The Egyptian economy has succeeded in absorbing the repercussions of the recent regional shock better than expected, benefiting from the improvement in international reserves, the flexibility of the exchange rate, and the speed of policy response. However, the economy’s ability to continue its resilience will remain linked to addressing chronic weaknesses, most notably the high public debt and financing needs, the continued exposure of the banking sector to the government, and the expanding role of the state in economic activity.
In an article published by the International Monetary Fund under the title “Resisting Under Pressure: The Egyptian Economy Defies Expectations,” Amin Mati, head of the Fund’s mission to Egypt and Assistant Director of the Middle East and Central Asia Department, and Yevgenia Kornienko, the senior economist in the same department, said that the reforms implemented within the framework of the Fund-supported program helped boost growth, put inflation on a downward path, rebuild reserves and improve banks’ foreign asset positions.
The Fund's latest assessment indicates that Egypt's total financing needs will remain around 40 percent of GDP in the near term, before gradually declining to less than 30 percent by 2030. This comes at a time when financing is largely dependent on short maturities, while banks remain highly exposed to government debt.
The markets received the shock... and the economy absorbed it
Egypt entered the recent regional conflict from a stronger macroeconomic position than during previous external crises, after an IMF-backed reform program helped boost growth, put inflation on a downward path, rebuild international reserves and improve banks' foreign asset positions.
When pressures intensified, markets reacted quickly and sharply. Non-resident investors' holdings of government debt denominated in the pound decreased from $39.1 billion in February to $22.2 billion in early April, while the Egyptian pound declined by about 14 to 17 percent.
However, the exit of funds did not turn into a broader economic crisis. As the pressures subsided, investment portfolio flows returned, non-resident holdings approached pre-conflict levels, and the pound recovered a large portion of its initial losses.
The IMF links an important aspect of this performance to the flexibility of the exchange rate, which allowed it to absorb part of external pressures, in addition to adjustments in energy prices after the rise in global oil prices, controlling spending, and expanding the scope of support directed to those who deserve it.
Growth hasn't stopped
What is noteworthy is that the financial turmoil did not spread to economic activity with the same severity. The growth of the Egyptian economy reached 5 percent in the third quarter of the fiscal year 2025-2026, while the tourism sector maintained its ability to withstand, and remittances from Egyptians working abroad rose to record levels, while Suez Canal activity continued its gradual recovery after temporary disturbances related to regional tensions.
The government was also able to contain fiscal pressures by increasing domestic revenues and reducing spending.
As for inflation, it rose due to the depreciation of the currency and energy price adjustments, but the increase was less severe than expected. On the other hand, the impact of the shock delayed the path of inflation returning to its target by about a year.
The maintenance of international reserves at comfortable levels, despite capital outflows at the beginning of the crisis, was one of the most prominent indicators of improvement compared to previous crises.
Investors return to Egypt
As tension in the markets subsided, investor confidence gradually improved.
The risk premium on Egyptian sovereign bonds fell below pre-war levels, while Cairo returned to international capital markets with issuances that met with strong demand. In May, Egypt issued “Eurobond” social bonds worth $1 billion, which were oversubscribed 5 times the amount offered, before issuing in June a “Samurai” bond worth $500 million.
By August, Egypt's sovereign risk premium had fallen to its lowest level since 2014, according to the IMF.
But improving market indicators does not mean that fundamental vulnerabilities have disappeared.
Financing needs remain a pressure point
But public debt remains high, overall financing needs are large, while a significant portion of borrowing depends on short terms, which increases refinancing risks if global market conditions change.
The IMF warns that these factors, along with banks’ increased exposure to the government, make Egypt more sensitive to shifts in global financing conditions and to any new external shocks.
The close relationship between the government and the banking sector may increase the risks of what is known as “public finance dominance” over economic policies, while the government’s large financing needs may crowd out credit and investment in the private sector.
Here the issue emerges that the Fund believes is most important for long-term growth: the size of the state in the economy, as it said: “The state’s presence in the economy is still excessively high.”
From shock management to reducing the role of the state
The Fund believes that maintaining the gains achieved requires continued exchange rate flexibility, an appropriately tight monetary policy, and financial discipline, in parallel with accelerating structural reforms.
In the debt file, this means improving debt management and gradually moving to longer-term, more market-based financing, expanding the investor base and deepening the local debt market, thus reducing refinancing risks and supporting debt sustainability.
But the Fund places state ownership reforms and asset divestment at the forefront of the reforms required to create more space for the private sector.
Matei and Kornienko say that “more decisively implementing the state ownership policy and divestment programme,” along with improving the governance of state-owned enterprises and enhancing competition, will be crucial to reducing state presence and creating conditions for stronger private sector-led growth.
Stronger steadfastness...but the mission is not finished
The recent experience reveals an important change in the Egyptian economy’s ability to deal with shocks. The markets faced a large capital outflow and a sharp decline in the currency, but reserves, exchange rate flexibility, and the speed of the government response prevented the financial turmoil from turning into a broader economic crisis.
However, this improvement does not eliminate structural challenges; High debt and financing needs, short maturities, the banking sector’s connection to public finance, and the expansion of the state’s presence are all factors that make continued resilience linked to the speed of implementing reforms.
Thus, the next challenge for Egypt is not only to absorb the next shock, but also to reduce the need to manage shocks by addressing the vulnerabilities that make the economy more vulnerable to them.
IMF estimates say that building on the gains achieved requires maintaining macroeconomic stability, in parallel with more decisive reforms that open the way for private sector investment and support more sustainable growth.
