One year after the Central Bank of Egypt (CBE) floated the Egyptian pound (EGP) and adopted a flexible exchange rate, London-based research firm Capital Economics held a briefing to assess the country’s economic progress.

 The discussion examined the impact of recent policy decisions, ongoing challenges, and the outlook for Egypt’s economy moving forward.

According to James Swanston, senior economist at Capital Economics, the policy shift has begun to yield positive results.

 Capital inflows into Egypt have stabilized, with foreign investors expanding their activities and certain export sectors performing better.

He pointed to recent Purchasing Managers’ Index (PMI) readings, which indicate that non-oil business activity has continued to expand for a second consecutive month—marking the strongest start to a year in over four years.

Despite these improvements, significant hurdles remain. The loss of Suez Canal revenues has put pressure on Egypt’s balance of payments, while the impact of the EGP devaluation has driven up import costs.

Additionally, external demand for Egyptian exports has not yet rebounded, limiting the benefits of a weaker currency. Meanwhile, tight fiscal policy, higher interest rates, and inflation have slowed economic growth in the short term.

However, a repeat of the 2016 economic crisis seems unlikely, according to Jason Tuvey, deputy chief emerging markets economist at Capital Economics.

Unlike previous years, Egypt has allowed its currency to move more freely, maintaining tight fiscal policies—a key area where the country has made sustained progress since 2016.

He also noted improvements in privatization efforts and a shift toward reducing the military’s footprint in the economy, factors that are boosting investor confidence.

A more flexible exchange rate is now seen as a major driver of investor trust, as it provides greater certainty for foreign direct investment (FDI).

 While Egypt has not yet experienced the expected post-devaluation FDI boom, Tuvey believes that slow but steady reform progress will lead to gradual increases in investment inflows over time.

Capital Economics does not see evidence of the EGP being overvalued and projects it to weaken to EGP 55 per USD by the end of the year.

However, Swanston suggested that stronger capital inflows and export growth could lead to unexpected currency appreciation.

Inflation, a key concern in recent years, is also expected to decline. Capital Economics forecasts that inflation will fall within the CBE’s target range of 7 percent ±2 percentage points in the coming months.

As inflation slows, the CBE is likely to begin easing monetary policy, potentially starting in April.

The next Monetary Policy Committee (MPC) meeting will be closely watched, as inflation trends will play a key role in determining the timing of rate cuts.

Swanston noted that the CBE has been waiting for a sharper and sustained drop in inflation, and upcoming data from February and March could provide the necessary evidence for policymakers to start loosening monetary policy.