Conflict in Red Sea will weigh on Egypt’s elevated financing needs; inflation to soar

Turbulence in the Red Sea emerged as a repercussion of the Israeli war on Gaza.

According to the International Monetary Fund (IMF), MENA’s financing needs in 2024 are projected at $186 billion (up from $156 billion in 2023), an increase of about six percent of fiscal revenues compared to projections in October 2023, added the report released on Wednesday.

The high financing needs are expected to be covered mainly through domestic bank financing, the report said. External financing would contribute only a small portion of the amount needed, as limited market access for highly indebted countries remains a strain.

The report highlighted the impact on MENA of halting the transiting of several shipping companies through the Red Sea in response to the tensions in the maritime lane, noting that Egypt’s economy will particularly be affected.

In this respect, the report said that Egypt’s foreign exchange flows may be adversely impacted, as Suez Canal revenues are a critical source of foreign exchange for the country.

“Inflation is set to remain elevated across MENA’s emerging markets and middle-income countries at 25.6 percent in 2024 and across low-income economies at 69.9 percent, especially in Egypt, Sudan, and Yemen,” according to the report.

Additionally, heightened uncertainty is expected to weigh on investor sentiment and net foreign direct investment (FDI) inflows into the country, said the report.

“Coupled with the sustained adverse impact of foreign exchange shortages on private sector activity, these factors are projected to negatively impact the external sector and economic growth. In turn, real GDP growth is projected to decline to 3 percent in 2024 (a downward revision of 0.6 percent relative to October’s projections,” the report added.

Gaza's immediate neighbours face a challenging outlook, according to the report.

“So far, Egypt’s tourism sector has been less severely impacted than in some other economies (Jordan, Lebanon). However, high-frequency tourism data show signs of a possible deterioration,” the report stated.

Tourism revenues account for 2-20 percent of 5he region’s GDP and between five and 50 percent of goods and services exports before the pandemic, stressing that the war will inevitably dampen growth.