Arab Finance: Egypt’s stronger macroeconomic buffers and swift policy response helped contain the economic fallout from the war in the Middle East, although significant vulnerabilities continue to weigh on the economy, according to an International Monetary Fund (IMF) assessment prepared by Amine Mati, the IMF’s mission chief for Egypt and an assistant director in its Middle East and Central Asia Department, and Yevgeniya Korniyenko, a senior economist in the same department.
The regional conflict initially triggered a sharp financial market reaction. Non-resident holdings of Egyptian government debt denominated in local currency dropped to $22.2 billion in early April from $39.1 billion in February, while the Egyptian pound depreciated by around 14% to 17%.
Those pressures subsequently eased, allowing portfolio investment to resume. Non-resident holdings recovered to levels close to those recorded before the conflict, while the pound regained much of its earlier losses.
The IMF attributed Egypt’s ability to manage the shock to an improved macroeconomic position compared with previous periods of external pressure. Reforms implemented under the IMF-backed program had supported growth, placed inflation on a downward trajectory, rebuilt international reserves, and strengthened banks’ net foreign asset positions.
The authorities also moved quickly to maintain policy discipline. Exchange rate flexibility helped absorb external pressures, while energy price adjustments following higher global oil prices were accompanied by spending restraint and an expansion of targeted support.
Despite the initial financial disruption, the shock did not develop into a broader economic downturn. Economic growth reached 5% in the third quarter (Q3) of the previous fiscal year (FY) 2025/2026, tourism remained resilient, and remittances rose to record levels. Suez Canal activity also maintained its gradual recovery following temporary disruption linked to regional instability.
Egypt contained fiscal pressures through higher domestic revenue mobilization and tighter expenditure management. Inflation accelerated following the currency depreciation and energy price adjustments, but the increase was less severe than anticipated. However, the expected return to the inflation target has been delayed by one year.
International reserves remained comfortably above adequate levels despite the initial capital outflows, highlighting the role of exchange rate flexibility in easing external pressures and marking a departure from Egypt’s experience during previous shocks.
Improving market conditions also supported a recovery in investor confidence. Sovereign spreads declined below their pre-war levels, while Egypt regained access to international capital markets.
The country issued a $1 billion social Eurobond in May that attracted subscriptions equivalent to five times the offering, followed by a $500 million Samurai bond in June. In August, Egypt’s sovereign risk premium fell to its lowest level since 2014.
However, the IMF cautioned that the economy remains exposed to substantial risks. Public debt and gross financing requirements are elevated, government funding remains heavily dependent on short-term maturities, and banks continue to have considerable exposure to the state.
Egypt’s gross financing needs are projected to remain at around 40% of gross domestic product (GDP) in the near term before gradually declining to below 30% by 2030. The IMF also said the state’s role in the economy remains excessively large.
