The Israeli war on Gaza has devastated Gaza’s economy, producing near-total unemployment, and it has significantly impacted Israel’s own economic sectors, including tourism and technology.
The global economy, already reeling from the Russian-Ukraine war and the Covid-19 economic slowdown, may also be affected if the war escalates further.
“No doubt, Israel, the West Bank, and Gaza are hardest hit,” said a recent report by the International Monetary Fund (IMF). “But the economic impact extends far beyond the area of the fighting.”
According to the IMF, the neighbouring countries of Egypt, Jordan, and Lebanon are “already enduring economic reverberations.”
“Amid concerns about the threat of escalation, visitors have been cancelling travel to the region, hitting hard at the very lifeline of these economies. Tourism, which accounted for 35 per cent to almost 50 per cent of goods and services exports in these economies in 2019, is a critical source of foreign exchange and employment. Tourism-dependent economies like Lebanon, where hotel occupancy rates fell by 45 percentage points in October compared to a year ago, will see knock-on effects for growth,” the IMF report said.
The impact on energy and financial markets has been limited and temporary, it added.
“After an initial surge, oil prices retreated and are now below pre-conflict levels, reflecting changes in global demand conditions (as there was no disruption to oil production),” the report said. “Natural gas prices have also come down after a large spike but are still about 25 per cent above pre-conflict levels.”
Houthi attacks on Red Sea ships from Yemen are also expected to wreak havoc with the global economy, as well as Israel’s commercial supplies. They put Egypt’s economy at risk if trade vessels are re-routed in attempts to avoid navigating the Suez Canal.
A recent report in the UK Financial Times titled “Global pre-Christmas trade at risk from twin Canal crises” also showed how supplies of Christmas gifts could be affected by both the drying of the Panama Canal and the wave of Houthi attacks on ships in the Red Sea.
Many countries will have to pay a price for the escalation of war on Gaza. And as the IMF report shows, “the extent of the impact on the region remains highly uncertain and will depend on the conflict’s duration, intensity, and spread.”
ECONOMIC SHOCKWAVES: The ongoing war, now entering its third month, has led to devastating socio-economic impacts on Palestine, as detailed in a joint assessment by the UN Development Programme (UNDP) and the UN Economic and Social Commission for Western Asia (ESCWA).
The key areas of impact include loss of lives, extensive infrastructure damage, health crises, increased poverty and food insecurity, impacts on jobs and businesses, and deteriorating macroeconomic performance.
The situation in Gaza has escalated to a severe humanitarian crisis, with critical shortages in fuel, food, water, medicine and medical supplies being seen. Israel’s blockade has caused a drastic 90 per cent reduction in electricity availability, severely affecting hospitals and sewage treatment facilities, and suspending the operation of desalination plants that supply drinking water.
Martin Griffiths, UN under-secretary-general for humanitarian affairs, said in a social media post that “the spectre of death is hanging over Gaza. With no water, no power, no food and no medicine, thousands will die.”
On 23 November, the World Health Organisation (WHO) reported that 27 out of 35 hospitals in Gaza had ceased operations due to compounded challenges. In Gaza, economic activity has practically stopped, with unemployment nearing 100 per cent. The war has inflicted severe damage on Gaza’s already fragile economy, worsening the humanitarian crisis in the region.
The UN report outlining the devastating impact of the war on the Palestinian economy pointed to the substantial losses in infrastructure, business, and human capital, further exacerbating the already precarious economic situation in Palestine.
Meanwhile, the war has also sent the Israeli economy into a state of apprehension. The war, described as an “existential shock”, has disrupted various sectors, leading to unforeseen economic challenges and a reevaluation of Israel’s economic resilience.
The war has precipitated a significant crisis in the economy, particularly in the collapse of its foreign-labour system. Israel’s economy heavily relies on foreign workers, especially in construction and agriculture. The conflict has led to a mass departure of these workers, particularly from Thailand, severely impacting Israel’s labour-intensive sectors.
Israel is now exploring options like recruiting workers from India and Sri Lanka to fill the gap. However, international human-rights organisations have raised concerns over the treatment of foreign workers in Israel, highlighting poor working conditions, including low wages and long hours.
In a significant departure from its historically resilient economic trajectory, Israel now confronts a daunting array of economic challenges as the war with Hamas intensifies. The prolonged nature of the hostilities, coupled with internal political dynamics, is exerting unprecedented pressure on various sectors of the Israeli economy, raising concerns about long-term financial stability and growth.
The Bank of Israel’s revised projections paint a grim picture, with growth rates expected to plummet if the war extends into 2024. This slowdown contradicts Israel’s previously positive economic indicators.
