The Hamas-Israel conflict in the Middle East spells a serious economic impact on the MENA (Middle East and North Africa) region. A further escalation of the war could exacerbate the already precarious economic situation in a region that is still grappling with the impacts of the Russian-Ukrainian war.
Inflation, rising commodity and service prices, and low purchasing power are among the serious issues that North African countries have to tackle.
So far, the impact of the war in Gaza on commodity prices has been modest. Prices of oil and gold have risen moderately, and other commodity prices have remained relatively stable, according to the latest “Commodity Markets Outlook” report released by the World Bank last week.
“Nevertheless, history suggests that an escalation of the conflict represents a major risk that could lead to surging prices of oil and other commodities—an outcome that would intensify food insecurity in the region and across the world,” said the report.
The Egypt and Sudan cases
Egypt, the largest economy in North Africa and the second largest in Africa after Nigeria, has been one of the most affected countries in the region. The Egyptian Ministry of Petroleum and Mineral Resources raised fuel prices for various octanes by 10 per cent while keeping diesel prices unchanged. The action is anticipated to feed the country’s inflation that has been hitting record high levels month after another, a situation which has dire repercussions for people’s daily lives. For instance, Egypt’s inflation in urban areas hit its all-time high of 38 per cent in September 2023, mainly driven by the increase in food prices as well as health, education, and communication services.
The conflict in the Middle East also has another face. Egypt has imposed two hours (sometimes up to four hours) of power outages across the country, as the Israeli energy ministry instructed the operator of the Tamar natural gas field to take it out of service amid the ongoing war.
Egypt counts on Israeli natural gas imports to meet a portion of the country’s local demand, as well as for re-exports in Liquified Natural Gas.
Egypt’s natural gas imports dropped to zero from 800 million cubic feet (mcf) per day, leading to more power cuts, the Egyptian cabinet said in a statement on 29 October.
Furthermore, there are concerns that Egypt might be unable to meet its international obligations regarding repaying loans secured from international and regional financing institutions. If the country were to default on its debt, this would send a negative message to current and potential economic actors that Egypt is not the proper place for their investments, at least over the short term.
What supports this prospect is that Egypt has not completed any of the reviews of its $3 billion loan programme deal with the International Monetary Fund (IMF) approved in December 2022. The delay is due to the country’s inability to fulfil its commitments under the programme.
Amidst a civil war, Sudan is experiencing a humanitarian catastrophe and escalating food insecurity. The country now has the highest number of displaced people in the world, with at least 7.1 million people having been driven from their homes. Food insecurity could get worse due to the supply chain disruptions caused by the Hamas-Israel conflict.
In its report released last week, Fitch Solutions set four scenarios that reflect the expected severe effects of the war in Gaza on MENA countries.
Each of these scenarios portends higher inflation, further monetary policy tightening, and a strong tendency for devaluating local currencies, which will all place higher pressure on the balance of payments, especially in already suffering North African countries, and make it all almost impossible for ordinary people to meet their basic needs.
After the covid 19 pandemic and the Ukrainian-Russian war, the Israeli-Hamas conflict could prove to be the last straw that would break the camel’s back of many economies in the world, particularly in the North African region.
If the conflict does escalate, the assessment also includes what might happen under three risk scenarios, relying upon historical precedents to estimate the effects of small, moderate, and large disruptions to the global oil supply. The magnitude of the effects will depend on the duration and scale of the supply disruptions. Trade restrictions and weather-related disruptions could also result in higher prices; conversely, a weaker-than-expected global growth represents a key downside risk to commodity prices.