Heading towards a ‘war economy,’ Egypt prepares for the worst

The Israel-Iran war threatens the country’s energy security, foreign currency reserves, tourism, and investment. There are Plan Bs but none are attractive, and the situation could yet get worse.

Al_Majalla

Heading towards a ‘war economy,’ Egypt prepares for the worst

Marcelle Nasr

last update on 17 Jun 2025

The regional economic fallout from the Israel-Iran war has shaken trajectories, transformed expectations, and caused headaches in Arab capitals, not least Cairo, where policymakers were already struggling to maintain balance and growth.

Soaring energy and gas prices put pressure on the Egyptian pound and foreign currency reserves, as leaders consider shifting to a “war economy” amid fears of prolonged instability. Given Iran’s strategic geographic position and its ability to close the Strait of Hormuz (a vital shipping lane), Egypt is well within range of volatility.

Navigation through the Suez Canal could be halted if the Bab-el-Mandeb Strait is closed or if Iran follows through on threats to block the Strait of Hormuz, jeopardising gas supplies and trade routes. This could negatively affect economic cooperation agreements between Egypt, East Asia, and the Gulf.

Plethora of worries

Chief among the Egyptian concerns are rampant inflation, a rise in the dollar’s value against the pound, higher gold prices globally and locally, and disrupted trade flows. A crisis committee, headed by Prime Minister Mostafa Madbouly, has been established to monitor the impact of the war and enhance readiness across all sectors.

The government said this committee includes the Central Bank governor, the ministers of industry, planning and economic development, international cooperation, electricity and renewable energy, finance, supply and internal trade, and petroleum and mineral resources, alongside representatives from the ministries of defence and interior, the General Intelligence Service, and the Administrative Control Authority.

Aiming to reassure nervous Egyptians, Madbouly announced that the country had sufficient food supplies for six months and urged citizens to reduce electricity consumption, adding that the government may reinstate power load-shedding schedules.

JACK GUEZ / AFP — A view of the platform of the Leviathan natural gas field in the Mediterranean Sea on August 29, 2022.

As war broke out, Israel closed its giant Leviathan gas field in the Mediterranean (in which Egypt has a stake). This led Cairo to halt supplies of fuel to food and cement production facilities for 14 days, aiming to reallocate about 8,000 tonnes of diesel daily to power stations to meet electricity demands.

Bracing for impact

Many of these scenarios have been ‘war-gamed’ by the Egyptian government, with pre-emptive steps being taken to secure supply chains and cushion strategic industries (such as fertilisers and cement), but with markets bracing for further impact, the question now is whether this war will go on for days, weeks, months, or years.

Both air and maritime navigation in the region have also been disrupted, with airspace closures in Jordan, Lebanon, and Syria. The Egyptian stock exchange has also taken a hit, with shares down more than 2,000 points in the first trading session following the war's outbreak. Analysts say this represents a loss of $2.68bn in market capitalisation.

Additionally, the Egyptian pound has depreciated further (nearing 51 to the dollar, from 49.5), largely driven by foreign investors liquidating treasury bills and bonds, creating increased demand for dollars and pushing the pound lower.

Amid the tensions, the inauguration of the Grand Egyptian Museum has been postponed, as officials worry about the war's impact on investor confidence, the tourism sector, and remittances from Egyptians abroad—both vital sources of foreign currency.

Given Iran's strategic geographic position and its ability to close the Strait of Hormuz, Egypt is well within range of volatility

Since late 2023, attacks on Western shipping by the Yemeni Houthi militia have diverted commercial vessels away from the Red Sea and the Suez Canal, which is by far the quickest way from Asia to Europe. This has cost Egypt $7bn in lost foreign currency earnings and canal transit fee revenues.

Constellation of costs

Cairo is working on a plan to attract urgent new investment and raise interest rates to stem capital flight, reversing previous cuts meant to stimulate growth, but Egypt's exports are also likely to be hurt. The challenges are compounded by US President Donald Trump's imposition of protective tariffs on key commodities such as iron, steel, and aluminium, all of which hit Egyptian companies.

Egypt is among the countries most vulnerable to economic shocks, but its situation could worsen drastically if it fails to secure external funding via loans or investments and cannot optimise its use of internal resources.

Economist Dr Mohamed Fouad told Al Majalla that suspended Israeli gas supplies amount to a daily loss of 800 million cubic feet, but "pre-contracted liquified natural gas (LNG) shipments still delivered savings of about $640mn despite high spot prices". Oil prices could hit $100 per barrel, he said, pushing up the cost of imports without adequate hedging mechanisms.

Markets are keeping a keen eye on sovereign risk indicators, such as JPMorgan's Emerging Markets Bond Index (EMBI) for high-yield debt. Further lost pressure from the Suez Canal, tourism, and oil imports could weaken the Egyptian pound further to 52 to the dollar, said Fouad, who estimated Egypt's annual financing gap at $20-22bn, with overall financial needs of more than 40% of GDP—among the highest in the world.

Shutterstock

Few good numbers

Any widening of the EMBI (an increase in the spread of the index over US Treasuries) could raise Egypt's borrowing costs and delay the issuance of its planned sukuk and bonds worth up to $5bn. Fouad predicted a quarterly decline in foreign direct investment of up to 25% if the war does not end soon.

Summer tourism bookings from the likes of Germany, Poland, and the Gulf could be down by up to 15%, some analysts have suggested, while any blockade of the Strait of Hormuz could imperil some of Egypt's most vital imports, like wheat.

Wafaa Ali, a professor of economics and energy at Suez Canal University, told Al Majalla that the situation is having "both direct and indirect effects on the global economy and energy markets, particularly for oil- and gas-importing countries, as these aren't ordinary commodities but integral to all sectors".

Egypt had secured 50-60 gas shipments under long-term contracts until 2026 before the Israel-Iran conflict, Ali explained, "to avoid load-shedding during peak summer heat", but policymakers in Cairo are bracing for the ripple effects of higher energy prices.

The government had "activated its emergency plan," he said, "increasing the use of fuel oil at power stations and cutting gas supplies to certain industrial activities". Egypt has three floating storage regasification units (FSRUs) with a combined capacity of 2,250 million cubic feet per day and is preparing to connect two more by the end of the month.

Cairo is working on a plan to attract urgent new investment and raise interest rates to stem capital flight, reversing cuts meant to stimulate growth

An eye on oil

On oil, Egypt's hedging policy remains in place, and the national budget may be spared any additional burdens if oil prices stay below $82 per barrel (the rate used in budget calculations). Every dollar above that threshold will cost the government $80mn. Medhat Youssef, former vice chairman of the Egyptian General Petroleum Corporation, said the current Israel-Iran conflict "affected Egypt significantly and swiftly".

Speaking to Al Majalla, he said: "Egypt relies on long-term oil supply contracts with Kuwait under favourable payment terms, as well as agreements with Iraq and Saudi Aramco. Most of this oil is sourced from the Gulf and transported through the Strait of Hormuz. Egypt also has LNG contracts with Trafigura, Aramco, Shell, and Total, many likely routed via the Gulf."

The immediate impact is in the increased cost of contractual oil and gas, and of maritime transport due to higher risks, he said. If Hormuz were closed, Egypt would need alternative energy sources urgently, "a task with serious economic implications".

Israel's closure of the Leviathan gas field "cannot be compensated for through other sources due to the limited number of available regasification vessels, even those contracted until July 2025," said Youssef. "If current conditions persist, Egypt will have no choice but to rely on fuel oil for electricity, despite it being half as efficient and priced similarly to LNG. This would require additional funding due to its higher cost compared to cheaper Israeli gas."

+ / -