Furthermore, the significant casualties of the ongoing war harm Israel’s attractiveness to foreign investors. The instability has led to a marked decline in foreign investment, a critical component of Israel’s economic success.
In addition to the decline in foreign investment, the Israeli currency is facing a devaluation. The Israeli Stock Market is also experiencing volatility, reflecting the broader economic anxieties stemming from the war.
The Tel Aviv Stock Market is looking to an unforeseen future, with significant losses in the market value of Israeli stocks. Looking ahead, the path to economic recovery will be formidable, with potential long-lasting effects on various sectors of the economy.
The tourism sector, a significant contributor to Israel’s economy, has been severely impacted, with a 76 per cent drop in revenues since the war began. Israel has also been hosting international events, which are now cancelling their presence in the country. This affects not only the immediate revenue from these events, but also impacts associated sectors like hospitality, travel, and local businesses.
The war has led to shuttered shops and empty streets, particularly in areas like the West Bank, which usually attract millions of tourists annually. The festive season, especially Christmas, a peak period for tourism in cities like Bethlehem, has been marred by cancellations and a lack of celebrations. This downturn has had an immediate effect on local businesses and the broader economy.
Moreover, the agricultural sector in Israel has been significantly affected, with a huge decline in productivity leading to increased costs of living and heightened economic strains.
The technology sector, a cornerstone of Israel’s economic prowess, also faces a slowdown. The mobilisation of reservists, many of whom are integral to the tech industry, has disrupted operations, and the inflow of foreign funds is drying up. This sector’s downturn is particularly concerning given its role as a key driver of economic growth.
The US Brookings Institution has highlighted the broader economic repercussions of the war on Israel. It has not only affected immediate sectors like tourism and trade, but also has long-term implications for Israel’s economic stability and growth prospects.
The disruption in normal economic activities and the increased military expenditure are likely to have lasting effects on Israel’s fiscal policies and economic strategies.
REGIONAL TURBULENCE
The Gaza war is not only a humanitarian and political crisis, but it has also been a catalyst for economic turmoil in the region. Countries neighbouring Israel are grappling with the war’s aftermath on their economies, with significant impacts on sectors like tourism and trade.
A UK Economist report on the broader economic instability in the region triggered by the war sheds light on trade disruptions, heightened security concerns, and investor apprehension, which collectively have slowed economic activities across the board. As a result, the region is expecting lower growth forecasts and increased pressure about the future economic trajectory, it said.
While countries like the UAE and Saudi Arabia may see less significant impacts, the overall perception of security risks could dampen tourist inflows. The war’s duration and potential spillover into the broader region remain key factors in determining the full economic impact. However, countries such as Lebanon, Jordan, and Egypt are more likely to experience economic and tourism impacts.
Lebanon, already dealing with its own internal economic crises, will undoubtedly face more challenges. The war has not only disrupted regional trade routes but also impacted tourism, a vital sector for Lebanon, leading to a 23 per cent loss in its GDP.
This decline is attributed to a potential 70 per cent drop in tourism receipts, a critical source of foreign currency. In 2022, tourism contributed 26 per cent of current account receipts, highlighting its significance to the national economy.
The Economist report also highlights Jordan’s economic challenges. The country, which shares borders with Israel, could see a significant reduction in tourism revenue, a vital component of its economy. Last year, tourism accounted for 21 per cent of Jordan’s current account receipts, indicating the potential for significant economic disruption.
A drop in tourism revenue could severely deplete its foreign-exchange reserves and reduce its GDP by up to eight per cent. Jordan’s economic losses have exceeded $50 billion since the war’s onset. These losses encompass trade disruptions, a decline in tourism, and increased security and defence expenditures, emphasising the war’s extensive economic impact on Jordan.
Fragile states in the region, such as Somalia, Sudan, and Yemen, might face reduced aid and increased economic challenges as well.
The conflict in Gaza, occurring along the border of Egypt’s Sinai Peninsula, exacerbates the economic situation in Egypt, already harmed by the Russian invasion of Ukraine and the global Covid-19 pandemic.
Tourism, a sector that showed signs of recovery with expectations of 30 to 40 per cent growth this year, is now under threat. Popular Sinai destinations like Taba, Nuweiba, Dahab, and Sharm El-Sheikh have experienced the most significant impacts, though other areas remain relatively unaffected.
Overall tourism bookings have seen a decline, with net cancellations reaching 10 to 12 per cent for the period extending to April. This downturn poses a significant challenge, given that tourism earned Egypt a record $13.63 billion in the financial year ending in June 2023.
