IMF warns of long-lasting economic impact of Gaza war on Middle East

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The IMF has warned that increasing regional instability caused by the Israel-Hamas war is likely to have a long-lasting economic impact in the Middle East and north Africa.

In its latest regional economic assessment, the fund said it expected growth in the Middle East, north Africa and Pakistan to be a “lacklustre” 2.6 per cent in 2024, down from 3.3 per cent in its previous forecast.

Kristalina Georgieva, head of the IMF, said “uncertainty” triggered by Israel’s war against Hamas in Gaza, and the threat of a full-blown regional war with Iran and its proxy forces, was hanging over the region.

Oil-rich Gulf states and some other countries in the region had recovered well in the immediate aftermath of the pandemic, but outbreak of the war in Gaza has triggered tensions and hostilities across the Middle East.

Hamas’s October 7 attack on Israel killed 1,200 people, according to Israeli officials, and triggered the conflict in Gaza that has killed more than 33,000, according to Palestinian officials.

Israel’s retaliatory offensive in Gaza has devastated the besieged strip while activity in the occupied West Bank has also been severely hit with Israel having banned Palestinian workers from entering Israel and withheld tax revenues from the Palestinian Authority.

“Gaza’s economy is wiped out, it’s more than 80 per cent gone. The West Bank is also severely impacted,” Georgieva said during a speech in Washington on Thursday.

The conflict has rippled across the region, with Iran launching its first direct attack on Israel this weekend in retaliation for a suspected Israeli strike on the Iranian consulate in Syria.

The heightened geopolitical risk has clouded investment decisions in the wider region, while attacks by Houthi rebels in Yemen on ships in the Red Sea have disrupted maritime trade routes. Traffic through the Suez Canal — a significant source of revenue for Egypt — has plummeted.

The IMF calculates that the cost of transporting a container from China to the Mediterranean Sea has quadrupled from $1,000 to $4,000 since the start of the Gaza war.

Tourism has also been badly hit, with travellers cancelling trips to neighbouring countries such as Jordan and Lebanon.

Georgieva said Jordan and Egypt’s economies had proven resilient, although the IMF agreed to another $8bn loan package for Cairo last month. Donors and allies have also committed to a $55bn bailout to support its economy.

Divergence is sharp between more fragile, resource-poor Middle East nations and wealthy Gulf oil exporters, which are more insulated from the shocks than their neighbours.

While non-oil economic activity is increasing as countries including Saudi Arabia and the United Arab Emirates diversify their revenues, voluntary oil cuts and lower oil prices had slowed their economic growth in real terms this year, the IMF said.

“The real issue is the erosion of stability, and this level of increasing risks could jeopardise the medium-term outlook for the region,” Jihad Azour, director of the IMF’s Middle East and Central Asia department, told the Financial Times. He added that the disruption to trade could have a prolonged impact.

He warned that the level of unemployment was “still high at the youth level in the region, among the highest worldwide”, while growth was “below the historical average”.

The war could also threaten the region’s economic recovery from the Covid-19 crisis, the IMF said.

Growth in the region last year was 1.6 per cent, according to the fund, after Covid-related lockdowns and repercussions from the Ukraine conflict hit many economies in the Middle East. Azour stressed that the “recovery is mild, with a lot of caveats”. 

Georgieva also highlighted the “terrible” situation in Sudan and Yemen, saying highly visible wars in Ukraine and Gaza had “overshadowed the pain and suffering that is happening in other places”. She said all those countries were benefiting from the IMF’s “support and attention, as difficult as conditions may be”.