Egypt has faced a recurring series of economic crises, exacerbated by structural budget deficits, balance of payments (BOP) issues and a reliance on fixed exchange rates. The most recent crisis, spanning 2023–2024, has been driven by high inflation, declining foreign reserves and disruptions in key sources of foreign exchange earnings. The Covid-19 pandemic, war in Ukraine and recent regional conflict in Gaza have further destabilized Egypt’s economy by impacting tourism, remittances and Suez Canal revenues. These issues highlight the vulnerabilities of Egypt’s economic model.

To address this crisis, Egypt has turned to international lenders and allies, including the International Monetary Fund (IMF), European Union (EU) and Gulf Cooperation Council (GCC) countries. They have secured over $50 billion in financial commitments in 2023 alone.

These interventions have allowed Egypt to implement critical short-term measures, such as devaluing its currency, reducing subsidies and increasing interest rates. Meanwhile, the IMF has offered an $8 billion loan package as part of its 2022 program for Egypt, aiming to mitigate currency overvaluation and fiscal imbalances. Yet analysts like Steven Cook, a Senior Fellow at the Council on Foreign Relations, note that Egypt’s economic resilience remains uncertain without deeper structural reforms. This is particularly true given the limited progress on divesting military-controlled businesses and liberalizing the private sector.

Egypt’s exchange rate has shown significant volatility over the past two decades, with the Egyptian pound (EGP) experiencing sharp depreciations against the United States dollar (USD). In 2024, the EGP/USD rate dropped by 37.03%, driven by shrinking foreign currency reserves, a widening trade deficit and rising demand for USD amidst persistent economic uncertainties. The Central Bank of Egypt (CBE) has responded with various stabilization measures, including devaluations, interest rate hikes and capital controls. However, structural economic challenges and market pressures continue to weigh on the EGP, signaling ongoing currency instability for the near term.

Historically, Egypt’s crisis reflects a dependence on international financial aid to address chronic fiscal issues. The country has experienced at least eight significant BOP crises since 1952, each leading to IMF programs or financial interventions from international partners to stabilize the economy temporarily. However, these interventions have rarely resulted in lasting reforms, as Egypt often returns to fixed or highly stabilized exchange rates following periods of financial distress. This recurring cycle is largely driven by Egypt’s state-centric governance model and persistent cronyism, which have deterred sustainable growth and prevented the formation of a resilient market economy.

While Egypt’s strategic importance makes it “too big to fail” for many international partners, questions remain about whether the current assistance will drive meaningful change or merely delay another crisis. According to a report by the United Nations Development Program (UNDP) and research from the IMF, without comprehensive reform, Egypt risks continued fiscal and economic instability. Experts argue that structural adjustments — including reducing military control of the economy and allowing a fully flexible exchange rate — are essential for breaking the cycle of economic instability and achieving sustainable growth.

Case comparisons: Argentina and Turkey’s currency crises

The economic trajectories of Argentina and Turkey offer insights into the cyclical nature of currency crises in emerging markets, particularly those burdened with high levels of external debt and recurrent currency depreciation. These cases demonstrate the limitations of short-term financial fixes in the absence of comprehensive structural reforms and robust fiscal management, with implications relevant to Egypt’s current economic challenges.

Argentina’s financial history is marked by chronic fiscal mismanagement, high external debt and recurrent reliance on IMF bailouts. Since the early 2000s, Argentina has defaulted on its debt multiple times, eroding investor confidence and creating a volatile investment environment. The country’s approach has typically focused on immediate crisis resolution through IMF assistance, currency devaluation and austerity measures, rather than on deep structural reforms. For instance, Argentina’s 2000–2002 crisis, during which it defaulted on $95 billion in debt, led to a sharp devaluation of the peso and significant social hardship. Despite an IMF bailout and subsequent restructuring, Argentina’s pattern of accumulating debt and renegotiating it without establishing a sustainable fiscal framework has continued. This culminated in additional defaults in 2014 and 2020.

The core of Argentina’s instability lies in its weak fiscal discipline, characterized by chronic budget deficits and a lack of political consensus on sustainable economic policies. This instability has created a self-perpetuating cycle: High debt burdens lead to recurring defaults, eroding trust among foreign investors, which then necessitates further reliance on external support and austerity measures, perpetuating economic fragility. Argentina’s experiences underscore the limitations of debt-driven growth and the dangers of relying on short-term financial infusions without addressing underlying structural issues, such as public spending control and inflation stabilization.

Turkey’s recent economic difficulties stem from a combination of high inflation, excessive reliance on foreign-denominated debt and an unorthodox approach to monetary policy under President Recep Tayyip Erdoğan. Unlike Argentina, Turkey’s crisis has been driven by its refusal to adhere to conventional monetary strategies, particularly concerning interest rate management. Erdoğan’s insistence on maintaining low interest rates, despite high inflation, has led to significant currency depreciation; the Turkish lira has lost over 80% of its value against the dollar from 2018 to 2023.

Turkey’s debt dynamics, particularly its dependence on short-term foreign debt, have exacerbated this volatility. Turkish corporations and financial institutions, heavily indebted in foreign currency, face severe financial strain as the lira depreciates, making dollar-denominated debt more expensive to service. This high level of exposure to external financing has heightened Turkey’s vulnerability to global economic conditions, such as interest rate hikes by the US Federal Reserve. It has increased the cost of borrowing for emerging markets.

Jeffrey Frankel, a research associate at the National Bureau of Economic Research, notes that Turkey’s reliance on foreign capital, paired with its unorthodox policy stance, has deterred investors. It has further devalued the currency and intensified inflation.

