Egypt’s credit ratings are at the lowest levels of “sub-investment” grade and the country has a decades-long history of lurching from one crisis to another, so one would expect the economy to be reeling from the impact of the Iran conflict.
It is proving quite resilient, however, reaping the benefits of sound policy measures taken last year.
I do not want to pretend that the Egyptian economy is unaffected by the war. About $8 billion in foreign portfolio investment has been lost, according to Moody’s. Tourist arrivals from Europe are slowing. Fees from traffic through the Suez Canal – already depressed by fear of attacks on shipping in the Bab al-Mandeb, off the Yemeni coast – have declined.
But when Egyptian finance minister Ahmed Kouchouk presented the 2026/2027 budget to parliament at the end of April, he forecast a smaller budget deficit than in the current year and a reduction of about $1 billion in foreign debt.
Kouchouk’s budget, which will take effect from July 1, is reassuringly boring and conservative. Alongside measures to reduce the debt burden, it includes perennial plans to raise more money through privatisation and optimistic forecasts of more-efficient tax collection.
Spending on food subsidies will increase to shield low-income households from the impact of higher global wheat prices, while a cash transfer programme for the country’s most economically vulnerable citizens will be expanded.
If a lasting ceasefire in the Gulf is achieved, it will not be long before Moody’s upgrades Egypt
Kouchouk’s room for manoeuvre arises from an improving monetary environment. Inflation has fallen to 15 percent, around half the level seen this time last year.
The Central Bank of Egypt reduced its overnight deposit rate by 1 percentage point to 19 percent in February. This is still high – and the monetary policy committee has made no further reductions since then – but this time last year the rate was 25 percent, and before that it had been even higher.
Crucially, the central bank has stuck to its policy of allowing the Egyptian pound to float, rather than deploying foreign-exchange reserves to defend values the market no longer accepts. When Egypt first abandoned its fixed exchange rate in March 2024, the pound fell to around 48 per dollar and stayed near that level until earlier this year.
The exchange rate has depreciated by about 10 percent since the start of the war. That has had an impact on the cost of imports, particularly food. But the central bank’s net international reserves have not only been preserved, they have increased. At the end of April they stood at $54 billion, nearly $5 million higher than a year before.
Egypt GDP growth
In April, Moody’s confirmed a positive outlook on Egypt’s long-term foreign-currency credit rating, citing the prospect of a sustained reduction in the government’s debt burden and improvements in monetary policy management.
That positive outlook has been in place since the flotation of the pound and the huge foreign-exchange injection from Abu Dhabi’s Ras El Hekma investment on Egypt’s north coast, which happened around the same time. If a lasting ceasefire in the Gulf is achieved, it will not be long before Moody’s upgrades Egypt from Caa1 to B-, in line with Fitch and S&P.
Let’s be in no doubt that a rating of B- is still deep in sub-investment-grade territory and indicates a significant possibility of default.
Nonetheless, over the past month, Egypt has raised $1.5 billion from an affiliate of the Islamic Development Bank to alleviate food insecurity arising from the war. It has issued a $1 billion sovereign bond. It has been reaching out to large private-sector banks in the region to secure additional financing for food imports.
Will this positive trend continue?
Much depends on the Iran conflict. Protracted uncertainty will further depress revenues from non-Gulf tourists and from Suez Canal fees. Higher commodity prices will put pressure on the government budget’s expenditure side, as the cost of food subsidies rises.
Plans to raise budgetary funds by selling government-owned industries are always overly optimistic. They may become even more so if GCC sovereign wealth funds shift their focus to domestic projects and to making their portfolios more liquid and ready to support budgetary strains at home.
Further reading:
An IMF mission was in Cairo in the second half of May to conduct the seventh review of the current Extended Fund Facility. Watch out for its report, which is expected in mid-June.
The fifth and sixth reviews successfully concluded in February, with the IMF issuing a broadly optimistic report and promptly disbursing $2 billion.
I will be looking for any shifts in tone or emphasis in the seventh review. I will also be watching Egypt’s ability to continue raising debt and assessing whether the central bank is sufficiently confident about the inflation outlook to cut its overnight deposit rate again.
Conditions can change quickly, in Egypt and in the wider region, but as I write, I’m cautiously optimistic on the Egyptian economy.
Andrew Cunningham writes and consults on risk and governance in Middle East and sharia-compliant banking systems