Indian Council of World Affairs

The launch of Houthi missile and drone attacks against commercial and merchant ships in the Red Sea soon after the outbreak of the Israel-Gaza war in October 2023 seems to have added new complexities to the political and strategic quagmire in the region. Within a month of the Israeli operation in Gaza in response to Hamas’ terrorist attack inside the Israeli territories, the Houthis, who were entangled in a long war against Saudi-led forces and were an unbeatable force in Yemen’s civil war in recent years, announced to join the war on the side of Hamas by obstructing and attacking those ships belonging either to Israel or those supporting Israeli military operation in Gaza. Since November 2023, hundreds of ships passing through the Bab al-Mandab in the southern Red Sea have been attacked, and three ships are reported to have sunk also in the Red Sea.[i] The Red Sea is one of the busiest sea lanes in the world, as 15% of the commercial ships pass through the Red Sea alone.[ii] The naval capability of the Houthis has surprised many as they are in confrontation with the joint UK-US naval forces along with the EU Naval Forces Operation (Aspides ).[iii]

During their decade-long war against both internal and external foes, Houthis were able to amass a huge consignment of weapons. Today, the Houthis’ arsenal is flooded with missiles, drones, suicide unarmed aircraft, ballistics and wing missiles, surface-to-surface missiles, hypersonic missiles and explosive drone boats.[iv] Over the years, they have modernised and diversified their war technology and have propped up a huge contingent of militia and trained fighters. The level of their technology can be gauged by the fact that their missiles hit the city of Tel Aviv in July while in Israeli retaliation, many Houthis were killed.[v] 

Soon after the launch of Houthis’ naval attacks in the Red Sea, most commercial shipping companies decided to evade the Bab al-Mandab, hence the Suez Canal transit, and instead chose the Cape of Good Hope around South Africa to reach the destinations. In today’s global transactions, around 80% of the world trade takes place through the sea routes and around 1.8 million seafarers are employed in ship industries.[vi] Before the Suez Canal was dug in mid-19^th century, the Cape of Good Hope was the only pass-through for Asian goods to be transported across the continents. Today, this re-routing of a large number of ships is causing an increment in shipment cost, longer duration of journey, disruption in supply chains and eventually, an unprecedented level of inflation. According to a report published by Project 44 (world’s leading advanced visibility platform for shippers), container ship traffic through the Red Sea has fallen by 78% in May 2024 in comparison to last year.[vii]

The Suez Canal, Houthi Attack and the Impact on Egypt 

Though the economies of many countries, along with shipping and insurance companies, are incurring huge losses because of burgeoning tensions in the Red Sea, the story of Egypt is quite different because the Suez Canal happens to be one of the principal sources of revenue for Egypt. The idea of digging the Suez Canal was first conceived by French colonial officials in the mid-19^th century, and after decade-long construction, the canal became operational in 1869, which eventually shortened the route between the Red Sea and the Mediterranean.[viii] After the Free Officers Revolt in Egypt in 1952, the canal was nationalised by Colonel Nasser in 1956, which had then created a tremor in world politics and resultantly, Egypt had faced a tripartite (the UK, France and Israel) military attack as well. 

Today, the Suez Canal continues not only to be a major source of revenue for Egypt’s state exchequer, but it is also a major source of foreign currency. It is noteworthy that around 5% of the world’s crude oil, 10% of the world oil product and 8% of liquefied gas transactions take place through the Suez Canal, while two-thirds of the crude oil coming from the Gulf region also passes through the same route.[ix] Moreover, 30% of the world shipment containers pass every day through the 193 kilometre-long Suez Canal, which constitutes about 12% of the total world trade transporting goods worth $1 trillion per annum.[x] Before the Houthi operation in the Red Sea or outbreak of the COVID-19 pandemic, 50 ships used to traverse the Suez Canal carrying between $3–9 billion worth of cargo. 

The head of the Suez Canal Authority, Osma Rabie, recently announced that the Canal lost around 23.5% of its annual revenue in the current fiscal year ending June this year, amounting to a total loss of $7.2 billion because of the rerouting of many ships away from the Suez Canal.[xi] The same source reported that in January 2024, a 40% decline was registered in revenue from the Suez Canal compared to last year.[xii] In February this year, President Abdel Fattah El-Sisi expressed his concern over the decline in Suez Canal revenue when he stated that recently there was decline of 40 –50% and not long ago, Suez Canal used to be the source of revenue worth $9.3 billion yearly.[xiii] Meanwhile, a UN conference on trade and development held in February said that by first half of February 2024, monthly traffic in the Canal had fallen by 42% and container tonnage transiting the Canal has declined by 82% in comparison to 2023. There are reports that the Suez Canal Authority to deter the rerouting of the vessels from the Suez Zone has offered concessions ranging from 25–75% for some shipping companies transiting the Suez Canal,[xiv] while it had earlier hiked the transit fee between 5% and 15% to compensate for the loss. [xv] It is also estimated that the suspension of single vessel transit through the Suez Canal cost the country around the loss of $600,000.[xvi]

