Since fighting between Israel and Hamas threatens to spread to region-wide chaos, the prospect of a prolonged and potentially widespread war could lead to a devastating human toll as well as economic devastation.
For Gaza, a wider conflict would certainly worsen the already deteriorating humanitarian conditions in the region. And Israel is facing a fresh blow to a resilient economy that until recently was hailed as an entrepreneurial powerhouse.
The outlook for the Palestinian economy was dire even before Israel announced the siege of Gaza in retaliation for the October 7 attacks, which the World Health Organization called a “humanitarian disaster.” An assessment this year by the International Monetary Fund said Israel’s blockade of the Gaza Strip and increasing sanctions on the West Bank were significant obstacles to growth and private sector development.
In Israel, about 360,000 reservists are quitting their jobs and businesses to mobilize for military duty, bringing parts of the economy to a halt. Israel’s technology industry, a driver of growth, has suddenly slowed down. Production at a major Israeli offshore natural gas field has been shut down. The central bank has pledged billions of dollars to prevent the collapse of Israel’s currency, the shekel.
The explosion comes at a troubling time for an economy that was ranked high economist As the fourth best performing economy among countries in the Organization for Economic Co-operation and Development last year. Israeli new companies in the area Has attracted billions of foreign investments. The Abraham Accords, which were signed in 2020 and established diplomatic relations between Israel and several Arab countries, opened the way toward greater economic prosperity. Israel is also developing a hub for exporting natural gas to Europe and beyond.
But the economy began to falter this year after the right-wing government led by Prime Minister Benjamin Netanyahu pushed forward a controversial plan to rein in the power of the judiciary, which critics say could undermine the rule of law. Due to which millions of Israelis can be instigated. Protests on the streets. Several tech leaders have threatened to leave the country over the judicial change, saying it would weaken Israel’s position, and warned of economic downdrafts.
Overhaul declined by 60 percent decline in foreign investment in Israel, and this has accelerated the erosion shekelThe value of and wide fluctuations in the Israeli stock market. Higher interest rates, rising inflation and expectations of a slowdown in the global economy were also weighing on growth.
Dan Ben-David, founder of the Shoresh Institution for Socioeconomic Research and a professor at Tel Aviv University, said the government’s enthusiasm toward judicial change created uncertainty among investors and “the money went out”.
“Going into this, we already had an economic problem,” he said. “And then the Hamas attack happened.”
Mr. Ben-David said the blow is further compounded by the fact that many of the reserves being called up for army service are tech entrepreneurs, teachers, lawyers and other secular Israelis, while ultra-Orthodox men are pardoned for religious reasons. . This has concentrated the pool of recruits around those who make up the bulk of Israel’s entrepreneurial economic activity.
This week two credit rating agencies warned that Israel’s debt could be downgraded. on Friday moody’s Said that the conflict was “even more serious than the incidents of violence that have occurred in the past few decades”, risking diversion of resources, reduced investment and loss of confidence in the economy.
And this Fitch Rating Agency It warned Tuesday that “Israel faces an increased risk of an escalation of the current conflict, including a long-term, large-scale military confrontation with multiple parties.” Just six months earlier, Fitch had cited Israel’s “strong economic growth”. A rating downgrade could force Israel to pay higher interest on borrowings.
Goldman Sachs said in a note on Monday that risks to Israel’s financial and economic stability, compared to previous major conflicts, appear to be low at the moment as Israel’s overall finances were strong today and the country has a large amount of foreign exchange reserves. There was a store.
The Bank of Israel has approximately $200 billion in foreign exchange reserves – close to 40 percent of the country’s GDP – which its governor is, Amir Yaron, In a video call on Sunday, IMF and World Bank officials said sufficient capacity had been provided to support the economy. Since the conflict, the central bank has earmarked $30 billion of foreign currency to support the shekel, which has fallen to an eight-year low.
The central bank faces a dilemma: lower interest rates to help shore up the wartime economy, or keep them high to support the shekel. The bank is scheduled to announce its decision on Monday.
Any war would likely impact Israel’s finances, Mr. Yaron said, but the government could make budget adjustments to adapt to the conflict. Israel routinely spends more than 4 percent of gross domestic product on the military – which stood at $23.4 billion last year – and receives additional aid. $3.8 billion in annual aid From the United States, primarily used to purchase American weapons. President Biden is expected to ask Congress for $14 billion in military and security aid to Israel in the coming days.
Goldman told clients in its note that it expected Israeli financial authorities “to remain cautious given the potential risks of further escalation of the conflict.”
The economic situation of Palestinians in the Gaza Strip and the West Bank has been very poor.
an annual imf Review August described huge losses to the Palestinian economy and people from persistent poverty and high unemployment. The IMF concluded that “the outlook remains bleak amid the volatile political and security situation”, adding that any change would require “an easing of restrictions imposed by Israel on movement, access and investment” as well as a political peace agreement. Will depend.
The Israeli siege of Gaza following Hamas attacks on 7 October led to the destruction of infrastructure and severe shortages of food, water, gasoline and other essentials, and the displacement of nearly half of Gaza’s more than two million Palestinians. Happened. The expansion of the conflict to include Hamas’s Iran-backed ally Hezbollah in Lebanon would be a development that some feared would increase regional frustrations.
In Israel, activity in many sectors of the economy has slowed or stopped. The tourism business has ground to a halt, with cruise ships turning away from Israel’s shores and people canceling trips. Major airlines have stopped flights to and from the country, including cargo. On Monday, UPS said it had stopped flying to Israel. Maritime freight operations have faced additional controls by the Israeli Navy, affecting cargo shipments. Israel, which is heavily dependent on imported oil, has closed one of its two main oil ports for security reasons, analysts said.
Tech companies and start-ups reported that many of their young employees have been mobilized. Nvidia, the world’s largest maker of chips used for artificial intelligence and computer graphics, said it had canceled an AI summit scheduled to take place in Tel Aviv. Retailers including H&M and Zara have closed stores in the country.
Analysts said the Israel-Gaza conflict could also slow natural gas investment in the region, hurting the ambitions of Israel and the broader region, which recently received a deal from Chevron to export natural gas to Europe and elsewhere. Got encouragement to become.
Mr Yaron, the central bank governor, said on Sunday that the Israeli economy “knows how to work and overcome difficult periods in the past and rapidly return to prosperity.”
Still, Mr. Yaron said, with many reserved troops on the front lines and civilians in shelters due to rocket attacks, real economic activity will be hit. And the war, he said, “is likely to continue for some time to come.”