When the drums of war sound across a region, their echoes do not stop at the blasts of explosions; they reverberate through government budgets and the daily lives of citizens.
The outbreak of the Iranian-US-Israeli conflict imposes a heavy cost on the global economy. Its effects are already visible in surging energy prices and disruptions to supply chains. For developing economies, however, with Egypt among them, the impact extends far beyond higher prices to challenge the stability of national economies across multiple dimensions.
Discussing the potential risks and implications of the conflict is, at this stage, a form of anticipatory thinking. No one hopes the war will escalate or widen, yet once a conflict begins it becomes difficult to determine precisely when or how it will end. For this reason, it is necessary to identify the risks that may arise as markets reopen and to assess them transparently, enabling policymakers and stakeholders to mitigate potential shocks.
This approach draws on international experiences where countries have successfully absorbed crises through flexible hedging policies and pragmatic crisis management.
Against this backdrop of uncertainty ahead of the reopening of markets, the trajectory of Egypt’s risk-sensitive economic indicators is likely to fall between two broad scenarios: containment or escalation.
Foreign exchange market and exchange rate
Under a scenario of limited stability, the market may witness modest and temporary fluctuations within a narrow range. By contrast, a full escalation scenario could place direct pressure on the Egyptian pound as relatively rapid outflows of so-called “hot money” move towards safer global markets.
No numerical forecasts are presented here to avoid creating unrealistic expectations, particularly given the availability of strong foreign currency reserves and the flexibility of the exchange-rate mechanism, which adjusts transparently according to supply and demand conditions.
Monetary policy and interest rates
If the crisis remains contained, the Monetary Policy Committee of the Central Bank of Egypt may opt to keep interest rates unchanged at its upcoming meeting in order to absorb the shock and allow time for conditions to stabilise.
However, if the conflict intensifies, Egypt could face a wave of imported inflation driven by higher shipping and fuel costs. In such a case, the committee may decide to maintain interest rates at current levels for a longer period than previously anticipated.
The Suez Canal
While hopes remain that revenues from the Suez Canal will stabilise at current levels, a broader escalation could lead to a sharp and prolonged decline. Such a development would potentially delay the expected recovery in foreign-currency inflows from canal revenues.
Safe-haven assets: Gold, silver and the US dollar
The economic repercussions of war extend beyond government finances to the financial portfolios of individual citizens. Demand for gold and silver as stores of value is expected to increase amid concerns about the weakening of emerging-market currencies.
Globally, the United States dollar is also likely to strengthen as the primary safe-haven currency. This would raise the cost of imports and increase the burden of servicing external debt.
Shock absorbers: Egypt’s financial safeguards
Despite these challenges, Egypt enters this period with what may be described as one of the strongest financial buffers in its modern history, providing policymakers with room to manoeuvre and absorb geopolitical shocks.
Record foreign currency reserves: Foreign reserves have reached approximately $52.6bn, giving the state significant capacity to secure essential needs and maintain market stability over an extended period.
Strong dollar liquidity: Workers’ remittances have recovered to about $41.5bn, while the net foreign asset position records a surplus of roughly $25bn. This represents a genuine financial cushion that helps ease concerns about foreign-currency shortages and limits the scope for speculative pressures.
Proactive flexibility: The presence of these real inflows, rather than debt-driven financing, strengthens the resilience of the Egyptian economy, enabling it to offset temporary outflows of volatile investment. At the same time, the flexible exchange-rate framework helps preserve transparency and efficiency in the foreign-exchange market.
Mohamed Abdel Aal – Banking expert
