Huge economic losses await the Middle East as a result of the war in Gaza

The war in Gaza could result in huge economic losses for the entire Middle East (by Adobe).

It is difficult to estimate the losses for the Middle East as a result of the war between Israel and Hamas. There are indications that the war has cost Israel and other countries in the Middle East billions of dollars so far. On top of this there is the loss of human lives. Ahmad Abdel Rahman explains what could happen in the region. 

The price of a barrel of Brent jumped by about USD8, to about USD93, more than two weeks after the war between Israel and Hamas broke out last October. This price compares to the required price of USD50 to USD60 per barrel. 

There are several reasons for this rise in the oil price. The most prominent is the Israeli government's closure of the Tamar gas field in the Mediterranean Sea and the stopping of gas pumping through a pipeline linking Egypt and Israel and another pumping gas from Estonia to Finland. This was reportedly a result of a malfunction.

As the war continues, fears increase about how other countries will be affected regionally and globally in terms of oil and gas production and exports. A fifth of the world's oil and gas supplies go through the Strait of Hormuz. Bloomberg experts expect the price of a barrel of oil to reach USD150 if the war expands and global gross domestic product (GDP) to decline by at least a trillion dollars by the end of 2024.

The risk of business interruption and investment stagnation

The rise in oil and gas prices brings benefits to countries in the Middle East, as it brings them more revenue and helps to fill any deficits they may have. However, such returns during war are vulnerable because the continuation of war increases inflation, raises transportation prices, poisons the business climate, and makes direct foreign investment in the region less likely. 

Money will escape to areas away from war zones. The value of currencies within war zones declines, and investments that enhance growth and development diminish. Indicators in the past days suggest the economies of the Middle East are facing troubles ahead if the war continues.

Adding to the risks are the weak growth rates of countries in the Middle East and North Africa, (MENA) which are predicted to decline by 2 per cent this year compared to more than a 5 per cent increase last year, according to a report by the International Monetary Fund (IMF) on the sidelines of the annual meetings of the IMF and the World Bank in Marrakesh during the first half of October 2023.

The Arab world's projects to diversify income are at stake

Regarding the Arab world, the value of currencies has stabilised, especially in the Gulf region, which has large dollar reserves to support their currencies. However, the shares of many companies and banks have declined amid fears that the conflict will expand. In Saudi Arabia, in particular, which has the largest Arab economy, has seen a significant decline in economic activity. This includes companies such as the oil giant Saudi Aramco, the Saudi National Bank, mining companies, and digital solutions services.

How will the war impact projects aimed at diversifying sources of income in the Middle East, most notably projects aimed at achieving the Saudi "Vision 2030" that are close to the conflict zone?  In addition, other projects, such as the trade corridor linking India to Europe via the Arabian Gulf and Israel, may not continue. The reason is that international companies that have the necessary knowledge and technology will not risk being in a war zone.

However, fears are not limited to what could happen to Israel and the Arab countries in the event of the war's expansion. Rather, warnings are increasing at the global level that the war could expand, that will ensure declining rates of growth and inflation, and rising prices.

This is what Kristalina Georgieva, director of the IMF, said when she stated on the sidelines of the annual meetings of the IMF and the World Bank in Marrakesh last October that the conflict between Israel and Hamas is "heartbreaking and threatens to add more gloom to the already cloudy global economic horizon".

The consequences of the war in Ukraine have shown that geopolitical factors have significant, even catastrophic, effects on various economies, albeit to varying degrees. There is no doubt that these factors will continue to be influential if the war between Hamas and Israel is prolonged.

The reason for this is the proximity of the area of military operations to the largest producers and exporters of oil and gas, led by Saudi Arabia, Iraq, and Qatar. This is in addition to the possibility of expanding the scope of the war to include Lebanon, Syria, and Iran.

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Friday, 19 April 2024