Egypt's economy, already facing a deep crisis, is poised to take a hit from Israel's war on Gaza and swirling tensions in the Red Sea, analysts said.
Currently „on life support,” Egypt's deteriorating economy is plagued by a growing public debt that accounts for more than 90 percent of its gross domestic product (GDP).
Now those challenges are being compounded by the war, with a large portion of Gaza's population pushed into Rafah and moving closer and closer to the border with Egypt, after four months of displacement as a result of Israel's relentless attacks. Tourism and the Suez Canal are Egypt's two main sources of foreign exchange.
A 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, approx Three Millions of Egyptians worked in the tourism industry.
Before Israel's war on Gaza broke out, Egypt's tourism industry was already struggling to recover from COVID-19. But it seemed to bounce back. The Gaza war and the Red Sea crisis may affect revenue prospects from this industry. According to S&P Global Ratings, Egypt's tourism revenue is set to experience a 10-30 percent drop from last year, costing 4-11 percent of the country's foreign exchange reserves and reducing GDP.
„The proximity of the conflict to the Sinai Peninsula has led to a sharp decline in tourism, which is expected to generate $13.63 billion in revenue in the 2022-23 fiscal year,” Amr Salah Mohammed, an adjunct lecturer at George Mason University, told Al Jazeera. .
„While it is difficult to quantify the full extent of the damage to Egyptian tourism from the current conflict yet, early indications, such as a 25 percent drop in bookings in early November, point to a significant decline that could continue if the conflict continues,” he added.
Suez Canal revenues fall
Since November, Egypt has been grappling with the economic impact of Houthi missile and drone attacks against Israel-bound merchant ships in the Red Sea, the Houthis' response to Israel's war on Gaza.
Many shipping companies were affected by the strikes on the narrow trade route that connects Asia to Europe via the Suez Canal. diversion Their ships around the Cape of Good Hope.
In the 2022-23 fiscal year, the Suez Canal will bring Egypt $9.4 billion in revenue. During the first 11 days of the year, revenue from the Suez Canal collapsed 40 percent higher than the same period last year.
Since then the damage has increased. Egyptian officials said revenues from the Suez Canal fell 50 percent year-to-date in January compared to the same period in 2023.
Problems in the gas sector
Since October 7, Egypt's gas economy has also been hit hard. Two days after the Hamas-led incursion into southern Israel, Israeli security forces ordered Extraction from the Tamar gas field, located 25 km (15 miles) from Israel's southern coastal city of Ashdod, was temporarily halted.
Egypt has two gas liquefaction facilities in the Eastern Mediterranean. Israel exports its gas – including Tamar – to Egypt, where it is converted into LNG and exported to other markets, notably Europe.
Because of the war, Egypt's gas re-exports fell even further 50 Percentage in the fourth quarter of 2023 compared to the same period in 2022. This dynamic highlights Egypt's economic dependence on Israel, which poses a major threat to Cairo at a time when tensions in the region are high due to the Gaza war.
Possible influx of refugees
The fate of the 1.4 million Palestinians who have taken refuge in Rafah is also causing unrest in Egypt.
President Abdel Fattah el-Sisi's government wants to prevent displaced Palestinians from entering the Sinai Peninsula to escape Israeli destruction across Gaza. Egypt already hosts nine million refugees, and Cairo has made it clear it will not support any move to permanently relocate Palestinians from Gaza, which many experts fear is Israel's game plan.
Security concerns over the presence of Palestinian militants in the 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 sees the forced 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, straining Egypt's already struggling economy.
Against this backdrop, Egypt has begun building a wall two miles west of the Gaza border, potentially preventing such a scenario. „There are those of us who fear that the Israelis will destroy the existing Egyptian border fence so they can push the Gazans into the Sinai,” former US ambassador to Qatar Patrick Theros told Al Jazeera.
“Egypt is lightly building a second border wall inside Egyptian territory to deter the Israelis. Deterrence may not work for Netanyahu's desperate bid to hang on to power and avoid going to jail,” he said. Israeli Prime Minister Benjamin Netanyahu's popularity is extremely low domestically. Many analysts have argued that a continuing battle is needed to avoid his removal from office. Netanyahu faces corruption charges.
„Washington's irrational refusal to stop him will encourage Netanyahu to extend the fight to the Sinai, even if it ends the peace accord with Egypt,” Theros said.
Managing expectations for economic reforms
Last month, US Treasury Secretary Janet Yellen met Egyptian Finance Minister Mohamed Maite in Washington and pledged US support for the Egyptian economy and reforms.
At the same time, there were discussions about increasing Egypt's $3 billion loan with the International Monetary Fund (IMF) to help deal with the war in Gaza and the Red Sea security crisis. Key components of the economic reform package include the Egyptian government's sale of stakes in dozens of state-owned enterprises, Subsidy reductionMoving towards a flexible exchange rate, and making the military's role in the national economy more transparent.
Still, analysts warn, the war in Gaza and the Red Sea security crisis, which follows the geopolitical shocks of Russia's invasion of Ukraine two years ago, may make Egyptian officials reluctant to implement some economic reforms.
In an interview with Al Jazeera, Ryan Bohl, Middle East and North Africa analyst at risk intelligence firm RANE, said the IMF must consider the many pressures Egyptian policymakers face when making demands.