Egyptians are sitting in the dark – literally – about what comes next. All eyes look to Israel and what it will do next. The worry of an escalation of violence and fighting on the nation’s doorstep is keeping people glued to their chosen news sources. This is good for President Sisi. Once again the country is being plagued by power shortages abruptly turning the lights off and bringing operations and output crashing down. Inflation continues to soar and people are being crushed by consistently climbing costs. The big picture shows that for now Egypt can weather this storm, but can its people? Bread prices, just like everything else have increased hitting those who can withstand it least the hardest.
Gaza. The fragile standoff between Egypt and Israel continues as Cairo encourages the ongoing ceasefire negotiations with Hamas while actively seeking regional co-operation to find a solution to the ever-deteriorating humanitarian situation in Gaza. This however does not mean it is pandering to Jerusalem. Foreign Minister Sameh Shoukry has strongly criticised Israel regards the passage of international humanitarian aid bound for Rafah. Egypt has formally lodged a complaint with the UN. Egyptian agencies have worked closely with UN officials to get 2,272 trucks into Gaza in the past three weeks yet much of it failed to reach its intended destinations. Operation of the Rafah Border Crossing and Philadelphi Corridor both remain bones of contention. Cairo rejected an Israeli proposal which would allow some wounded Palestinians to leave Gaza via Rafah but only under Israeli supervision. Cairo has shut down the suggestion, insisting that travel procedures must be completed on the Egyptian side of the crossing which, it says, should be in coordination with Palestinian management on the Gaza side prior to coordination with Israel. Aid entry will continue to move via the Karem Abu Salem crossing while talks on Rafah continue. Israel appears to have no real interest in compromising with Sisi on refugees, aid, or territorial control. Israel will also continue to ignore international criticism of its actions.
Lebanon. Tensions continue to brew between Israel and Hezbollah in Lebanon – a situation being closely watched by Egypt. There is a very real and looming potential for Israel to invade Lebanon and strike at Hezbollah, indeed we suspect that we are days or weeks from it. From the perspective of Israel’s military, Hezbollah has been brazenly launching rockets and drones into northern Israel since October, and the IDF cannot allow that to go on indefinitely. Whilst an invasion of Lebanon will draw condemnation, this will not deter them; Israel generally pays scant heed to the opinions of commentators, campaigners, and foreign politicians. However, on a regional scale such action will inflame tensions further. Arab nations that had hitherto been measured in their responses to Israeli action in Gaza will feel increasingly forced to harden their stances, Egypt included. This will stem from domestic opinion and the influence of both Palestinian and Lebanese diaspora within their nations. Iran-backed militant groups across the region will heighten their attacks against Israel, and western interests.
As to the IDF’s prospects; Hezbollah are not Hamas, but something very different. They are far more heavily armed, with well prepared positions and stockpiles. Many of their fighters gained valuable combat experience in Syria in recent years. Hezbollah has faced IDF troops repeatedly in the past and learnt well – this is no Gaza 2.0. Israel on the other hand will need to replenish munitions and (re)deploy additional troops. Whether the IDF admit it or not, the fighting in Gaza has taken much more effort than anticipated. Opening a new front is not a small undertaking, and indeed it is this logistical challenge that is most likely to determine when the IDF goes into Lebanon more than any other factor.
An Israeli invasion of Lebanon would represent a new level in this conflict. It risks tipping the scale on an already delicate regional situation. Western diplomats will apply whatever pressure they can to dissuade Israel from doing so (including withholding munitions shipments). Should Israeli forces nevertheless launch into Lebanon, anticipate a spike in oil prices and a flurry of western efforts to quell escalation. How Israel’s Arab state neighbours respond will be key, and much will hinge on Egypt’s stance.
Budget. Egypt’s new financial year begins today and the budget is ambitious. Exceeding EGP5.5 trillion, it is a huge increase on last year’s EGP3.4 trillion. The focus of the next 12 months of spending will be shoring up social welfare systems and stimulating the economy. There are also big plans to boost revenue through enhanced tax collection systems. EGP 636 billion has been allocated for subsidies, grants, and social benefits.