The decline in Suez Canal revenue, which constitutes 2.3% of GDP[xvii] has incurred an additional burden on the national economy. The country needs hard currency to import wheat (one of the largest importers of wheat in the region), and today its foreign debt has reached $160 billion, and out of this huge amount, $29 billion needs to be paid this year alone.[xviii] It should also be noticed that a slowdown in navigation in the Red Sea means a slowdown in Egyptian imports of necessary items like fuel, food and intermediate goods necessary for industries. 

Amidst ongoing conflict in the Red Sea, the Gaza war has stopped the flow of tourists, deepening the economic woes in Egypt. The tourism sector, which along with the Suez Canal revenue constitutes about 25% of the total national income in the country, somehow revived after a long lull in the wake of COVID-19, but it has again dampened, and there are reports of large-scale cancellations by tourists who had booked tickets for South Sinai, and the charms of resorts in South Sinai overlooking the Red Sea seem to be diminishing. 

All these are happening when the country is in the trap of all-time high inflation and foreign debt has reached 87.2% of total GDP.[xix] Egypt has also seen a plunge in the remittances from ex-pats working abroad, and current fiscal year witnessed a decline of $1.9 billion. The flow of natural gas exports has also been affected due to a decline in local production and an international fall in gas prices.[xx] According to the German Trade and Investment (GTAI), an economic information service, Egypt’s GDP will shrink from $475 billion in 2022 to $375 billion. [xxi] The same report also indicates that inflation will also rise in the future and the public debt presently stands at a rate of 88% of the GDP.[xxii] There are reports that by the end of the year, the government is planning to increase the fuel and electricity prices given the gap in production and service charges. Today, more than half of the Egyptians are living below the poverty line, and revenue loss from the Suez Canal would further aggravate the situation.[xxiii] The ongoing conflict in Sudan has forced thousands to flee the country and seek shelter in Egypt, which is already hosting thousands of Syrian refugees, and not to mention those Gazans who are crossing over to Egypt because of constant Israeli military onslaught, and these naturally would add to the economic hardship in the country. 

Rising oil prices due to regional instability are another major economic concern for Egypt. Given the situation in Gaza and the looming danger of an inevitable expansion of war in the region, the government needs to spend more on its security and defence, and it is already gearing up for major security challenges arising out of the involvement of several militia groups in the Israel-Gaza war. The prospect of much-needed foreign investment in Egypt too seems significantly bleak due to the mounting military tensions in the region. 

On 6 August 2024, the commander of the European Naval Operation (Aspides) in the Red Sea Vasileios Gryparis[xxiv] visited Egypt and held a comprehensive talk with the newly appointed Egyptian Minister for Foreign Affairs, Immigration, and Expats, Dr Badr Abdel Aati. Both discussed the rising tensions in the Red Sea and other contiguous maritime region. Egypt pledged its full support to the mission in repelling the Houthi attacks in the Red Sea. Badr Abdel Aati called for creating a secure environment for the ships passing through the Red Sea as it is directly impacting the Egyptian economy. He also said that the disturbance in the sea route is directly linked to rising tensions in the region, which is an outcome of the Israel-Gaza war. 

Amidst the steep decline in revenue from the Suez, there were some reports in the local media that the government in Egypt had decided to sell the Suez Canal for $1 trillion, but it was strongly refuted by the government, saying that the Suez Canal’s national importance is constitutionally protected and it is an international waterway owned by Egypt.[xxv] The government also denied those reports of any plan to sell a few airports in the country to foreign companies in view of the economic situation and stated that the government was already mulling a comprehensive plan to modernise several airports. 

Conclusion 

Recent developments in the Red Sea are a source of major concern to Egypt because the growth and stability of its economy are significantly linked to the Suez Canal. Today, both tourism and the Suez Canal are directly hit by tensions in the region. A series of operations have been launched by European naval forces apart from several joint US-UK operations against the Houthis but have not been sufficient to affect the realities on the ground, and even today many ships are evading the route of Babal al-Mandab. There is little hope for de-escalation, as the danger of confrontation between Israel and Iran is already looming large in the wake of the assassination of Hamas chief in Tehran. The Houthis have not changed their stance, and they continue to attack the ships, and the momentum of their assault is likely to expand in the near future because of their committed support for Hamas. In such an uncertain situation, Egypt is likely to face further economic stress and countries will have to look at ways of cooperation on dealing with the situation in the region.

