When the Egyptian pound rebounded last week to trade above 50 per US dollar for the first time since March, market officials and analysts celebrated it as a sign the country’s prolonged economic stabilisation efforts were gaining traction.
The numbers seemed to support the optimism. By the end of the week, the currency had surged more than 7 per cent against the dollar since early May, making it the world’s best-performing currency over that period, Bloomberg data showed.
The pound lost about 10 per cent of its value in the first month of the US-Israeli war on Iran, hitting a low of about 55 pounds per dollar, as oil prices surged, hot money fled local debt markets and Suez Canal revenue sank. A US-Iran agreement to reopen the Strait of Hormuz has led oil prices to drop sharply, with portfolio investors returning to Egyptian treasury bills and the pound snapping back.
Egypt’s macroeconomic picture rests on tangible gains. Foreign reserves climbed to a record $52.8 billion during the Eid holiday, while remittances from Egyptians surged 33.2 per cent year-on-year to $39.2 billion in the first 10 months of the current fiscal year.
The International Monetary Fund, which is expected to approve its seventh review and release a about $1.3 billion tranche as early as next week, has said Egypt’s stabilisation measures are beginning to deliver results. Standard Chartered, meanwhile, forecasts the pound will end the year at 49 pounds to the dollar.
Overstated optimism
But some economists and bankers suggest the optimism may be overstated. Economist Moustafa Badra points to one clear positive – the government’s commitment to maintaining a flexible exchange rate.
Until 2024, Egypt routinely upheld the value of the pound, a strategy long considered by the country as a way to attract investment by projecting currency stability to investors, even though that was not the case. “But investors saw through the artifice, they didn’t fully trust to invest any money into the country,” Mr Badra said.
The shift to a flexible exchange rate, allowing the pound to adjust in line with geopolitical conditions rather than resist them, sends a clear signal to foreign investors that the currency is behaving naturally and can be trusted.
“The old system made investors leave and forced the state to borrow from its own people at high interest rates. A flexible rate works for both sides,” Mr Badra said. He would take greater comfort if the dollar were trading closer to 47 or 48 pounds – somewhat stronger than current levels, he added, arguing that the structural picture behind the exchange rate remains largely unchanged.
The suggestion is one that has been heard time and time again over the past few months and one that he could not stress enough – geopolitics will determine all.
Falling Suez Canal revenue
The Suez Canal remains the clearest illustration of Egypt’s vulnerability. Annual canal revenue has fallen from a record $10.25 billion in 2023 to between $3 billion and $4 billion this year, marking a decline of about 70 per cent, Egypt’s ambassador to the UN said.
April brought a partial rebound, with revenue rising to $419 million, the strongest monthly figure since early 2024, driven primarily by oil tankers rerouted from the Strait of Hormuz. But that recovery is energy-led and fragile. Container traffic has not yet recovered, with net tonnage still about 89 per cent below pre-crisis levels, according to LSEG data, while major shipping lines have not returned to the route.
In other words, the canal that once generated more than $10 billion a year has yet to recover anywhere that near that level.
The canal’s struggles illustrate Egypt’s broader vulnerability. Egypt’s hard currency model still rests on a cluster of external, largely uncontrollable income streams, such as the canal itself, remittances, tourism, and portfolio flows, rather than productive exports or domestic industry.
When one of those pillars is disrupted, the country’s external position quickly comes under pressure. And a ceasefire deal does not change that architecture, Mr Badra said.
He estimates that the aftershocks of the war, on shipping confidence, oil prices, regional economic activity and investor sentiment, will take between six months and a year to fully work through.
The oil price question compounds this. Crude has not returned to pre-war levels. Mr Badra warns the situation could reverse overnight.
“Oil prices can rise again overnight. The optimism is kind of irritating,” he said. “Until a more concrete deal comes along, we must note, this is a 60-day agreement. The Houthis have not formally stood down, and have explicitly threatened further disruptions to both the Suez Canal and the Bab Al Mandeb strait. The situation remains highly unstable.”
The view is also shared across the country’s banking sector also.
A senior banking official told The National that while Cairo is “certainly breathing a little easier”, with more room to manoeuvre with the currency rebounding and foreign capital trickling back, there is “little confidence” in the durability of the US-Iran deal.
“If Israel continues to strike Lebanon and Hezbollah continues to strike back, markets will not be reassured. So until that is remedied in a more permanent way, we will only attract the foreign investors who are already comfortable with high risk,” said the official.
No need for more IMF funding
Meanwhile, there is optimism about the IMF programme. The fund’s approval next week would leave one remaining disbursement under the programme, which ends in December 2026.
“In my opinion, we won’t be going back for more money to the IMF … until this moment,” Mr Badra said, adding that if the war expands, Egypt will need to go back to the fund for more money.
The IMF stamp of approval matters for what it signals to creditors and investors, he said.
For now, Cairo is in a better position than it was two months ago. The pound has recovered, reserves are at a record, remittances are strong and the carry trade is working.
But the structural question remains answered about whether the Suez Canal revenue that once underpinned Egypt’s external accounts can be rebuilt before the current IMF programme expires and the next cycle of external financing pressure begins.
