URU, Alm.del - 2023-24 - Bilag 75: Baggrundsmateriale til briefingen med UNDP om situationen i Gaza den 15. december 2023

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E/ESCWA/UNDP/2023/Policy brief.2/Summary

Expected socioeconomic impacts of the Gaza war

on neighbouring countries in the Arab region

Summary

Johannes/via adobe stock

Introduction

The war in Gaza has entered its third month. After a short

humanitarian pause between 24 November and 1 December 2023,

military operations have resumed with significant intensity.

In November 2023, the Economic and Social Commission for

Western Asia (ESCWA) and the United Nations Development

Programme (UNDP) conducted an early assessment of the then

expected economic and human impact of the war on the State

of Palestine alone.

The present policy brief complements that

assessment

by examining the likely effects of the Gaza war

on the immediate neighbours of the State of Palestine, namely,

Egypt, Jordan and Lebanon.

If these effects materialize, they will

add to pre-existing vulnerabilities in these countries, which have

yet to fully recover from the effects of past shocks.

The war in Gaza

has entered

its third month

The spillover effects on

immediate neighbours of the

State of Palestine, namely,

Egypt, Jordan and Lebanon,

could be significant

URU, Alm.del - 2023-24 - Bilag 75: Baggrundsmateriale til briefingen med UNDP om situationen i Gaza den 15. december 2023

The estimates are tentative at this stage, because

there are several unknowns regarding the future

course of the Gaza war in terms of its intensity and

duration. Moreover, the transmission channels are

more than any model can accurately accommodate

in a comprehensive way. In addition, different

models utilize different specifications and

assumptions, and results may vary across them.

Lastly, up-to-date data are lacking. The following

estimates synthesize the results from alternative

simulations developed by ESCWA and UNDP.

The estimates suggest that so far, regional

effects of the Gaza war have largely been

contained, but are significant enough during

such a short period of time to provide

grounds for concern. Unless the war ends

soon, the spillover effects on immediate

neighbours of the State of Palestine could

be significant; all three countries have

limited policy space to address them arising

from pre-existing structural gaps and more

recent impacts (including the pandemic and

the war in Ukraine); and the Gaza war could

have long lasting effects. The impact on the

three countries could become more severe,

especially if the war involves other countries

in the region.

Likely transmission channels of the impact and the

situation in neighbouring countries

Neighbouring countries to the State of Palestine

could be affected through a variety of channels,

though not all of them are relevant to each

country or have the same intensity (table).

Regional spillovers of specific conflicts in the Middle East in neighbouring countries

Conflict/

indicator

Iraq Invasion of 2003

Gaza war of

2008–2009

Syrian crisis (2011-present)

Gaza war

of 2014

Oil prices

Brent Crude one month

impact: 17 per cent decline.

Brent Crude 12-month

Limited

impact: roughly the same as

the pre-invasion price

Limited

Inflation

Increase in rents and prices in

Limited

Jordan and Lebanon

Increased public debt, and

infrastructure strain in Jordan Limited

and Lebanon

Limited direct impact on the

exchange rate due to pegged

exchange rates in Jordan and

Limited

Lebanon, but sizeable impact

on reserves and the external

sector due to influx of refugees

Short term

impact on

neighbouring

countries,

especially

Egypt, Jordan

and Lebanon

Public debt

and fiscal

Limited

pressures

Exchange

rate and

external

sector

Limited

Tourism

and trade

Sizeable

Short term

impact on

neighbouring

countries,

especially

Egypt, Jordan

and Lebanon

Limited

Sizeable

Banking

sector

Some reduction in foreign

bank lending in the region

owing to geopolitical risks

Some reduction in foreign

bank lending in the region due Limited

to geopolitical risk

URU, Alm.del - 2023-24 - Bilag 75: Baggrundsmateriale til briefingen med UNDP om situationen i Gaza den 15. december 2023

Poverty,

labour

markets

and the

overall

economy

Some disruptions in labour

markets

Limited

The gross domestic product

(GDP) growth in Iraq, Jordan

and Lebanon decreased by 1.2,

1.6 and 1.7 percentage points,

Limited

respectively, and poverty

rates rose by 4 per cent in

Jordan, 7.1 per cent in Lebanon

and 6 per cent in Iraq.

Significant displacement

leading to socioeconomic

strains, and cross-border

terrorism risks

Mainly short-

term impact

Security

Cross-border terrorism,

intensification of separatism

and sectarian discord among

neighbours of Iraq

Mainly short-

term impact

Such channels include higher and more volatile

oil and gas prices and energy supply disruptions;

public debt and fiscal pressures; inflationary

pressures and protracted monetary tightening;

currency depreciation/devaluation; effects on

banks; trade diversion; increased transport/

logistics costs; sectoral effects, including on

tourism and agriculture; higher displacement

rates and numbers of refugees; labour market

disruptions; higher security provisions; and an

overall decline in GDP, lower aggregate demand

(including investment and consumer spending)

and increases in poverty.

