[Salon] Egypt’s economy: on a knife’s edge - ArabDigest.org Guest Post

Egypt’s economy: on a knife’s edge Summary: the economic impact on Egypt of the US-Israeli war against Iran may be “relatively contained” but the longer hostilities continue the greater the damage to an already heavily battered Egyptian economy. We thank our regular contributor Maged Mandour for today’s newsletter. Maged is a political analyst who also contributes to Middle East Eye and Open Democracy. He is a writer for Sada, the Carnegie Endowment online journal and the author of Egypt under El-Sisi (I.B.Tauris) which examines social and political developments since the coup of 2013. In a press conference on 19 March, the IMF offered its evaluation of the impact of the war on Iran on the Egyptian economy, assessing that it was “relatively contained.” There are reasons for this cautious optimism. For example, the hard currency reserves hit a record of US$ 52.8 billion in February , offering a healthy buffer to meet mounting hard currency obligations. The banking sector as well has posted its highest net foreign currency assets since 2012, reaching US$ 14.5 billion making the banking system more robust. Finally, the outflow of hot money did not reach the level of 2022, when US$ 20 billion exited the Egyptian market in the span of a few weeks. At the time of writing the estimated outflow is anywhere between US$ 5 and 8 billion, with reports of returning inflows. These factors all provide a sense of comfort that there are enough buffers and that market panic has not yet been ignited in a way that would trigger a sudden collapse. There is, however, a degree of wishful thinking and tunnel vision in the above logic with a more holistic view revealing deep structural vulnerabilities that are blissfully ignored. There is good reason to argue that these buffers will buy time but nothing more. Egypt faces deep structural risks from heavy reliance on volatile "hot money" and a strained state budget, compounded by the regional war's impact which has already slashed Suez Canal traffic by 50% and threatened the vital financial lifelines provided by Gulf allies. Arguably the most volatile mix in the regime's economic vulnerabilities is the heavy reliance on hot money, which reached a whopping US$ 45 billion last September. A mass exodus would be disastrous. This, however, has not happened yet with markets still underestimating the impact on the global economy of the war dragging on. If investor appetite for risk diminishes and a mass exodus follows, the impact would be catastrophic. There are signs of increased risk aversion against investing in Egyptian debt. For example, on 16 March, and for the third time in a row, the Central Bank refused bids to sell EGP 10 billion worth of long term bonds due to the high interests rates demanded by investors which reached 30%. In the same offering the Central Bank was only able to sell 2% of a targeted EGP 38 billion with two and three year maturities. These are signs of increased perceived risks by investors. The situation is compounded by a fragile currency, which hit a record low against the dollar, trading below EGP 52 for the dollar, recording a drop of 4.3% in a single day driven by the initial exodus of hot money. The weakening of the currency does not only add pressure on the ability of the regime to meet its debt obligations but is bound to increased inflation which in turn will pressure the Central Bank to increase interest rates already at a high of 19%. This in turn will add pressure on an already strained budget to meet debt obligations which consumed 96% of state revenues in the first five month of the fiscal year 2025/26. It is worth mentioning too that in 2026, the total external debt obligation reached US$ 29 billion with the financing gap for the current fiscal year reaching US$ 8.2 billion, showcasing the heavy burden on the state budget. The other obvious vulnerability is the heavy dependence on imported energy which leaves the country susceptible to imported inflation and a high energy bill that will consume the state's budget. This was reflected in the more than doubling of the energy import bill to reach US$ 1.65 billion per month since the start of the war. If the war continues to escalate then the pressure to raise import levels will increase resulting in higher inflation while hurting growth. Stagflation becomes the order of the day. Adding to the pressure, the war is also expected to have a negative impact on the Suez Canal, with early indicators suggesting traffic has already dropped by 50% since the start of the war. Another less talked about stress is the expected increase in the price of food, due to the shortage in fertilisers, the price of which has already spiked by 30%, due to the blockade of the Strait of Hormuz. About a third of the world's fertiliser passes through the strait. Egypt, the world's largest importer of wheat and heavily dependent on food imports, is likely to be severely hit thus ramping up food price inflation, affecting the poor the most and causing poverty levels to spike. The most alarming development, however, is the impact of the war on the GCC economies which will make it more difficult for them to again bail out the government. For example, Qatar's economy is expected to contract by 14%, while economies of the UAE - the Sisi regime's biggest backer - and Saudi Arabia are expected to contract between 3 and 5%. These contractions will make it less likely the GCC will continue to invest in Egypt at the same pace. There are already reports that the war has delayed US$ 20 billion worth of Gulf investments. This could leave the regime without a lifeline and if the war continues it can affect one of the main sources of foreign currency, namely worker remittances - which reached a record US$ 41.5 billion last year - thus leaving the regime in an extremely vulnerable position. All of these factors speak to a potential crisis with devastating consequences. The regime's reserves are only buying it time but that does not change the fundamental dynamics. In many ways it is even more vulnerable to shocks with the war on the GCC countries making it ever more fragile. Policies that created a debt crisis and have caused near complete dependence on the Gulf reveal just how vulnerable Egypt's economy is. The eruption of another crisis would have consequences that are difficult to imagine, especially if the war continues and the economic damage Iran is inflicting on the GCC states Sisi relies on reaches a critical level.