Egypt’s economy absorbed the spillovers from the latest Middle East conflict without slipping into a broader downturn, supported by exchange-rate flexibility, stronger macroeconomic buffers and a swift policy response, the International Monetary Fund (IMF) said.
In a country focus article, IMF officials Amine Mati and Yevgeniya Korniyenko said reforms under Egypt’s IMF-supported program had strengthened growth, put inflation on a downward path, rebuilt international reserves and improved banks’ foreign-asset positions ahead of the latest shock.
Growth reached 5.0% in the third quarter of FY2025/26, while tourism remained resilient, remittances reached record highs and Suez Canal activity continued its gradual recovery despite temporary disruption from regional turmoil.
The financial shock was significant, with nonresident holdings of local-currency government debt falling from $39.1 billion in February to $22.2 billion in early April, while the Egyptian pound depreciated by around 14-17%. As pressures eased, portfolio inflows resumed, nonresident holdings recovered toward pre-conflict levels and the pound regained much of its initial losses.
The IMF said inflation increased following the currency depreciation and energy price adjustments, but the rise was less severe than initially expected, although the return to the inflation target was delayed by a year.
International reserves remained above adequate levels despite the initial capital outflows, with exchange-rate flexibility helping absorb external pressures.
Investor confidence also improved as market pressures eased. Sovereign spreads fell below pre-conflict levels, while Egypt returned to international capital markets with a $1 billion Social Eurobond in May that was five times oversubscribed, followed by a $500 million Samurai bond in June.
By August, Egypt’s sovereign risk premium had fallen to its lowest level since 2014, according to the IMF.
Despite the improved resilience, the Fund warned that significant vulnerabilities remain, particularly high public debt and gross financing needs, reliance on short-term financing and elevated bank exposure to the government.
Gross financing needs are expected to remain around 40% of GDP in the near term and decline only gradually to below 30% by 2030, the IMF said.
The Fund called for continued exchange-rate flexibility, appropriately tight monetary policy and fiscal prudence, alongside faster implementation of structural reforms.
It also highlighted the need for stronger debt management, longer-term market-based financing, a broader investor base and deeper domestic debt markets to reduce refinancing risks.
Most importantly, the IMF said faster implementation of Egypt’s State Ownership Policy and divestment program, stronger governance of state-owned enterprises and greater competition would be critical to reducing the state’s footprint and supporting stronger private-sector-led growth.
