Jpassed us One hundred days after Hamas’ brutal attack on Israel sparked war in Gaza, the conflict continues to escalate. On January 11, America and Britain began attacking Houthi strongholds in Yemen, after months of Houthi missile attacks on ships in the Red Sea. Five days later, Israel fired its largest targeted barrage yet into Lebanon. The target is Hezbollah, a militant group backed by Iran.
An outright regional war has so far been avoided, largely because neither Iran nor America want one. Yet the economic consequences of the conflict are already enormous. Trade routes have been blocked, disrupting global shipping and devastating local economies. The Middle East’s most productive industries are being battered. And in Lebanon and the West Bank, increasing hardship threatens to lead to even more violence.
Start trading. Before Hamas’ attack, a fifth of an average Middle Eastern country’s total exports — from Israeli technology to Gulf oil — were sent elsewhere in the region. Geopolitical enemies increasingly traded with each other. Now the routes that carried more than half of all goods are blocked. Intra-regional trade has collapsed. At the same time, the cost of shipping goods from the Middle East has increased. This will cause many exporters, who operate on razor-thin margins, to go bankrupt in the coming months.
The Red Sea used to handle 10% of all goods transported around the world. But since the Houthis began launching missiles, shipping volumes have fallen to just 30% of normal levels (see chart). On January 16, Shell, an oil and gas giant, became the latest multinational to say it would avoid the Sea.
For some countries bordering the Red Sea, Houthi missile attacks have much worse consequences. Eritrea’s economy is supported by fishing, agricultural and mining exports, all of which travel by sea due to tense relations with neighboring countries. For crisis-hit Sudan, the Red Sea is the only access point for aid, almost none of which has reached the 24.8 million people who have needed it since the attacks began.
Further disruption could lead to financial ruin for Egypt, one of the largest countries in the region. For its population of 110 million, the Red Sea is a vital source of dollars. The government made $9 billion in the year to June from tolls on the Suez Canal, which connects the Mediterranean to the Red Sea. Without the toll revenues, Egypt’s central bank would no longer have foreign exchange reserves, which stood at $16 billion (or two months’ worth of imports) at the beginning of 2023. The government is also said to have faced a gaping hole in its budget. which is already dependent on cash injections from the Gulf States and the IMF.
Both crises could occur in 2024. Egyptian revenues from the Suez are 40% lower this year than this time last year. That puts the country at real risk of running out of dollars, causing government default and budget turmoil.
Conflicts have also hit the Middle East’s most promising industries. Before October 7, Israel’s tech sector was the brightest bright spot, contributing a fifth of the country’s GDP. Now it’s struggling. Investors are withdrawing money, customers are canceling orders and a large part of the workforce has been called up to fight.
Jordan is now suffering from the disappearance of tourism, which normally accounts for 15% of total tourism GDP. The struggle is typical of those across the region, with even the Gulf states seeing a drop in tourist numbers. In the weeks following the Hamas attacks, international arrivals in Jordan fell by 54%. The government has turned to Western lenders to plug the hole in its finances. On January 11th the IMF made new bailout money available two months before Jordan’s existing program was set to end. A few weeks after the start of the war in Gaza, agreement was reached on additional support.
Yet the most dangerous economic consequence of the war may be the hardships imposed on the people of Lebanon and the West Bank, two powder kegs that could easily explode into further violence. As Israel and Hezbollah exchange air strikes, they destroy southern Lebanon. More than 50,000 people have already been displaced (and 96,000 in northern Israel). Repairs will be expensive, but there is no more money for them: Lebanon has had a shell government since it went bankrupt in 2019. In recent months, the economic freefall has accelerated as foreign tourists and banks, who together make up 70% of the population, GDPhave left the country on the advice of their governments.
Things are no better in the West Bank. Of the 3.1 million inhabitants, 200,000 are factory workers who commute to Israel every day. They are out of work after Israel revoked their permits. Meanwhile, 160,000 civil servants have not been paid since the start of the war. The West Bank government is now refusing to accept its tax revenue from Israel (which collects it), after Israel withheld money that would normally be sent to Gaza. Public services are closed and missed mortgage payments by civil servants threaten to trigger a banking crisis.
The Middle East has long been full of economies on the brink. Israel’s war with Hamas could now topple them. To make ends meet, their governments have built houses of cards, balancing bailouts from the Gulf states, bailouts from America and expensive short-term loans. The risk of everything collapsing is worryingly high.
The rest of the world economy has so far been little affected by the conflict. Oil prices have remained relatively calm, apart from a spike in early January, and the effects on global growth and inflation are likely to be minimal. But if much of the Middle East falls into a debt crisis, all that could change quickly. It would hit populations that are young, urban and increasingly unemployed. That is a recipe for even more extreme politics in a large group of strategically important, chronically volatile countries. The consequences would reverberate around the world. ■
Clarification (January 28, 2024): We have updated this article with the details of Jordan’s latest IMF program.