The U. S.-Israeli conflict with Iran is increasing pressure on Egypt’s already fragile economy. This situation has led to higher energy costs, reduced exports, and foreign investors selling their treasury holdings. Analysts highlight that Egypt, with a population of nearly 120 million, is viewed by many Western nations as crucial for regional stability. Previous unrest in Egypt has affected migration, trade through the Suez Canal, and security near Gaza.
Egypt faces significant financial challenges, including soaring debt where interest payments make up about half of government spending this fiscal year. Inflation has also surged, reaching a peak of 38% in September 2023. The country relies on short-term foreign investments, known as “hot money”, to help manage its budget deficit, which is essential for financing imports of goods like gas and wheat. As of the end of September, foreign investors held about $45.7 billion in Egyptian treasury bills, but the central bank does not report on longer-term maturities.
The total capital outflow from Egypt since the start of the conflict is estimated to be between $5 billion and $8 billion, which is considerably less than the roughly $20 billion lost during the COVID-19 pandemic and the Russian invasion of Ukraine. This outflow has weakened the Egyptian pound, which has dropped to over 52 to the dollar. Economists believe that while Egypt has some buffer with $29.5 billion in net foreign assets and $53 billion in foreign reserves, a long-term conflict could lead to inflation by driving up costs.
Egypt’s Prime Minister Mostafa Madbouly reassured citizens that the country is meeting its energy needs to prevent disruptions like those experienced two years ago. The finance minister reported that a majority of Egypt’s petroleum needs are met through hedging contracts, yet disruptions in Israeli gas supplies and rising energy prices have forced domestic fuel price increases. Increased costs could potentially double the subsidies allocated for petroleum, which is budgeted at around 75 billion pounds.
The conflict has led to higher freight and insurance costs that are negatively impacting Egypt’s exports. An internal finance ministry report indicated that export declarations dropped by 77% in the immediate days after the war began compared to the same period the previous year, with particularly sharp decreases in exports to Saudi Arabia and the UAE. Analysts warn that prolonged conflict could also harm other key revenue sources for the country, including tourism, Suez Canal fees, and remittances from overseas workers.
Past financial assistance, like an $8 billion loan from the International Monetary Fund and a $35 billion investment from the UAE, has provided some economic stability. However, as the conflict continues, it risks escalating capital outflows and a cautious approach from investors toward Egypt and other emerging markets. The Gulf states, typically major supporters of Egypt, are facing their own economic challenges, which may limit Egypt’s options moving forward.
With information from Reuters