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*Dr. Fazzur Rahman Siddiqui, Senior Research Fellow, Indian Council of World Affairs, New Delhi.
The views expressed are personal. 

Endnotes

[i]Yemen’s Houthis are prepared for a lengthy battle in the Red Sea, The New Arab July 29, 2024, Accessed https://shorturl.at/RmdDS August 5, 2024.

[ii] Yemen’s Houthis are prepared, The New Arab July 29, 2024 https://shorturl.at/R3yZ5  

[iii]  Aspides is a Greek word for shield and the operation is also known as EUNAVFOR Aspides

[iv] Missiles and Drones: Know about the Houthi Arsenal, Al-Arabi, November 9, 2023,  https://shorturl.at/TVDEC Accessed August 2, 2024.

[v] Yemen’s Houthis are prepared, The New Arab July 29, 2024 https://shorturl.at/R3yZ5  

[vi] Red Sea Nightmare: How Houthi Attack Led to Shortage of Sailors, Aljazeera (Arabic), June 19, 2024, Accessed https://shorturl.at/xeF1P August 1, 2024.

[vii] Red Sea Nightmare https://shorturl.at/xeF1P.

[viii] Suez Canal: The Longest Water way in the World, Aljazeera (Arabic), January 14, 2024, Accessed   https://shorturl.at/kiyoC August 4, 2024.

[ix] Kristine Petrosyan, the Suez Canal Closure highlights Asia’s Growing dependence, International Energy Agency, March 27, 2021, Accessed https://shorturl.at/WTBge July 30, 2024.

[x]The importance of Suez Canal to Global trade, New Zealand Foreign Affairs and Trade, April 18, 2021, Accessed https://shorturl.at/15n2g August 5, 2024.

[xi] Egyptian Foreign Minister: Security Threat to Navigation in the Red Sea Affects our Economy, Al-Quds-Al-Arabi (An Arabic Daily), August 7, 2024, Accessed https://shorturl.at/rUZZW August 8, 2024.

[xii]Shahira Amin, Houthi Attacks on Ships in the Red Sea Add to Egypt’s economic Trouble, Atlantic Cluncil, February 8, 2024, Accessed https://shorturl.at/smNB1 August 10, 2024

[xiii] Suez Canal Revenue Down by 40-50%, Egypt’s Sisi says, Forbes, February 19, 2024, Accessed https://shorturl.at/N2JxH August 1, 2024.

[xiv]Kamal Tabikha https://shorturl.at/2M3pC

[xv]Kersten & Mahmoud https://acesse.dev/asymN

[xvi] Houth Anti-Isarel Attacks Ham Egypt and Jordan, Foundation for Défense of Democracy, December 21, 2023, Accessed https://acesse.dev/ToJel August 10, 2024.

[xvii] Palestine-Israel Conflict: UN reports on Houth Attack Impact on Suez Canal, CNN (Arabic) February 23, 2024, Accessed https://shorturl.at/o6GRJ August 7, 2024.

[xviii] Egypt External Debt, CEIC, n.d., Accessed https://www.ceicdata.com/en/indicator/egypt/external-debt August 5, 2024.

[xix]Kamal Tabikha, Concern Grows in Egypt over increased Houth attacks in the Red Sea, The National, December 18, 2023, Accessed https://shorturl.at/Brbuo August 8, 2024.

[xx] Patrick Werr, Suez Canal Diversions Pile Pressure on Egypt’s Diedstresed Economy, Reuters, January 12, 2024, Accessed https://shorturl.at/zQbRd July 28, 2024.

[xxi]Kersten & Mahmoud, Red Sea: Houthi Attacks Put Pressure on Cairo, DW, January 27, 2024, Accessed   https://acesse.dev/asymN July 15, 2024.

[xxii] Kersten & Mahmoud https://acesse.dev/asymN.

[xxiii]Kersten & Mahmoud https://acesse.dev/asymN.

[xxiv]Foreign Minster Discusses with Visiting Aspide Commander, Almisry-al-Youm (An Arabic Daily ) , August 7, 2024,Accessed https://shorturl.at/3Rs9w August 8, 2024.

[xxv]Egypt: Government responds to rumour of selling of Suez Canal, CNN (Arabic), July 31, 2024, Accessed   https://shorturl.at/PvWEr August 3, 2014.