+965 2224 8361
Egypt Economic Brief
24.09.2025Overview
Egypt’s economy is showing further concrete signs of improvement. GDP growth hit a more than 3-year high of 5% y/y in Q2 2025 despite still-high (if easing) inflation, tight financing conditions and regional geopolitical tensions. Moderating inflation has provided space for 525bps of interest rate cuts by the central bank YTD, with another 300bps in play by year-end in our view. An IMF mission is due in Cairo in October to conduct the combined fifth and sixth reviews of Egypt’s $8bn Extended Fund Facility, which runs until late 2026. The program remains focused on maintaining exchange rate flexibility, reducing inflation to single digits, narrowing the fiscal deficit, lowering debt service, and creating space for private-sector growth. So far, Egypt has received $3.2bn under the program, with another $2.5bn likely following the reviews. These flows, with the Fund’s endorsement, should help reinforce confidence in the external financing position against a backdrop of continued current account deficits and debt repayments. The Egyptian pound has already strengthened by 5% this year against a generally weaker US dollar.
Latest developments
• GDP grew by 4.4% in FY24/25, exceeding the government’s target of 4.2% and a substantial improvement on the 2.4% recorded in FY23/24, as announced by the minister of finance. The preliminary estimates for Q2 2025 show further acceleration to 5% y/y – the fastest rate since Q1 2022. While growth remains largely consumption-driven, private investment has returned to positive territory after two years of contraction. (Chart 6.) At the industry level, growth was driven by the manufacturing sector, followed by financial intermediaries, tourism, agriculture, and the wholesale & retail sectors.
• Inflation slowed for the third consecutive month in August, though the core rate remains sticky. Headline inflation eased to 12% y/y (0.4% m/m), down from 13.9% in July. This is the lowest reading in nearly three years, with the decline driven by disinflation in the food, transport and recreation categories – the latter two also recorded their first monthly deflation in years. Consequently, the core inflation rate, which excludes the volatile and regulated items, eased to 10.7% y/y from 11.6% in July. (Chart 1.) However, the ‘supercore’ inflation rate, which excludes food, energy and housing items, remains above 20% y/y, underscoring the persistence of services-related price pressures and raising concerns ahead of the planned fuel subsidy cut. The deceleration in inflation exactly matched the size of the interest rate cut made in the same month by 200 basis points (bp). Therefore, the real interest rate remains stable at 11% – one of the highest in the world.
• The Egyptian pound has appreciated on strong portfolio inflows, especially to short tenor treasuries, which reached $6.6 billion in (May-August). August saw a fourth consecutive month of net inflows, pushing the pound to EGP48/$1. (Chart 2.) The appreciation has been underpinned by US dollar weakening, albeit not matching the magnitude of the dollar’s decline. The USD has depreciated by 10.5% YTD against the major currencies in the world and by 7.2% YTD against EM currencies; however, the EGP only appreciated by 5.6% YTD against it. The banking sector has consequently become flush with foreign currency liquidity.
• Workers’ remittances and tourism revenues hit record highs in FY2024/25. Remittances from Egyptians working abroad increased significantly in FY2024/25, rising by 66% y/y to an all-time high of $36.5 billion where the month of June alone recorded $3.6 billion (41% y/y) – a monthly record. A base year effect was one of the reasons behind this annual surge that brought remittances back to their old levels north of the $30 billion threshold. Egypt also witnessed a 23% y/y increase in tourist arrivals over the first 8 months of 2025, and potentially up to 20% for the year as a whole. Hotel occupancy rates exceeded 80% on average in tourist areas across the country, as per the latest announcements from the minister of tourism. Both remittances and tourism revenues represent two of the main sources of foreign currency inflows for Egypt and play an important role in closing the trade deficit while supporting the foreign currency position in the financial sector. (Chart 3.)
