The economies of Egypt, Jordan and Lebanon are drowning under the rubble of Gaza and will not be able to survive without outside help. The IMF and the Gulf monarchies understand the risk to the entire Middle East if they go under. Credits flow to Amman and Cairo, but not to Beirut. Lebanon seems beyond any possible rescue. He is the weakest link in the chain that must maintain balance in the region and no one seems capable of helping him.
Last month, the IMF agreed on a $1.2 billion loan with Jordan and is about to close another $10 billion loan with Egypt. The aid is conditional on the usual financial adjustments, that is, austerity, currency devaluation and liberalization: fewer public subsidies and more opportunities for the private sector.
The support was also expected to reach Lebanon. In April 2022, a loan was agreed, but there has been no president since October of that same year, and this power vacuum prevents Parliament from approving the reforms demanded by the IMF.
The numbers are alarming in the three countries, which basically live on tourism, remittances and services. Tourism, for example, accounts for 24.6% of Lebanon's GDP, 14.6% of Jordan and 12% of Egypt. Last year was a record year, but since October 7, flights to its international airports have plummeted. 79% in Lebanon, 49% in Jordan and 26% in Egypt.
The problem of these countries is not only the tourists. The war in Ukraine made grain more expensive and, as a result, the cost of food has skyrocketed. In Egypt they have risen 70%, and in Lebanon, 350%. It is an unsustainable increase for the vast majority of families, especially because unemployment is high and salaries are low.
Emigrants, especially Lebanese and Egyptians, have stopped sending as many remittances as before the war in Gaza. The Egyptian and Lebanese pounds are in free fall. In Lebanon, it is worth so little that the economy has been dollarized. Almost everything is paid in dollars. Also the salaries. In Egypt, it has lost 50% of its official value against the dollar. The exchange rate was 15 pounds to one dollar in 2022 and today it is 31 to one. On the black market, however, 70 pounds buys a dollar.
The IMF asks Egypt to devalue the pound, to let it fluctuate freely. The economy would be more competitive, starting with tourism, but the military would be harmed. They control the bulk of the economy. Their companies would lose a lot of value. It seems clear that they will do everything in their power to break promises of reform. However, the IMF, aware of the risk to the Middle East, tolerates Egypt more than it tolerates any other country.
Marshal Abdul Fatah al Sisi spends as if there were no war and no tomorrow. Since he came to power in 2013, the debt has multiplied by four. The new capital that is being built next to Cairo alone has consumed 60 billion dollars, 15% of the GDP. Servicing the debt costs another 8% of GDP and 60% of the budget. The rest goes almost all into the salaries of the six million civil servants.
Al Sisi maintains pharaonic projects, including a plan to double the number of tourists. From today's 15 million annually it wants to go to 30 in just four years.
He also wants to expand the Suez Canal so that it absorbs 15% of world trade, three points more than today. During the first month of fighting in Gaza, merchant traffic fell by 30%, and income by 40%. It is not expected to recover as long as the international coalition led by the US does not corner the Houthis who threaten ships in the Red Sea.
Egypt is the world's first debtor and the IMF's second, behind Argentina. He owes about 100 billion dollars. It's too much money to drop. The IMF itself thinks so and also the Gulf monarchies, which prop up the military dictatorship with petrodollars.
Jordan, the most pro-Palestinian of the Arab countries, also benefits from those same petrodollars. They help you overcome the burden of the boycott of Western brands, very common since October 7. McDonald's and Starbucks, for example, suffer from it daily. Their employees have seen their hours and salaries reduced, if not lost their jobs.
International investors see many more risks than opportunities. If it weren't for Saudi Arabia, Jordan would have a hard time moving forward. Saudi investments exceed $12 billion and are concentrated in agriculture and pharmaceuticals.
Lebanon is not so lucky. The real estate sector has traditionally been the one that attracted the most foreign investments, but now it is not enough. Not with a war in the south of the country, especially now that Israel seems determined to create a security zone several kilometers deep along the border. It is a strip of territory that Hizbullah will not hand over just like that. The war seems to be a foregone conclusion and, therefore, the economic recovery that the World Bank predicted has vanished. GDP will continue to decline, as it has done since 2018.
The Lebanese debt exceeds 180% of GDP and there is no way to pay it back. Not, at least, as long as there is no effective government and Parliament. If the country is still standing it is thanks to remittances, which account for 37.8% of the wealth. Without the diaspora, much larger than the local population, Lebanon would not survive.
The war in Gaza is entering its fifth month, and Kristalina Georgieva, managing director of the IMF, anticipates that if it drags on too long it will drag down the economies of the Middle East and beyond. Production chains are suffering in Europe, although the extra cost of maritime transport due to the Houthi threat in the Red Sea will only add, for now, 0.1% to global inflation, according to Goldam Sachs. Additionally, energy is projected to decline this year and next, which will help reduce inflation.
Everything can change, however, overnight. It is enough, for example, for Saudi Arabia to further reduce oil production. More expensive crude oil will be bad news for Joe Biden ahead of re-election, but it will be even worse for the weakened economies of the Middle East.
