As Egypt’s International Monetary Fund (IMF)-supported economic reform programme nears its conclusion later this year, the government’s announcement that it is preparing a purely Egyptian economic programme presents an important opportunity.
The new programme is expected to promote sustainable growth, improve living standards, and strengthen the economy’s resilience to external shocks. However, achieving these objectives will require more than simply setting ambitious targets. It will also require testing whether the proposed policies can withstand adverse developments in an increasingly uncertain global and regional environment.
This is where stress-testing should become an integral part of economic policymaking. Widely used by central banks, financial institutions, and international organisations worldwide, stress-testing assesses how adverse events could affect key economic indicators.
Rather than predicting the future, it prepares policymakers for it by identifying vulnerabilities before they become crises. In today’s geopolitical and financial environment, such an exercise is no longer optional, but is an essential component of prudent economic management.
Among the many risks facing the Egyptian economy, one warrants particular attention: the risk of a sudden reversal of short-term foreign portfolio investment, commonly called “hot money”.
Egypt has attracted substantial foreign investment in local treasury bills and bonds by maintaining relatively attractive interest rates. These inflows have supported the balance of payments, strengthened the country’s international reserves, and contributed to exchange-rate stability. However, the very features that make these inflows useful also make them volatile. Unlike foreign direct investment (FDI), portfolio investment can leave as quickly as it arrives, responding within days or even hours to changes in global financial conditions or geopolitical developments.
While portfolio inflows are a normal part of modern financial markets and provide governments with an additional source of financing, a major concern arises when an economy becomes excessively dependent on them and treats their presence as permanent. The most important policy question is therefore not whether hot money should be encouraged or discouraged, but whether the economy could withstand its sudden departure without undermining financial stability.
Recent estimates suggest that foreign investors hold around $40 to $46 billion in Egyptian treasury bills, though the precise figure varies over time. These figures do not necessarily mean that a complete withdrawal is likely or that such an amount could leave overnight. Portfolio investments mature at different times, investors respond differently to market developments, and many may choose to maintain their positions. Nevertheless, a severe deterioration in global financial conditions or a major geopolitical shock could trigger a substantial outflow within a relatively short period.
Moreover, while Egypt’s international reserves stood at approximately $55 billion at the end of June, they cannot be considered as a pool of idle cash waiting to finance capital outflows. Instead, they constitute the country’s first line of defence against external shocks and are needed to finance essential imports, meet external debt-service obligations, maintain confidence in the financial system, and support orderly foreign-exchange market conditions.
Moreover, part of the reserves consists of gold, which is a valuable reserve asset and contributes significantly to the country’s financial strength. However, gold is less suitable than liquid foreign-currency assets for responding immediately to a sudden surge in demand for dollars.
That is why stress-testing the adequacy of the reserves is more informative than simply quoting the headline figure. Policymakers should assess how much immediately usable foreign-currency liquidity would remain under various adverse scenarios, rather than assuming that all reserve assets can be mobilised equally and instantaneously in the event of adverse events. The objective is not to create alarm but to ensure that contingency plans exist before they are needed.
One plausible scenario would involve a sudden attempt by foreign investors to withdraw a substantial share of their holdings from Egypt. Such an event would undoubtedly put considerable pressure on the foreign-exchange market. Yet it would not necessarily require the Central Bank of Egypt (CBE) to provide an equivalent amount of dollars from its reserves. The final impact would depend on several factors, including the pace of the withdrawals, the maturity profile of the investments, and the exchange-rate policy adopted by the authorities.
Perhaps the greatest mistake in such circumstances would be to defend a particular exchange rate at almost any cost. Using tens of billions of dollars in reserves simply to allow foreign investors to exit at an unchanged exchange rate would rapidly deplete the country’s most important financial buffer. It would effectively transfer exchange-rate risk from investors to the Egyptian public sector while leaving the economy with less protection against future external shocks. Such a strategy could ultimately undermine, rather than strengthen, market confidence.
A more balanced approach would be to allow some exchange-rate flexibility as part of the adjustment mechanism. But the problem with this approach is that a depreciation of the pound would impose costs through higher inflation, higher import prices, and greater debt-servicing burdens on foreign-currency liabilities. These costs are real and should not be underestimated. Therefore, exchange-rate flexibility alone cannot constitute a comprehensive response.
If market conditions became exceptionally severe, temporary capital-flow management measures (CFMs) might also merit consideration. This remains a sensitive subject because such measures are often associated with restrictions on capital flows. However, the IMF’s 2012 Institutional View acknowledged that, under exceptional circumstances, temporary CFMs may play a legitimate role when disruptive capital outflows threaten financial stability. At the same time, it emphasised that these measures should not replace the necessary macroeconomic adjustments required to restore confidence.
This distinction is important, because temporary measures should be viewed as tools for buying time rather than as a means of solving underlying problems. Their purpose is to slow destabilising capital flows while broader policy adjustments take effect. They should remain targeted, transparent, temporary, and proportionate to the severity of the crisis.
One possible emergency measure that should be put on the table is the temporary use of a dual exchange-rate system, under which exiting portfolio investors would convert their proceeds at a less favourable exchange rate than that available for ordinary commercial transactions. This is one of the CFMs recognised by the IMF to mitigate the risks associated with capital inflow surges, as well as for outflows during crises or imminent crises.
This mechanism could reduce immediate pressure on the reserves by discouraging rapid withdrawals, although it could also involve legal, operational, and reputational risks. Investors could view it as a restriction on convertibility, and it could complicate future access to international capital markets and create opportunities for market distortions. Hence, if it is ever considered, it should be regarded as a last-resort emergency instrument rather than a substitute for sound macroeconomic management.
The forthcoming national economic programme offers an ideal opportunity to institutionalise stress-testing as a routine part of economic policy design. Every major policy proposal should be evaluated not only under optimistic assumptions but also against adverse scenarios, such as geopolitical tensions, higher energy prices, weaker tourism revenues, slower remittance growth, or a sudden reversal of portfolio investment.
These exercises would not signal pessimism. On the contrary, they would demonstrate confidence that prudent planning is the best defence against uncertainty.
* The writer is a banking consultant.
* A version of this article appears in print in the 6 August, 2026 edition of Al-Ahram Weekly.
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