'Too big to fail' Egypt faces economic crisis but has an anti-Gaza refugee policy. Israel and the U.S. hope that will change

With long-held ties to Israel and a border with Gaza, Egypt’s stance is shaping up as key to the fate of any refugees and a sustained flow of aid for the besieged territory’s 2 million residents after Israel cut off crucial supplies in response to Hamas’s deadly Oct. 7 assault. 

That opens up opportunities for the most populous Arab nation as it wrestles with its worst economic outlook in decades and President Abdel-Fattah El-Sisi prepares for elections in less than two months’ time. A host of domestic and regional considerations, however, are seen ruling out any refugee deal.

The Israeli government has spoken to counterparts in several countries about Egypt temporarily housing Palestinians fleeing the violence in Gaza, according to officials with knowledge of the matter. Israel has suggested they could be moved to tent camps in the Sinai Peninsula — funded by the United Nations and the US — and then returned once military operations end, said the people. It’s unclear if Israel has put the idea directly to Egypt.

“Clearly the hope on Israel and the US’s side had been that Egypt would accept economic incentives, at a time when it is suffering an economic crisis, to allow Gazans into Egypt,” said Mirette Mabrouk, director of the Egypt program at the Washington-based Middle East Institute. 

Yet “there is little to no constituency for going against decades of policy on not allowing Palestinian displacement,” she said, while the inducements “might wind up becoming a political liability, especially in an election year.”

All the same, multiple economists, bankers and investors Bloomberg spoke with this month in Morocco during annual meetings of the International Monetary Fund and the World Bank saw Egypt as likely to receive some economic backing, whatever its refugee stance. The crisis has reminded global players of the North African nation’s status as a regional linchpin, entrenching the idea it’s too big to fail.

Egypt, which reached a deal with the IMF in December, is already in talks on boosting that rescue program to over $5 billion from $3 billion, people familiar with the discussions told Bloomberg this month.

It’s possible the IMF’s key shareholders in the US and Europe may pressure the Washington-based lender to soften its requirements and move ahead with the program despite Cairo’s slow pace of reforms, according to Riccardo Fabiani, project director for North Africa with Crisis Group. 

That’s also because the current conflict serves to highlight the growing instability on all sides of Egypt, in Libya, Sudan and now in Gaza. It confronts the US and Europe with the need to ensure that “Cairo remains a stable and reliable partner in the area” that “deserves external support,” Fabiani said.

There was evidence of that international focus on Saturday when El-Sisi hosted what’s billed as a “Summit for Peace” in Cairo, with Middle East and European leaders in attendance.

Diplomatic Onslaught

The recent flurry of diplomacy centered on Cairo has marked something of a return to Egypt’s traditional role figuring prominently in every discussion over power politics across the region in the latter half of the 20th century.  

It rallied Arab forces and led the 1973 attack on Israel that triggered the Yom Kippur war, before the two countries signed a peace treaty and established full diplomatic relations in 1980, going on to become strategic allies.  

In the days since Hamas, which the US and Europe designate a terrorist group, launched its attack on Israel, El-Sisi has been courted by a succession of world leaders. US President Joe Biden reaffirmed the two countries’ “enduring, strategic partnership” in a call. Visiting Chancellor Olaf Scholz praised German-Egyptian unity in working to prevent a Middle East “conflagration.” Chinese President Xi Jinping met Egyptian Prime Minister Mostafa Madbouly in Beijing.

The war “underscores the important role Egypt has always played vis-a-vis security in and around Gaza,” said Robert Satloff, executive director at The Washington Institute for Near East Policy. 

That’s not lost on European governments that woke up to Egypt’s importance as a regional gas producer after Vladimir Putin’s invasion of Ukraine last year. European officials visited to assess Egypt’s potential as a gas supplier — with Israel’s help — to supplant at least some Russian supplies. 

Those same governments are now courting El-Sisi for help in alleviating the pressure on Gaza. But he has rejected any suggestion Egypt host Gazan refugees, suggesting Israel should instead take in Palestinians to its Negev desert. “They can transport Palestinians there until Israel implements its announced plan to destroy Hamas,” he said Wednesday.

Egypt already hosts some 9 million refugees and other migrants from countries including Syria, Sudan, Yemen and Libya. Opening a route for Palestinians may also present a new security risk in the Sinai peninsula, where the army has only just managed to get a handle on its fight with Islamist militants.

Jordan has also refused to accept more Palestinians and it’s unlikely Egypt would become a regional exception and take in refugees many suspect may never be let back into Gaza. That would risk being seen in the Arab world as facilitating another mass displacement and betraying the Palestinian cause all Arab countries vocally espouse.

Also, while Egypt could absorb a certain number of people, the domestic political consequences would be “huge,” said the Washington Institute’s Satloff. “The political leadership considers this a red line not to be crossed and would prefer to face worsening financial distress than accept a significant number of refugees.” 

There is a precedent of sorts for Cairo winning favors as a regional war raged. 

Egypt secured forgiveness of half its $20.2 billion debt owed to the US and allies in 1991 — one of the most generous incidences of debt relief creditor nations have granted — in exchange for support for the anti-Iraq coalition during the Gulf war.

The US wanted to reward Egypt’s President Hosni Mubarak for his pivotal role in lining up Arab nations against Saddam Hussein and to reimburse Egypt for heavy financial losses in the war. Egypt also sent armed forces to participate.

Replicating that scenario would be difficult though. Back then there was general consensus that since Kuwait had been invaded, it needed to be supported, and while Egypt’s participation “was not met with any great joy in military circles, it was not a particularly hard sell and the debt relief was an immense added incentive,” according to the Middle East Institute’s Mabrouk.  

Not so today, not least because Egypt’s commitment would not be comparable with its burden in 1991 when it was the second-largest source of manpower in the US-led coalition, and so it couldn’t expect anything like a similar level of economic assistance, Satloff said.

Way Out

One way out of the dilemma may be for Egypt to offer Saudi Arabia a role co-leading the Palestinian issue for the Arab world in return for financial support, according to strategists. Crown Prince Mohammed bin Salman, aware of domestic anger at Israel, might welcome such an initiative to strengthen his regional profile, though he was absent from Saturday’s summit.

The fluid situation may offer Egypt other opportunities to take a mediating role that could be rewarded, Crisis Group’s Fabiani said.

For now, Egypt will try to play a constructive part “in the hope that its contribution will be acknowledged by its international and regional partners and potentially rewarded economically,” he said.