File Photo: The seal for the International Monetary Fund (IMF) in Washington, DC. AFP
The release of the GFSR preceded the IMF/World Bank Group Spring Meetings, scheduled for 13–18 April.
While these inflows have helped deepen financial markets and expand financing options, the IMF warned that they also leave emerging economies more exposed to volatility and changes in global financial conditions.
The report highlighted that investment funds and hedge funds are particularly “flighty,” reacting sharply to shifts in global sentiment. During periods of market stress, such as the COVID-19 shock or monetary tightening cycles, these investors tend to withdraw funds rapidly, tightening financial conditions and raising borrowing costs in emerging markets.
According to the report, countries with weak fiscal positions, low foreign reserves, and weaker institutions are especially exposed to such outflows, often facing currency depreciation, widening bond spreads, and reduced access to international capital markets.
The IMF also highlighted emerging risks from the rapid growth of private credit and stablecoin flows, which could increase financial stability risks due to limited transparency and weak regulatory oversight.
To mitigate risks, the report urged policymakers to strengthen macroeconomic fundamentals, build fiscal and external buffers, and enhance institutional frameworks, while calling for greater international coordination and improved data transparency to monitor non-bank financial activity.
Although Egypt is not specifically mentioned in the report, the findings are relevant to economies with similar characteristics, including heavy reliance on foreign portfolio inflows such as participation in local debt markets, exposure to short-term capital flows and non-bank investors, and ongoing external financing and foreign exchange pressures.
Since the outbreak of the current Middle East conflict, the Egyptian pound has lost about 14 percent of its value against the US dollar following the exit of more than $10 billion in short-term capital due to regional tensions.
The report noted that countries with weaker buffers, such as reserves and fiscal space, higher external debt, and reliance on foreign investors are more vulnerable to capital outflows, currency pressure, and rising borrowing costs, a profile that applies broadly to several frontier and emerging markets, including Egypt.
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