Is Netanyahu harming Egypt’s economy?

The ceasefire between Israel and the Islamic Resistance Movement Hamas was short-lived, once again depriving Egypt of the opportunity to revive its strained, debt-laden economy, which has been under pressure for the past decade.

Egypt is among the most affected by Israel’s violation of the ceasefire agreement on 18 March, following nearly two months of calm and prisoner exchanges. The renewed hostilities have once again heightened tensions along Egypt’s border with the Gaza Strip and in the Red Sea, disrupting international trade passing through the Suez Canal.

A few days ago, the US Department of Defense deployed additional military reinforcements, including increasing the number of its aircraft carriers in the Middle East to two and dispatching more fighter jets. This move comes amid the ongoing US air campaign in Yemen, which has lasted for over two weeks and rising tensions with Iran.

Tally of losses incurred

Two weeks ago, Egypt was among the top contenders poised to benefit from the ceasefire agreement, which followed more than 15 months of a bloody war that extended its flames across Gaza, Israel, Lebanon, Yemen, Iran, Iraq, Syria, Jordan and the Red Sea.

The situation shifted rapidly with the resumption of the war amid warnings of severe repercussions for the Egyptian economy, which could incur total losses of nearly $20 billion over the past fiscal year (2023/2024) and the current fiscal year (2024/2025), according to estimates by the United Nations Development Programme (UNDP).

The largest portion of Egypt’s economic losses resulting from the war in Gaza stems from the Houthi group in Yemen targeting vessels transiting the Red Sea. This has led to a significant decline in revenues from the Suez Canal—one of the country’s most critical sources of foreign currency.

Egyptian President Abdel Fattah Al-Sisi stated that Egypt’s economy lost more than 60 per cent of Suez Canal revenues in 2024, amounting to nearly $7 billion.

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As a result of Houthi operations in the Red Sea, many shipping companies avoided passing through the Bab Al-Mandeb Strait to reach the Suez Canal, opting for longer routes around Africa to their destinations, increasing both shipping costs and time.

The unrest in the Red Sea is fuelling alternative plans to establish secure routes for international shipping as substitutes for the Suez Canal. One such project is the India-Middle East transport corridor, which combines sea and land routes from East Asia through the Gulf and Jordan and onward to Europe via Israel.

These plans place significant economic pressure on Egypt, necessitating improvements to the Suez Canal’s competitiveness and the completion of its full dual-lane expansion. The canal alone accounts for 12 per cent of global trade, ten per cent of the world’s oil shipments and 30 per cent of global container traffic.

Militarily, Egypt is compelled to increase its defence spending in order to contain these risks, implement protective measures for navigation and trade passing through the canal, secure its northern border with the Gaza Strip and prevent smuggling and infiltration through its territory.

Reconstruction

Egypt is counting on securing a valuable share of the Gaza Strip’s reconstruction efforts, which are estimated to cost $53 billion over five years. However, Israeli Prime Minister Benjamin Netanyahu’s decision to resume the war has thrown the entire plan into jeopardy.

To finance this plan, an international conference is scheduled to be held in Cairo at the end of April, during which a trust fund will be established to receive financial pledges from donor countries and institutions.

Egyptian companies are poised to be among the primary beneficiaries, particularly those operating in construction and building materials manufacturing, due to their geographical proximity to the Gaza Strip and their extensive experience in reconstruction efforts in Libya, Iraq, Lebanon and Syria.

These hopes are now at risk of fading unless military operations are halted and a comprehensive agreement and long-term truce are reached between Israelis and Palestinians, accompanied by genuine security guarantees on the ground that would enable the flow of donor aid to fund the reconstruction process.

The resumption of the war in Gaza has other negative repercussions, further intensifying pressure on the country’s foreign currency reserves. This comes amid continued tensions in the Red Sea, which are impacting the operations of Egyptian ports, tourism flows and the inflow of foreign investments, according to economic experts.

Egypt’s tourism sector, which is highly sensitive to regional instability, is also being affected by rising tensions in the area. This is due in part to the significant proportion of tourists arriving directly from Israel, who accounted for seven per cent of all visitors to Egypt in 2022—making them the fourth largest group of inbound tourists.

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These security risks increase the cost of Egypt’s losses due to the outflow of capital, the loss of thousands of job opportunities, the potential depreciation of the national currency and the rising cost of government borrowing.

British research firm Capital Economics affirms that economies neighbouring the Gaza conflict—such as Egypt, Jordan and Lebanon—have been more severely affected by its repercussions than others.

Geopolitical repercussions

Egypt’s losses do not end there, as the resumption of the war in Gaza poses a threat to social and political stability in the most populous Arab country—one that has long-standing historical and geographical ties to the Palestinian cause.

According to Egyptian political analyst Mohamed Gomaa, in an interview with Middle East Monitor, sustained geopolitical calm in the region breathes new life into the Egyptian economy, whereas the resumption of the war in Gaza—particularly the expansion of military operations in the Palestinian city of Rafah—will only deepen Egypt’s suffering and concerns.

These concerns centre on Netanyahu’s plans to depopulate Gaza and carry out a forced displacement of its residents toward Egyptian Rafah and the Sinai Peninsula.

Another layer of concern stems from Egypt’s fear that Palestinian fighters might infiltrate its territory, potentially shifting the centre of conflict with Israel into Egypt’s interior, threatening national security and possibly reigniting the armed insurgency that plagued North Sinai for several years.

The presence of Israeli forces at the Rafah crossing and along the Philadelphi Corridor directly contradicts the terms of the 1979 Egypt-Israel Peace Treaty, as well as the 2005 supplementary agreement signed following Israel’s withdrawal from Gaza.

Continued Israeli military presence in these areas risks eroding Egypt’s strategic role via the Rafah crossing, prolonging border tensions with Gaza and fuelling domestic unrest—tensions that could be exacerbated by the ongoing war.

According to Alessandro Fracassetti, resident representative of the UNDP in Egypt, the war in Gaza is testing Egypt’s resilience and its ability to manage during turbulent times. He stressed the urgent need to address the war’s social and economic impacts.

Ultimately, the resumption of the war in Gaza imposes numerous challenges on Egypt—economic, military and social—and places mounting pressure on the country’s financial portfolio. Among the most serious concerns are continued instability in the Red Sea, declining revenues from the Suez Canal and the potential for Israeli military operations to worsen Gaza’s humanitarian crisis, prompting thousands of Palestinians to flee toward Egyptian territory.

In the short term, Egypt’s options appear limited and constrained, especially if its economy remains hostage to the policies of Netanyahu’s government—policies aimed at igniting regional unrest and opening multiple fronts. In contrast, a sustainable truce and ceasefire offer a vital lifeline to Egypt’s struggling economy.

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The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.