Another critical concern is the disruption to natural gas imports from Israel, on which Egypt relies for both domestic consumption and re-export. The conflict has led to a reduction in gas supplies, impacting gas-intensive industries like fertilisers. This situation jeopardises Egypt’s aspirations to increase liquefied natural gas (LNG) exports to Europe, a plan already hindered by domestic energy challenges.
In the light of these challenges, there is speculation about increased financial assistance from the Gulf states for Egypt, which have previously supported Egypt’s economy through deposits and credit. This potential support could be crucial in stabilising Egypt’s economy as it navigates through turbulent times.
The IMF is also considering altering its loan programmes for Egypt, acknowledging the significant impact of the war. The potential boost in the loan programmes reflects the IMF’s recognition of the economic challenges posed by the war for the country.
President Abdel-Fattah Al-Sisi has expressed concern over the escalating conflicts in the region. He emphasised the potential dangers of an expanding conflict and reassured the Egyptian people of the nation’s preparedness.
“Regardless of where they came from, it [the attack] underlines my previous warning that widening the conflict is not in the interest of the region. The region will be like a ticking time bomb that will hurt all of us,” Al-Sisi said in televised comments.
“It is important that you don’t worry. The Egyptian state, thanks to its people, young people, and the army is capable of totally protecting the homeland.”
GLOBAL ECONOMY
The ongoing Gaza war casts a long shadow, raising concerns about its potential effects on the global economy. While opinions vary, experts are closely monitoring the situation, acknowledging that the war’s impact is expanding.
A recent article in the UK Financial Times offered a reassuring perspective, suggesting that the Gaza war might not be a catalyst for a global economic upheaval. The report said that unless the war triggers significant geopolitical shifts, such as influencing the outcome of the US elections or prompting aggressive actions by China in Taiwan, its direct impact on the global economy might remain contained.
However, there might still be potential for the war to tip the global economy into recession. This second perspective emphasises the interconnectedness of global economic systems and the potential for regional wars to have worldwide economic repercussions.
The US Wilson Center’s analysis presents a more complex scenario and outlines five major risks emanating from the war. These include economic disruptions affecting oil and food prices, increased military vulnerabilities, especially for the US and its allies, deepening political polarisation on a global scale, strategic challenges with China potentially emerging as a geo-strategic beneficiary, and the changing nature of warfare due to the involvement of non-state actors like Hamas.
This multifaceted analysis highlights the diverse ways a regional war can impact global stability and economic dynamics.
The historical context of Middle Eastern wars has also led to oil price spikes and market tensions. The Gaza war could deepen existing economic and geopolitical divides, potentially leading to a realignment of global alliances and impacting global economic growth. The unfolding events in Gaza could be a defining factor in shaping the economic landscape in the months to come.
The consequences of the Gaza war also extend to the tense standoff between Russia and Ukraine. As these two nations vie for international support, the Gaza war threatens to divert global attention and resources crucial for Ukraine’s defence against Russia. This shift in focus could lead to a reduction in Western economic and military assistance for Ukraine, potentially altering the balance in this high-stakes geopolitical war.
On the economic front, the US Federal Reserve’s response to the Gaza war contrasts sharply with its reaction to the Ukraine war. While the Fed moved swiftly to address the economic fallout from the war in Ukraine, particularly in terms of its impact on global commodity markets, it perceives the war in Gaza as posing little immediate threat to the US economy.
The Gaza war stands as testimony to the interconnected nature of global affairs. Its impacts transcend regional boundaries, influencing major international relationships, shaping the economic policies of global institutions, and directly affecting the domestic economies of the nations involved.
As the war continues, its implications for the global political and economic landscape remain a subject of critical importance, watched closely by world leaders, economists, and policy-makers alike.
The war has profound socio-economic implications not only for Palestine but also for the broader Middle East region. It underscores the need for immediate humanitarian aid and long-term economic strategies to address the cascading effects of the conflict. The situation highlights the importance of international cooperation and support to mitigate these challenges and foster regional stability and development.
Furthermore, the war has had far-reaching implications on Israel’s economy. It has left a significant mark on various sectors, from tourism to agriculture to technology and the stock market. As Israel navigates these uncertain waters, the path to economic recovery and stability remains complex and fraught with challenges.
The interconnected nature of regional stability and economic prosperity affects Israel’s neighbours. As these countries navigate through these turbulent times, the resilience and adaptability of their economies to external shocks will be crucial in determining their future trajectories.
Various policy responses have been undertaken by the neighbouring countries to mitigate the economic impacts of the war. These measures include seeking international financial assistance and implementing economic reforms to stabilise their economies in the face of the ongoing tensions.
* A version of this article appears in print in the 21 December, 2023 edition of Al-Ahram Weekly
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