Numbers. The economy is continuing to exhibit strong signs of recovery. Standard & Poor’s monthly Purchasing Managers’ Index shows Egypt jumping to 49.6 in May from 47.4 just one month prior. This represents a 33 month high. The economy is riding the wave of increased foreign reserves and investment after a two-year long currency crisis. The Central Bank of Egypt is targeting an inflation rate of 7% by year end. Headline inflation is dipping slightly but still lingers stubbornly high, currently at 28.15%, so much work still needs to be done. Despite the sizable budget numbers, the challenge of the GDP to budget deficit must also be at the top of any agenda and work to bring it down to a manageable 7%, or lower, in the medium term will do much to further smooth economic sailing. Last month we told you of the mature approaches now being taken to confronting Egypt’s national debt. A similar approach must now be focused on deficits and inflation. Back in May the government increased the national minimum wage from EGP3,500 to EGP6,000 per month but that has still not been enough to keep the wolves away from the door for most. Almost 70 million Egyptians are eligible to receive food subsidies but those too are seeing price hikes.
Bread. We knew it was coming. On 1st June the government finally cut bread subsidies. Before that date, a local loaf cost EGP0.05, a price set and held since 1988. Now however, it is priced at EGP0.20 – a 300% increase. With minimum wage guaranteed only to public sector workers, millions are living on less than that. Now the cost of what is often their only daily source of carbohydrate is out of reach for many. Previously, when talk of bread price increases have been heard it has provoked riots. This time around we don’t see that happening however. People appear to be suffering from protest fatigue as they realise all the dreams they fought for during and after the Arab Spring have not materialised. Their standards of living continue to sink. Instead they will quietly complain amongst themselves while going hungry to feed their children. Sisi has a small window of manageability here. He would be well advised to capitalise on it before the cooler temperatures in autumn begin to tempt people to take to the streets.
Electricity. Nationwide power cuts are now longer and more frequent than ever as summer temperatures continue to soar. The government announced in early June that cuts would typically be three hours long but as a timetable for outages has not materialised it has left individuals and business at a loss for how to best manage their time and resources. Some days electricity remains stable but on others the blackouts can be numerous and unpredictable. Our Cairo analyst can testify to seven cuts, varying in length, in one 24-hour period only three days before writing this.To try and tame consumption the government has announced that from 1st July all shops nationwide must close at 2200hrs. Pharmacies and restaurants must close by 0100hrs. The price of electricity had been set to increase in July. Needless to say in efforts to keep the calm, the decision to postpone this hike until 1st September has been taken. When implemented it will be the second price increase this year putting yet more people on the brink of poverty and pushing those already in it even deeper into despair. Taking care of citizens must be a high priority for Sisi’s government but ensuring that factories, businesses and recreational facilities can function is paramount. Previously immune from power cuts, even tourist resorts are now falling victim too. With a bruised tourism sector still struggling to recover from the pandemic, it does not need any bad press internationally as is seeks to woo back visitors and their much needed hard currency. Increasing fuel for power generation must now be a priority and now that there is money in State coffers this must be a core focus.
Houthi forces continue to target vessels in the Red Sea and the Gulf of Aden. On 12th June, a Greek cargo vessel was attacked causing flooding and damage to the engine room. One person was reported killed. On 13th June a Palau-flagged cargo ship was hit by two Houthi projectiles injuring one and starting a fire. Further south, the MV Tuto sank overnight on June 18/19, off the Eritrean coast. A continued heightened naval presence is certain as the conflict between Hamas and Israel continues. A US led maritime force, Operation Prosperity Guardian, has been deployed to provide extra security to vessels in the region. An EU led mission, Operation Aspides was launched in February. Since then it has reported the destruction of several UAVs, missiles, speedboats, USVs, and at least one unmanned underwater vehicle (UUV). Major shipping companies continue to avoid the route to the Suez Canal or are operating reduced transit policies to limit risk. The impact of this should not be ignored. Canal revenue dropped to USD337.8 million in May 2024 down from USD648 one year earlier. In the same period, the number of ships transiting the canal fell by 54% and tonnage is down by 68%. In response, the Suez Canal Authority has extended fee discounts for certain vessels on selected long-distance trades until the end of the year.
Egypt will remain centre stage as the world intently watches this region. There is a sensation of collective breath holding and the world is waiting to exhale. It is tough to predict what Israel’s next move will be and, in turn, how Sisi and his fellow world leaders will respond but we can assert that Sisi’s interactions now with Israel will make and shape the global response that follows. Sisi’s response to any Israeli invasion of Lebanon will set the tone for the entire region – once again, Egypt is a lynchpin.