The ongoing Iran war has led to significant economic challenges for Egypt, including a sharp depreciation of the Egyptian pound, massive foreign capital outflows, and soaring oil prices. The government is expected to implement painful economic measures such as fuel price hikes and possible electricity tariff increases. The closure of the Strait of Hormuz and disruptions in gas supplies exacerbate the crisis, forcing Egypt to seek costly alternatives in the global market.
The recent war involving Iran has triggered a series of severe economic repercussions for Egypt. This article explores the economic impact observed in the first weeks of the conflict, the expected government measures, and the challenges posed by disruptions in oil and gas supplies.
The Egyptian pound experienced a difficult week, with the secondary market witnessing an outflow of approximately 2.2 billion US dollars. The exchange rate moved from around 46.80 EGP to nearly 50 EGP against the dollar within two weeks, marking an increase of about 7 to 10 percent.
Foreign investors withdrew around 2.057 billion dollars, while Arab investors contributed a smaller positive inflow of 13 million dollars, which was insufficient to offset the outflows.
The Egyptian stock market also saw outflows, with about 50 million dollars leaving during the week.
The dollar is expected to continue its upward trend but at a slower pace, likely stabilizing around 50.50 to 50.75 EGP in the coming week, assuming no extraordinary developments in the war.
The Prime Minister has announced that exceptional economic measures are forthcoming. However, the specifics remain unclear. Potential measures may include:
The government is advised to proceed cautiously to avoid irreversible decisions that could have long-term negative effects.
The government's recent auction for treasury bills and bonds saw lower-than-expected sales, with only 72.5 billion EGP sold against a target of 95 billion EGP. Despite this, interest rates rose significantly:
This indicates a demand for higher yields, which could further increase inflation and pressure on government finances.
Gold prices initially rose by about 100 dollars but then corrected downward. This fluctuation is attributed to geopolitical tensions and shifts in US-China relations, with both countries temporarily reducing their confrontations.
Investors are currently prioritizing purchasing oil over gold due to the energy crisis.
Iran has closed the Strait of Hormuz, a critical passage for approximately 20-25% of global oil shipments. This unprecedented move has disrupted global oil supply chains.
Large oil tankers face difficulties passing through the Suez Canal, even after expansions. Solutions include offloading cargo at the SUMED pipeline and reloading at the Mediterranean port of Alexandria.
Brent crude prices have surged from an average of 65-70 dollars per barrel to around 94 dollars, representing a 45-50% increase.
Egypt's budget was planned based on an oil price of 75 dollars per barrel. The recent price fluctuations and currency depreciation have created a budget deficit.
The government had previously fixed fuel prices until October, but an increase of 2-3 EGP per liter is expected soon, which will be painful for consumers.
Egypt's natural gas production has been declining for the third or fourth consecutive year, reaching the lowest levels in a decade.
Egypt relied heavily on gas imports from Israel, approximately 1 to 1.2 billion cubic feet per day. However, Israel has cut off supplies, forcing Egypt to seek alternatives.
Egypt had four LNG regasification ships but reduced to three after returning one to Jordan. The global LNG market is tight, with prices soaring to 20-25 dollars per million British thermal units (MMBtu), compared to the previous 7-12 dollars.
The electricity sector, the largest consumer of gas in Egypt, currently receives gas at about 6 dollars per MMBtu, while Egypt must now pay much higher prices on the spot market.
This situation may force the government to increase electricity tariffs by 30-40%, adding to inflationary pressures.
Rising fuel and electricity prices will likely increase inflation, which the government is trying to control. Higher inflation could lead to increased interest rates, further straining the budget and economic stability.
Egypt is facing an unprecedented economic crisis triggered by the Iran war and its global repercussions. The depreciation of the Egyptian pound, capital flight, soaring oil and gas prices, and disruptions in energy supplies are forcing the government to consider painful economic measures. The situation remains fluid, and the government's response will be critical in mitigating the impact on the Egyptian economy and its citizens.
The situation is complex and evolving. The government has declared an economic emergency, and all measures depend on the war's duration and developments. Citizens and investors should stay informed and prepared for further changes.
Thank you for reading. Please feel free to leave questions or comments for further discussion in future updates.
