned their citizens to leave and airlines have canceled 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.”