• Commercial banks’ net foreign assets (NFAs) reached $8 billion in July (64% m/m), their highest level since November 2014. Total banking system NFAs, which include the central bank, rose by 24% m/m to $18.5 billion by the end of July, the best reading since February 2021. While largely driven by carry trade inflows, other FX sources such as remittances and tourism revenues are also expected to provide support going forward, partly offsetting risks from future outflows. NFAs in the banking system work as a first line of defense in times of turbulence and provide a buffer for the CBE to maintain a stable level of official foreign currency reserves. (Chart 4.)
• There has been a significant drop in the volume of deposits by banks at the central bank via Open Market Operations (OMOs). The weekly amounts submitted by banks in fixed rate deposits represent the excess liquidity they have after tapping the interbank market. The CBE typically absorbs this excess liquidity to maintain the stability of the banking system. Submissions in the CBE’s weekly fixed-rate deposit auction in mid-September dropped 75% w/w to EGP87 billion, from EGP344 billion the week before. (Chart 5.) Earlier in 2025, high interest rates had driven OMO balances above EGP1 trillion. With policy easing underway since April, liquidity is shifting toward the treasury bill market, where yields have decoupled from OMO rates that are directly affected by the policy rate. This trend could persist in 2026, with banks increasingly incentivized to start using repos to capture higher treasury returns as OMO fixed rates decline.
This direction towards the treasury market can be seen also in the sluggish real growth in domestic credit, which reached only 7% y/y in July compared to 6% y/y in June, despite significant real growth in domestic demand deposits of 37% y/y during the same month. This growing short-term liquidity inside the banking sector has not been directed at the domestic business community but rather at investments in the treasury primary market, tightening domestic liquidity for many firms.
• The government has taken notable steps toward fulfilling its commitments under the IMF program, yet progress has been uneven. One of the main sticking points has been delays in structural reforms, particularly the privatization of state-owned (SOEs) and military-owned enterprises (MOEs). The privatization program, which was first launched in March 2023 with the aim of selling stakes in 40 entities across 18 sectors, was originally scheduled to wrap up by March 2024. However, the timeline has been repeatedly pushed back, with explanations ranging from undervaluation concerns to hurdles in due diligence. In addition, the authorities requested to postpone certain fiscal consolidation measures to help ease social pressures. These delays prompted the IMF to merge its fifth and sixth program reviews – initially planned separately – into a single review now scheduled for October 2025.
Forecast
Stronger growth ahead, driven by consumption
After GDP growth exceeded our expectations in FY24/25, our forecast for FY25/26 has been revised upward to 4.7% from 4.2%. (Chart 6.) Growth is expected to be driven primarily by consumption, supported by improving purchasing power, but also by private investment, which is forecast to rise for a second consecutive year, encouraged by lower borrowing costs amid ongoing monetary easing. The expected reduction in borrowing costs, allied to lower-trending inflation, higher social spending as well as accelerating public and private sector wage growth will underpin economic growth in the medium term. Remittance inflows, also, are projected to remain strong and support household demand, while foreign direct investment inflows are expected to continue their recovery, especially following recent steps to address distortions in the foreign exchange market.
Privatization approach shifts to minority stakes
According to media reports, a planned government privatization drive will include the sale of 30–35% of Banque du Caire, alongside partial listings of several SOEs and MOEs such as Safi (bottled water), Wataniya (petroleum), Silo Foods (food manufacturer), Chill Out (fuel retail), Midor (refining), Gabal El Zeit (wind energy), Al-Amal Al-Sharif (plastics), as well as CID Pharma and Misr Pharma (pharmaceuticals). The revised program shifts the emphasis toward minority stake offerings on the Egyptian Exchange generally between 10–40% with only a handful of strategic sales expected. The authorities now aim to raise about $3 billion from privatization proceeds in FY25/26, lower than the earlier $5–6 billion target, reflecting a more measured pace. Beyond revenue generation, the program seeks to deepen Egypt’s capital market, attract new equity inflows, and reaffirm commitment to structural reform in the eyes of international partners.
