Egypt’s economy absorbed Iran war shock better than expected, but vulnerabilities remain -IMF

Egypt’s economy absorbed the Iran war better than almost anyone could have expected seven months ago, supported by a flexible exchange rate, swift policy responses, and comfortable international reserves. But persistent vulnerabilities, including high gross financing needs, heavy short-term debt, and a large state footprint, continue to pose medium-term risks, according to the IMF’s latest Egypt assessment.

What worked

The FX flexibility buffer worked: Unlike previous external shocks where fixed exchange rates drained foreign currency, a market-driven rate allowed the country to navigate capital flight during regional volatility earlier this year. “We haven’t seen a drop in net international reserves — if anything, it’s been increasing since the start of the year,” CI Capital economist Sara Saada tells us.

The reason, Saada says, is structural. Fixed-income trades settle directly in the interbank market, not through the Central Bank of Egypt (CBE), meaning the exchange rate’s flexibility absorbs the outflow rather than forcing the CBE to sell down reserves to defend the EGP, she explains.

Non-resident holdings of local currency T-bills also fell from USD 39.1 bn in February to USD 22.2 bn in early April as portfolio capital exited, accompanied by a 14-17% EGP depreciation, the IMF noted. As market conditions normalized, portfolio flows returned near pre-crisis levels, and sovereign spreads narrowed below pre-war levels.

Disinflation outpaces Fund baselines: The Fund’s assessment points to a cautious disinflation outlook — noting that “the path back to the inflation target was pushed back by a year.” But domestic numbers show faster cooling on the ground. Urban annual inflation slowed to 14.5% in August, beating the 15.5% market consensus, as a 1.1% m-o-m drop in food prices helped absorb electricity tariff adjustments.

Capital market access returned: Egypt’s sovereign risk premium fell to its lowest since 2014. The government issued its first USD 1 bn Social Eurobond in May, followed by a USD 500 mn Samurai bond in June. The Finance Ministry is weighing a return to global debt markets between October and December under an approved plan targeting USD 3 bn in new international issuances.

The vulnerabilities that remain

But the underlying vulnerabilities haven’t gone away. “Remittances have recovered sharply — rivaling total non-oil exports — but these inflows, along with tourism, remain highly sensitive to external shocks and geopolitical tensions,” economist Iten El Margoushy tells EnterpriseAM. Post-program stability depends on building a more production-based footing through FDI, export growth, and localizing raw material inputs, she says. “If incentives are put in place to produce raw materials locally rather than importing them, it will take significant pressure off both the balance of payments and monetary policy.”

On the sovereign-bank nexus: The IMF flagged public financing needs of roughly 40% of GDP near-term and banks’ heavy exposure to government debt as risks that crowd out private lending. El Margoushy says that exposure persists simply because the yield is hard to beat: “Even after taxes, Treasury yields offer returns near 20%, which keeps bank exposure to local debt high as long as state financing needs remain active.”

On lengthening debt maturities: Extending debt tenors remains a primary target, but market conditions dictate the pace. “The Finance Ministry wants to increase the average maturity of debt to lower rollover risk,” Saada says, but with heightened global volatility, investors naturally tilt toward shorter-term paper over longer commitments. Meanwhile, timing is everything when tapping international markets: funding should ideally be secured ahead of major repayments, El Margoushy says, cautioning that a lower USD interest rate does not automatically mean cheaper financing once exchange-rate risk is factored in.

On privatization: Economists we spoke to attribute the delay to geopolitical conditions rather than policy inertia. “Evaluating reform progress or privatization timelines under current conditions is difficult because regional geopolitical uncertainty has naturally suppressed investor appetite,” Saada tells us. Policy implementation remains on track despite external interruptions, she notes. Saada frames the gap between achievement and target as a function of the starting point. Debt reduction “is taking longer than other reforms that are already bearing fruit” because Egypt came from a “very high” debt-to-GDP level, with annual rollover and deficit adding to the pile, she says.

IN CONTEXT- The government raised roughly USD 5.9 bn of a USD 12.2 bn privatization goal set for March 2022 to July 2025, prompting officials to reset the bar at USD 10.3 bn by the end of FY 2026/27. Two transactions are due before the IMF program wraps up. Banque du Caire’s long-delayed IPO is now slated for November with a 30-40% stake on offer. The European Bank for Reconstruction and Development and the International Finance Corporation are reportedly circling a combined 10% tranche. The government plans to offer up to 20% of Misr Life Ins. as well.

On debt itself: Public debt fell from a peak of around 90% of GDP to 82.5%, with the Economist Intelligence Unit projecting it to hover around 83% by end-2026. El Margoushy stresses that while near-term containment is a welcome step, achieving lasting fiscal health requires pushing it into the 70% range over the next three years.