Every major economy is feeling the Iran war through rising energy costs. Most are feeling it through supply chain disruption. A handful of countries are feeling it through a specific combination of pressures that no policy response can easily address because each channel of exposure feeds the others. Egypt is in that handful. It is not merely an oil importer absorbing a price shock. It is simultaneously an oil importer, a transit corridor owner whose revenue depends on the same shipping routes the war is disrupting, and a sovereign borrower that finances its deficit through the most volatile form of international capital available. When all three of these channels are squeezed at the same time by the same event, the arithmetic compounds faster than any individual buffer can absorb. This is the three-channel squeeze that is pressing on the Arab world's largest economy in May 2026.

Egypt oil import price shock Iran war budget deficit energy 2026 Morgan Stanley

Egypt is a net oil importer. Its government budget for the 2025-2026 fiscal year set the assumed oil price at $75 per barrel, a figure that reflected the pre-war consensus forecasts of most international institutions for 2026 energy prices. Brent crude has been above $110 per barrel since the Hormuz closure in February 2026, with a war premium that shows no signs of abating while the conflict continues. The gap between $75 and $110 is not an abstraction. It is a direct addition to the government's energy import bill, which must be settled in US dollars that Egypt must earn from its exports, its Suez Canal revenues and its foreign borrowing.

According to government sources who spoke to Middle East Monitor, the government is expected to raise fuel prices if the war continues for an extended period and the Strait of Hormuz remains closed. Prime Minister Mostafa Madbouly has already warned that the continuation of the war could force his government to reconsider fuel prices. Estimates issued by Morgan Stanley suggest that Egypt's energy deficit in the state budget could increase by between $400 million and $600 million during the remainder of the 2025-2026 fiscal year if the war ends, rising to $2.4 billion if the escalation continues. That $2.4 billion figure is not the total energy cost of the war to Egypt. It is the incremental addition to the deficit above what was already budgeted — the war premium on top of an already stretched fiscal position.

Suez Canal revenue decline Iran war Hormuz 2024 2025 2026 Egypt foreign currency

The Suez Canal is one of Egypt's most important sources of foreign currency, generating revenues that at their peak in 2023 reached approximately $10.2 billion per year. Suez Canal revenues reached approximately $10.2 billion in 2023 before falling to around $4 billion in 2024, a decline of nearly 61 per cent due to regional tensions, according to Canal Authority Chairman Lt. Gen. Osama Rabie. In 2025, revenues rose slightly to about $4.1 billion but remained below pre-crisis levels. Following the Gaza ceasefire in January 2025, projections had pointed to revenues recovering to nearly $10 billion in 2026 — a recovery that the Iran war has placed at significant risk.

The war is pressuring Suez Canal revenues through two distinct mechanisms. The first is the Hormuz closure itself: oil tankers that would normally exit the Gulf through Hormuz and transit the Red Sea and Suez Canal to reach European markets are instead rerouting around Africa's Cape of Good Hope, removing a significant class of vessel from the Suez transit count entirely. The second is the ongoing security risk in the Red Sea from Houthi activity, which raises insurance premiums and deters smaller vessels from the route even when it is technically navigable. The Hormuz closure has diverted Gulf-to-Europe oil around Africa rather than through Suez, with Suez traffic down approximately 20 to 30 per cent in the first quarter of 2026 compared to the same period in 2025, though revenue per transit actually increased because larger vessels paying higher tolls continued using the canal while smaller ships rerouted. The Canal Authority raised transit fees in January 2026, partially offsetting volume declines. But partial offsets do not restore a revenue stream that Egypt's fiscal arithmetic depends upon at $10 billion per year.

Egypt hot money flight foreign investors treasury bills Egyptian pound depreciation dollar trap

The third and most structurally dangerous channel is the one that the Suez Canal Authority cannot manage and the Energy Ministry cannot budget around. Egypt finances a significant portion of its fiscal deficit through short-term purchases of Egyptian treasury bills by non-resident foreign investors — capital that moves rapidly into and out of markets in search of returns, and that exits as quickly as it enters when geopolitical risk rises or currency stability is questioned. Foreign portfolio investors, on whom Egypt relies heavily to finance its fiscal deficit, have pulled some $6 billion out of the Egyptian market because of concerns about the impact of higher import costs, the potential loss of revenue from tourism and the Suez Canal, and the risk of a fall in remittances from Egyptians working in the Gulf.

The self-reinforcing logic of the hot money loop is the most dangerous feature of Egypt's current exposure. When hot money exits, demand for Egyptian pounds falls and the pound depreciates. When the pound depreciates, every import costs more in pound terms — including the oil imports whose dollar cost is already elevated by the war premium. When import costs rise, domestic inflation accelerates. When inflation accelerates, the real return on Egyptian treasury bills is eroded, making them less attractive to the non-resident investors Egypt needs to attract. When those investors stay away or exit further, the pound faces more depreciation pressure. The central bank has allowed the Egyptian pound to depreciate in response to these pressures, rather than releasing reserves. This has provided some assurance to investors, and there have been recent reports of a modest recovery in foreign purchases of government securities. Allowing the pound to depreciate rather than burning reserves is the textbook response to this kind of pressure. It is also a decision that imposes real costs on Egyptian households whose purchasing power falls as the pound weakens.

Egypt IMF programme reserves remittances net foreign assets buffer 2026 resilience

The analytical picture would be incomplete without acknowledging what Egypt has built since its 2022 crisis that provides genuine resilience against the current squeeze. Approximately $10 billion has exited Egypt since the war started, and the shock is likely to be better absorbed this time. Banks have accumulated foreign currency liquidity tied to significant foreign inflows, which has led to the sector's record-high net foreign asset position of about $30 billion as of January 2026. This is in direct contrast to the crisis in 2022, when the banks had a net foreign liability due to portfolio outflows and hard currency shortfalls.

Egypt's $8 billion IMF Extended Fund Facility, negotiated in 2023 and expanded in 2024, provides both a financing backstop and a credibility signal to international investors that the government is committed to the structural reforms that reduce the chronic fiscal vulnerabilities the three-channel squeeze is now exploiting. Record remittance inflows exceeding $33 billion annually from Egyptians working abroad provide a structural dollar inflow that partially offsets the hot money outflow. And the decision to allow the pound to depreciate rather than defend an unsustainable rate preserves reserves for genuine emergencies rather than consuming them to maintain an artificial peg that markets will eventually break regardless.

These buffers are real and they matter. Egypt is not on the edge of a balance of payments crisis. Among regional oil importers, the IMF had projected that inflation would remain low in Jordan and fall from elevated levels in Egypt, supported by the waning effects of past currency depreciation and energy price hikes. Those projections were made before the Iran war. They are now operating against a significantly more adverse external environment. The buffers provide time. They do not eliminate the structural exposure that the three-channel squeeze has made visible. The oil bill will keep rising as long as the war continues. The Suez Canal will keep underperforming as long as the Red Sea security situation remains unresolved. And the hot money will keep watching the pound for signs of further weakness, ready to exit again at the first signal that the adjustment is not yet complete. Egypt has stronger defences than in 2022. The war has found them anyway.