What the Fed’s first hike in three years means for Egypt’s debt

The US Federal Reserve raised interest rates on 16 September for the first time since July 2023, lifting its target range by 25 bps to 3.75-4.00%, even as the US economy keeps growing.

Much of the inflation pressure comes from energy, driven by the war on Iran, which began on 28 February and shut the Strait of Hormuz to most shipping, pushing Brent as high as about USD 126 a barrel on 30 April and helping lift US consumer prices 3.7% y-o-y by September. Long-term borrowing costs have climbed too, with the 30-year Treasury yield hitting 5.73% in October (a 24-year high) during a global bond selloff that the Fed’s own minutes tie partly to the heavy borrowing behind the AI buildout. And while the Fed held rates on 28 October, two policymakers pushed for another hike, and markets are pricing in a high chance of one at its 9 December meeting.

Egypt owes the US relatively little: about USD 5.8 bn at the end of December 2025, out of USD 163.9 bn in total external debt, according to the Central Bank of Egypt’s (CBE) latest External Position report (pdf).

So the Fed’s tightening reaches Egypt’s debt by other routes. The effect comes through floating-rate loans from multilateral lenders and, more importantly, through pressure on the EGP. Multilateral institutions hold USD 45.5 bn of that debt, led by the World Bank’s main lending arm (USD 12.5 bn) and the IMF (USD 12.4 bn), while Arab countries hold USD 38.9 bn, mainly Saudi Arabia (USD 15.2 bn), the UAE (USD 10.7 bn), and Kuwait (USD 6.3 bn). Together they account for about half the total debt.

The Arab debt is largely shielded. Roughly half of it is deposits held at the CBE — which Gulf governments have repeatedly rolled over or put to other uses — and much of the Gulf lending has historically been on fixed terms that US rate moves don’t touch. Multilateral debt is the exposed part, because much of it floats with global rates, US rates included.

The World Bank prices its USD loans off SOFR, the US overnight rate that moves with Fed policy, while the IMF’s charges are built on the SDR interest rate, a weighted average of short-term rates on five currencies (the USD, EUR, CNY, JPY, and GBP) in which the USD carries about 43% of the weight. So a higher Fed rate feeds into what Egypt pays to its two biggest multilateral creditors, which hold about 55% of its multilateral debt between them. That includes USD 13.1 bn of SDR-denominated debt.

The bigger risk is the currency, since a weaker EGP raises the local cost of every USD Egypt owes. Higher US yields make EGP-denominated debt less attractive to foreign investors running the carry trade, and that money has already shown how fast it can leave: foreign holdings of EGP government securities fell to USD 27.1 bn in March from a USD 38.1 bn peak in January as the war took hold.

The pressure returned in October, when the EGP lost 7.3% against the USD, and the CBE responded before the month was out, raising rates by 100 bps, which lifted the overnight deposit rate to 20% and ended an 825-bp easing cycle that began in April 2025. The CBE called the move preemptive, citing tighter global financial conditions, risk-off sentiment, and imported inflation, though the hike also widens the extra yield foreign investors earn by holding EGP debt instead of US debt.

Still, there’s a case that Egypt is better placed than the currency moves suggest. Urban inflation slowed to 12.7% in October from 13.9% in September, and the CBE revised its inflation forecast down at its September meeting. It also said output remains below potential, which keeps demand-side price pressures limited in the short term.

That helps on prices, but it leaves the debt risk largely untouched. Slower inflation does little to protect Egypt from a weaker EGP, which is where the debt risk lies, and the disinflation looks less secure than it did in September. When the CBE hiked rates in October, it pushed back the date for hitting its 7% (±2 pp) target to 4Q 2027 from 2H 2027.

That leaves Egypt’s exposure to the Fed running through its currency first and its multilateral interest bill second, with US creditors a distant third. The next tests come eight days apart: the Fed meets on 9 December and the CBE on 17 December.

This article was contributed by Yassin Amr, a 16-year-old macroeconomics and financial markets enthusiast and an avid reader of EnterpriseAM.