In addition, the impact of war can worsen

pre-existing vulnerabilities, and it can also

have longer-term implications arising from

the higher-risk environment that has emerged

and its effect on domestic and foreign direct

investment and on political and social stability.

Most importantly, the impact of war on human

development cannot be overstated.

The Gaza war is already affecting Egypt,

given its geographic location and its existing

economic relations with Israel. As a result of

the war, gas supply to Egypt was briefly halted

at the end of October 2023 due to a suspension

of production, and then resumed at reduced

volumes. In addition, like in the two other

neighbours of the State of Palestine, tourism

has declined, the economy is already strained,

and the social sectors are under significant

stress. The inflation rate is persistently

high, the currency is depreciating, Egyptian

debt has been downgraded, and investor

confidence has significantly declined followed

by large capital outflows. Egypt had already

been affected significantly by the outbreak of

the war in Ukraine, given its reliance on food

Meysam Azarneshin/via adobe stock

URU, Alm.del - 2023-24 - Bilag 75: Baggrundsmateriale til briefingen med UNDP om situationen i Gaza den 15. december 2023

imports from both the Russian Federation

and Ukraine. On the social front, inflation has

been eroding household purchasing power,

and poverty remains high. Furthermore, Egypt

was already dealing with challenges on its

southern border after thousands of refugees

fled the Sudan war.

Jordan, given its geographical proximity to the

conflict and its existing economic ties with

Israel, is facing socioeconomic, diplomatic and

security challenges because of the Gaza war.

Israel is the main supplier of natural gas to

Jordan. Frequent and sizeable demonstrations

are taking place across the country coupled

with civilian boycott campaigns against brands

with a connection to Israel, which could have

an impact on retail activity and jobs. Tourism,

a major component of GDP, has already taken

a big hit, and prospects for its revival before

mid-2024 are uncertain. The Government has

little fiscal space to introduce countercyclical

policies, if there is a significant reduction in

economic activity or a need to increase security

spending. In the meantime, servicing the high

debt level is crowding out public expenditures

that could have been used for infrastructure

investment or social protection. Unemployment

is high and fairly stable at high rates. Although

increases in energy and food prices, and

inflation in general, have been contained, the

purchasing power of vulnerable households has

not increased over time. Furthermore, recent

cutbacks to humanitarian assistance for Syrian

refugees are likely to have adverse fiscal and

welfare consequences.

In Lebanon, as a result of the Gaza war, there

have already been almost one hundred of

deaths and tens of thousands of displaced

people, as a direct consequence of increased

tensions on its southern border. Schools have

closed, public infrastructure has been damaged

and tourism has plummeted. These already

dire socioeconomic conditions are expected to

worsen including a continuing decline in GDP,

uncontrollable inflation, high unemployment

and poverty, and millions in need of assistance.

Possible scenarios on the impact of the Gaza war

The following estimates of the impact of the

Gaza war are based on a several assumptions

nested in various models. Firstly, as the war is

already in its third month, and has resumed

with significant intensity after the short

humanitarian pause and partial release of

Israeli hostages/Palestinians prisoners, the

simulations refer to likely impacts during the

first three months and after a hypothesized

six-month war. Secondly, the war is assumed

to be contained within Israel and the occupied

Palestinian territory, the latter including rising

incidences in the West Bank. Thirdly, Israeli

trade relations with Egypt and Jordan will be

maintained. Fourthly, the tourism sector will

suffer from a sizeable hit during the assumed

duration of the war. Fifthly, there will be no

change in the price of oil and gas. Sixthly, the

impact on the global economy is likely to

remain muted.

Based on past estimates of the spillover effects

of previous wars in the region (for example, Iraq,

Gaza and the Syrian Arab Republic), reduced

tourism is one of the main transmission

channels of the impact of wars on the economy,

as tourist receipts are a significant component

of GDP and affect many other productive

activities, including trade.

Although there is no

precise information on the immediate impact on

tourism, the ongoing war in Gaza has resulted

in reduced international tourism to the three

countries in the last quarter of 2023. This is

expected to be followed by subdued tourist

arrivals, and only a gradual recovery thereafter.

Under the three-month war scenario, the drop

in tourism owing to the slowdown in economic

activity could lead to a combined GDP loss in

the three countries of 1.3 per cent of total GDP

in 2023 from its baseline (equivalent to $5.7

billion). If the war continues for six months,

the GDP loss could reach 2.1 per cent from its

baseline ($9.5 billion).