Inflation to accelerate before declining in 2026
Inflation will likely rise to 13–15% by end-2025, reflecting subsidy removals, before easing to 9.5% by Q4 2026. The CBE is expected to continue its easing cycle, with 300bps of cuts in 2025 and 600bps more in 2026, fully reversing the steep hikes in 2024. Real interest rates are projected to fall to 4–5% by 2026 but remain among the world’s highest, keeping Egypt attractive for carry trade investors despite global risks.
External balance improves, reserves on the rise
Exports are recovering, aided by competitiveness gains from last year’s EGP devaluation and resilient US demand for apparel and food despite tariffs. The current account deficit narrowed to $2.3bn in Q1 2025. For the full FY24/25, the deficit is estimated at $15.7 billion (4.3% of GDP), with a further narrowing to $14 billion (3.3% of GDP) anticipated in FY25/26. Stronger exports, Suez Canal receipts, remittances, and tourism revenues (likely above $16bn) will drive this improvement. The $20bn financing gap will be covered by FDI, debt issuance, and IMF disbursements. Reserves are expected to surpass $50bn in 2026, well above the IMF adequacy threshold, currently estimated at $44 billion as of Q3 2025.
Egyptian pound holds firm amid risks
The Egyptian pound is benefitting from strong portfolio inflows, a narrower current account deficit and a generally weaker US dollar, which should help it preserve recent gains and trade within the range of EGP47-50/$1 through the end of 2025. Still, several headwinds could weigh on the currency in the coming year. These include the persistence of the current account deficit, elevated inflation relative to main trading partners, and the potential for recent weakness in the US dollar to abate. In addition, an expected decline in local interest rates could lower appetite for portfolio inflows, reducing an important source of FX liquidity.
Fiscal deficit narrows, debt pressures ease
The government’s overall fiscal deficit is projected to narrow to 6.6% of GDP in FY25/26, compared with an estimated 7.1% in FY24/25. (Chart 7.) The expected improvement will be driven mainly by three factors. First, revenues are anticipated to rise by 23%, supported by ongoing tax reforms. The authorities have already introduced adjustments to the VAT system and are finalizing a broader plan to overhaul the tax framework. While no new taxes are being introduced, the reforms focus on simplifying tax payments, reducing exemptions, and curbing evasion, all of which are expected to widen the tax base and strengthen collections.
Second, the ongoing monetary easing cycle is expected to push yields lower, helping to reduce the government’s debt service burden. Average yields in FY25/26 are projected at around 20%, down from an average level of 27% in FY24/25. This shift in the yield curve will have a positive impact on the budget given that interest payments remain the single largest expenditure item, accounting for roughly half of total spending and absorbing about 73% of total revenues. Third, lower global oil prices are expected to persist through the fiscal year, lowering subsidy costs and allowing the government to avoid cuts in capital spending. Looking ahead, strong nominal GDP growth and a sustained primary surplus are expected to bring down the public debt ratio from 85.6% of GDP at end-June 2025 to around 82% by end-June 2026.
Risks to the outlook
Upside risks to the fiscal outlook include the conclusion of any new investment deals like Ras El-Hekma or a sharper-than-expected drop in debt servicing costs. Also, portfolio inflows have been strong across EMs including Egypt in 2025 amid improving risk appetite. If this appetite continues in 2026, it might underpin the recent strengthening in the pound.
Downside risks include treasury yields staying higher for longer or fiscal revenues underperforming, which could widen the deficit and put upward pressure on debt levels. Moreover, ongoing delays in the privatization process run the risk of not meeting the IMF’s performance criteria, which may affect reform credibility in the eyes of the global financial community. Meanwhile, foreign holdings of short-term Egyptian government debt have risen to an estimated $42 billion, leaving the currency more exposed to potential outflows. Reliance on these flows underscores sensitivity to shifts in investor sentiment.
Finally, a slowdown in global demand could weigh on exports, while renewed risk-off sentiment towards EMs or an escalation in geopolitical tensions could reduce Suez Canal receipts, tourism revenues and remittances. Such pressures could weaken the pound, reversing the recent decline in inflation and interest rates, and potentially push the economy into a period of greater stress.