Policy shifts and economic reforms

Egypt’s rising external debt raises concerns about the government’s capacity to service it without continuous outside assistance. This debt burden puts downward pressure on the currency, as investors demand higher returns to offset the risks associated with holding Egyptian assets. Moreover, declining foreign exchange reserves have limited the Central Bank of Egypt’s (CBE) ability to stabilize the currency, contributing to further depreciation. Countries like Argentina have encountered similar difficulties, with diminishing reserves constraining options for currency defense and increasing reliance on the IMF.

The CBE’s recent shift to a more flexible exchange rate is intended to attract foreign investment and fulfill IMF requirements, allowing the EGP to fluctuate more freely. While a floating currency can provide stability over time, Egypt’s experience reflects the risks associated with rapid depreciation. This phenomenon is also evident in Turkey’s recent currency challenges.

To counteract inflation, the CBE has raised interest rates, hoping to draw in foreign investment; however, this has not been sufficient to prevent the EGP’s decline. This underscores the need for comprehensive economic reforms to secure long-term stability.

Strategic economic reforms for Egypt

Ruchir Agarwal, a Mossavar-Rahmani Center for Business & Government (M-RCBG) research fellow at Harvard Kennedy School, and Adnan Mazarei, a non-resident senior fellow at Peterson Institute for International Economics (PIIE), argue that Egypt’s recurring economic crises, exacerbated by governance and policy shortcomings, require a fundamental shift in approach. They emphasize that Egypt has to address governance and policy deficiencies, military dominance and cronyism to implement necessary economic reforms and break its cycle of recurring crises, rather than relying on international financial bailouts.

To stabilize and attract foreign investment, Egypt should prioritize macroeconomic stability and regulatory reform using four steps. First, maintaining a flexible exchange rate will help reduce speculative pressure on the EGP, creating a more predictable environment for investors. Second, focusing on inflation control through targeted subsidies and supply chain improvements would further support this stability. Third, by adopting global standards in transparency and corporate governance, Egypt can build investor confidence; streamlining regulatory processes would make foreign investment more accessible. Finally, reducing the military’s role in the economy, curbing cronyism and enforcing anti-corruption measures could help establish a more equitable environment for private businesses.

The Egyptian conundrum: elite capital flight and economic stability

Egypt’s economic journey has frequently involved partnerships with the IMF to address persistent fiscal challenges and stabilize the macroeconomic framework. However, one of the most significant yet underexplored dynamics undermining Egypt’s fiscal stability is elite capital flight — the large-scale transfer of domestic wealth by political and economic elites to offshore financial centers. This practice has far-reaching consequences for economic development, governance and societal equity.

Egypt’s case exemplifies the challenges of elite capital flight. Over decades, economic and political elites have transferred vast sums of wealth to offshore havens, facilitated by weak anti-money laundering (AML) frameworks and global financial opacity. While exact figures are difficult to ascertain, estimates of the financial assets held abroad by Egyptian elites highlight the magnitude of this issue.

These outflows coincide with structural economic inefficiencies and governance gaps, leaving the state financially constrained. In turn, the government is often forced to implement austerity measures or seek external funding, amplifying socio-economic pressures.

Elite capital flight undermines economic stability and development through several interrelated mechanisms. It exacerbates socio-economic disparities. While elites secure their wealth abroad, the general population faces the consequences of reduced public spending and austerity measures. This creates a dual economic reality where the wealthy remain insulated from domestic economic pressures, while lower-income groups bear the brunt of fiscal challenges.

Elite capital flight is a longstanding feature of Egypt’s economic landscape, deeply rooted in governance inefficiencies and weak regulatory frameworks. Economic and political elites often perceive domestic instability, potential expropriation or shifts in policy as triggers for safeguarding wealth abroad. These dynamics are facilitated by global financial systems that accommodate opaque wealth transfers and shield assets from domestic scrutiny.

Egypt’s economic elite have historically diversified their financial portfolios, funneling resources into offshore financial centers such as Switzerland, the United Kingdom and other jurisdictions with favorable conditions for wealth concealment. This “insurance” mechanism not only provides security against domestic uncertainties but deprives the nation of critical resources that could otherwise bolster infrastructure, public services and social programs. As Andreas Kern, a Teaching Professor at the McCourt School of Public Policy at Georgetown University, argues, “the ability to draw on the IMF creates perverse economic incentives so that a country’s elites can privatize economic gains by moving funds into offshore financial destinations before the arrival of the Fund.”

Egypt’s economic trajectory highlights the interplay between governance failures, elite capture and external financial interventions. Without addressing the systemic drivers of elite capital flight, external assistance risks perpetuating a cycle of dependency rather than fostering sustainable growth. As global scrutiny on financial transparency intensifies, Egypt’s experience offers valuable lessons for crafting more equitable and resilient economic policies.

Egypt’s next steps

To effectively implement and sustain the policy recommendations made in this piece, in addition to macroeconomics and government reform, Egypt must prioritize the development of expertise in AML and counter-financing of terrorism (CFT). This will require a skilled workforce across financial regulation, law enforcement and compliance to ensure that Egypt’s AML/CFT frameworks align with international standards while addressing the country’s unique economic challenges. Building this expertise will involve continuous training, technical assistance and collaboration with global organizations such as the Financial Action Task Force (FATF) and IMF.

Elite capital flight also represents a significant barrier to Egypt’s economic development and stability. By diverting critical resources from the domestic economy, it exacerbates fiscal deficits, perpetuates inequality and undermines trust in governance. Addressing this issue requires a comprehensive approach that combines domestic reforms with international cooperation to foster a more equitable and resilient economic framework. For Egypt, tackling elite capital flight is not only a question of fiscal prudence but also of social and economic justice.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.