In addition to the impact of reduced tourism

activities, there could also be effects arising from

other changes in the economy, such as those

affecting investment, productivity and trade.

Taking such changes into account,

figure 1 shows

the simulated upper-bound adverse impact of the

war on GDP. Under the three-month scenario, the

URU, Alm.del - 2023-24 - Bilag 75: Baggrundsmateriale til briefingen med UNDP om situationen i Gaza den 15. december 2023

estimated total combined GDP loss across these

three countries comes to an average of 2.3 per

cent of GDP (equivalent to $10.3 billion). Under

the six-month scenario, the GDP loss could reach

up to 4 per cent (equivalent to $18billion).

Figure 1:

Combined GDP loss (Egypt, Jordan

and Lebanon)

230,000 500,000

people

Three-month

scenario

Six-month

scenario

People who may fall into

poverty in Egypt, Jordan

and Lebanon

Billions of dollars

Percentage

-2.3

-4.0

-10.3

compared with

the 2023 baseline

-18.0

Three-month

scenario

Six-month

scenario

Source:

ESCWA and UNDP preliminary estimates.

Note:

These numbers correspond to upper-bound estimates.

Figure 2:

Increase in the number of poor (Thousands)

387

174

Six-month scenario

Jordan

Lebanon

adydyka2780/via adobe stock

Three-month scenario

Egypt

Source:

ESCWA and UNDP preliminary estimates, derived from

macroeconomic accounting simulations.

The estimated GDP loss is expected to have an

effect on poverty. Preliminary results suggest

that around 230,000 people may fall into

poverty in Egypt, Jordan and Lebanon under

the three-month scenario compared with the

2023 baseline. If the war lasts for six months,

this number may increase to over half a million

people (figure 2). It is also possible that human

development, as measured by the Human

Development Index, could regress in these

three countries, although at varying speed,

particularly as a consequence of a 6-month

war scenario.

Alexeiy/via adobe stock

URU, Alm.del - 2023-24 - Bilag 75: Baggrundsmateriale til briefingen med UNDP om situationen i Gaza den 15. december 2023

Conclusion

The unprecedented loss of human life in

Gaza and Israel thus far is already adding to

economic losses in Egypt, Jordan and Lebanon,

and its impact could quickly spread to social

conditions. Future losses could be much higher

owing to lower investment in both physical

and human capital. Such impacts will further

stress the already weak resilience systems in

these countries.

A protracted war could have more severe

effects on the three countries and beyond,

in addition to its economic impact on Israel.

According to some estimates, by the end of

2024, the cost to Israel could be 10 per cent of

GDP (approximately $50 billion), assuming that

the war lasts between 8 and 12 months and is

only limited to Gaza, without participation by

Iran, Lebanon and Yemen.

The prolongation

of the war may also risk the involvement of

additional actors.

A comprehensive and coordinated approach

is required, which includes both international

support and regional cooperation. International

support, including financial aid, policy advice

and technical assistance, remains critical in

helping affected countries to mitigate the

initial impact of the war, and to avoid additional

regional spillovers.

However, first and foremost, an immediate

ceasefire is needed to reverse the destruction

and despair that the Gaza war has inflicted on

the region, including its dangerously escalating

economic costs.

Aleksej/via adobe stock

Endnotes

The early estimates suggested that the gross domestic product (GDP) loss may have reached 8.4 per cent for the

State of Palestine as a whole (or $1.7 billion), thereby worsening pre-existing vulnerabilities among the 3 million

people who were estimated to need assistance in 2022, with food insecurity in Gaza being more acute with 80 per

cent of residents relying on assistance (Source: ESCWA and UNDP, Gaza war: expected socioeconomic impacts on

the State of Palestine, 2023.

The present policy brief does not include an updated assessment of the impact on Gaza, but the situation will be

re-evaluated at a later date.

There are no official data for the Syrian Arab Republic.

For example, S&P Global Ratings estimated that GDP loss in the three economies arising from a reduction in

tourism receipts of 10–70 per cent would range between 0.3 and 1.8 per cent in Egypt, 1.2 and 8.5 per cent in

Jordan and 3.3 and 22.9 per cent in Lebanon (Source: S&P Global Rating, MENA tourism likely to take a hit from

Israel-Hamas war, 6 November 2023).

This was done using GTAP, a multi-region and multisector computable general equilibrium model.

The GDP estimate for 2023 for the three countries is $470.2 billion (Egypt at $398.4 billion; Jordan at $50 billion;

and Lebanon at $21.8 billion) (Source: International Monetary Fund, World Economic Outlook Database).

The Business Standard, War with Hamas to cost Israel above $50 billion, 5 November 2023.