The region witnessed a notable military escalation at the end of February 2026, after the Economy and Israel launched coordinated strikes on Iran on February 28, despite the ongoing nuclear negotiations between Washington and Tehran at the time. Iran responded with retaliatory attacks targeting Israel and U.S. bases in the Gulf Cooperation Council (GCC) countries, raising concerns over a broader regional spillover of the conflict. In this context, the League of Arab States held a meeting during which it affirmed its support for the GCC countries’ right to self-defense, while calling for a ceasefire and international intervention to contain the crisis.
In the following days, markets experienced sharp movements, as the temporary closure of the Strait of Hormuz and rising threats to target vessels in the Red Sea disrupted global trade flows. Israeli gas flows to Egypt also declined starting March 4. At the same time, the U.S. dollar exchange rate in Egypt rose to above EGP 50 on March 4, before reaching EGP 52.7 on March 26. Meanwhile, oil prices fluctuated between approximately $93 per barrel on March 6 and over $100 on March 9, eventually reaching $108 on March 26, 2026.
Global Market Reactions
These developments were quickly reflected in global markets, which repriced risks associated with energy and international trade. The closure of the Strait of Hormuz and the decline in oil and gas production from GCC countries pushed energy prices to a range of $90–$100 per barrel, impacting fuel costs, transportation, and production inputs. At the same time, investors shifted toward safe-haven assets, particularly the U.S. dollar, leading to the depreciation of emerging market currencies and increasing the cost of imports and external debt servicing.
Security threats in the Red Sea also raised shipping and insurance costs, resulting in higher supply chain expenses and delays in transportation. Amid heightened uncertainty, capital outflows from some emerging markets were observed, causing reduced liquidity and more limited access to external financing.
Impact of the Iran War on the Egyptian Economy
Egypt was quickly affected by these pressures, as the rise in the U.S. dollar exchange rate to above EGP 52 increased the cost of imports denominated in foreign currency, particularly food, fuel, and production inputs. This, in turn, drove up production costs and domestic prices, even in the absence of additional increases in global prices.
The annual inflation rate recorded 13.4% in February 2026, compared to 11.9% in January, with expectations of further increases driven by the combined effects of exchange rate movements and supply chain disruptions.
Balance of Payments Developments
The balance of payments was also impacted by these developments, as the rise in the exchange rate increased import costs, widening the trade deficit and raising demand for foreign currency. Although the depreciation of the Egyptian pound could theoretically enhance export competitiveness, higher production costs limit this effect.
Security tensions also affected Suez Canal revenues due to shipping rerouting, increasing the need for foreign currency. Meanwhile, declining foreign investment inflows and capital outflows heightened the economy’s sensitivity to financial volatility. Workers’ remittances may also be affected in the event of a slowdown in economic activity in GCC countries.
Energy Sector
The energy sector faced mounting pressures due to reduced gas supplies from Israel and lower oil and gas flows from GCC countries. This prompted the government, on March 10, 2026, to raise fuel prices by EGP 3 per liter, bringing gasoline 95 to EGP 24, gasoline 92 to EGP 22.25, and gasoline 80 to EGP 20.75, while diesel reached EGP 20.5 per liter. Natural gas for vehicles ranged between EGP 10 and EGP 13 per cubic meter.
These developments indicate potential pressures on the stability of electricity supply, with the possibility of implementing load management measures which could affect productive activities and increase operating costs.
Impact on Productive Sectors
Productive sectors are facing rising costs of imported production inputs, with the industrial sector exposed to the greatest risks. For instance, Egypt imported aluminum worth $454 million from GCC countries in 2024, reflecting the extent of external dependence.
The automotive sector is also experiencing declining demand due to rising prices, while tourism may be affected in the future if tensions persist, particularly from regional markets, which would impact foreign currency revenues.
Future Outlook
Future developments remain open to multiple scenarios, depending on the level of escalation and duration of the conflict. If tensions are contained, oil prices may range between $85 and $120 per barrel in the short term. However, if the conflict escalates further, prices could exceed $120, increasing the likelihood of a global economic slowdown. In the event of a ceasefire agreement and the reopening of the Strait of Hormuz, oil prices may gradually decline to around $65 per barrel in the medium term.
Government Response
The government has begun implementing measures to address the repercussions, including raising fuel prices as part of a subsidy reform plan and managing public expenditure, alongside studying certain import-related measures. Efforts are also underway to strengthen social protection programs to mitigate the impact of inflation on the most vulnerable groups.
Conclusion
Recent developments highlight the extent to which the Egyptian economy is linked to regional and global variables, particularly in energy, trade, and exchange rates. Amid ongoing uncertainty, the trajectory and duration of the conflict remain the most critical factors determining the scale of economic pressures and the economy’s ability to adapt.