Egypt, a country long beset by structural and policy challenges that have resulted in low growth, high inflation, a misaligned exchange rate, and worrying levels of unemployment and poverty, recently averted an all-out economic crisis.

Shortly after the disruptions caused by the COVID-19 pandemic and the Ukraine war, the Egyptian economy was pummeled by the Israel-Hamas war that erupted in October 2023. Specifically, the Gaza war cut deeply into Egypt’s foreign-exchange revenues, with tolls and transit fees from the Suez Canal declining by 60% in 2024 – a loss of $7 billion. Investors were therefore less willing to meet Egypt’s large external-financing needs, which the International Monetary Fund projected to be around $40 billion for the 2023-24 fiscal year.

For now, financial assistance from the IMF, the World Bank, the European Union, the United Arab Emirates, and others has pulled the Egyptian economy back from the brink. Some of this support was conditioned on policy reforms such as abandoning the country’s unsustainable fixed-exchange-rate regime and changing subsidy and tax rules. Perhaps most important, the government is obliged to loosen its grip on key parts of the economy. The military, in particular, owns large tracts of land, oversees construction projects, maintains privileged access to finance, and receives tax exemptions.

As Ruchir Agarwal and I argued in a recent Peterson Institute for International Economics policy brief, the 2023-24 crisis is only the latest in a series of episodes since 1956 in which outside powers have helped Egypt stave off a full-blown economic collapse. The main reason for the influx of aid has been the international community’s interest in ensuring Egypt’s economic and social stability amid regional conflagrations and geopolitical uncertainties – the country has been too strategic to fail. The downside to this external financial assistance is that it has enabled Egypt to avoid the deep structural reforms needed to develop a strong, export-oriented private sector.

The Egyptian economy has traditionally been inward-oriented, state-controlled, and highly regulated, and this has resulted in major public enterprises and rampant cronyism. To maintain social stability and address youth unemployment, the government has provided considerable, though not well-targeted, food and fuel subsidies, and created a bloated public-sector workforce. These massive outlays, coupled with inadequate national savings, have led to budget deficits and external imbalances, to which policymakers have responded by relying heavily on external and domestic debt and squandering central-bank reserves to fix or stabilize the exchange rate.

The new IMF program has produced some successes. Egypt’s exchange-rate system was reformed; inflation, while still elevated at 24% in December 2024, has been slowing; and the debt-to-GDP ratio has fallen, although it remains high at 89% in the 2023-24 fiscal year.

But meaningful reforms to economic governance, including a loosening of the military’s control over the economy, the divestment of government assets, and improved management of the vast public-enterprise system, have not yet been undertaken. As a result, Egypt remains at risk of political and economic turmoil. The IMF has reduced Egypt’s growth forecast for 2025 from 4.1% to 3.6%, and revised down the program’s fiscal-adjustment path. The most recent data from Egypt’s central bank show that the balance of payments recorded a $991 million deficit in July-September 2024, down from a $229 million surplus during the same period in 2023.

Popular discontent is high, owing not only to weaker growth prospects, but also to high inflation, lower food and fuel subsidies, and continued political repression. There is a general lack of trust in the government’s ability and willingness to reform the economy and fight cronyism and corruption. Given the recent toppling of Bashar al-Assad’s dictatorship in Syria, Egyptian authorities have clamped down harder on political expression over fears of a similar uprising. Simmering public anger could come to a boil. The Arab Spring may not be over after all.

There are also significant external risks. First, even with a ceasefire in Gaza, a large portion of the Strip’s population could be forced to settle in the Sinai Peninsula. Recently, US President Donald Trump advocated such a resettlement, but the Egyptian government quickly rejected the idea. This would have serious implications for Egypt, including fresh winds in the sails of the Muslim Brotherhood, which would almost surely provoke a repressive response from the Egyptian military. Moreover, given that Egypt already hosts 1.2 million Sudanese refugees, an influx of Palestinians from Gaza would exacerbate pressure on the country’s resources and infrastructure.

Second, international financial assistance, especially from the Gulf countries, is geopolitically motivated and thus may not last. The IMF will likely continue to face pressure from its main shareholders to support Egypt. But those shareholders could condition the Fund’s support on Egypt resettling Gazans in Sinai or further reducing the military’s role in the economy; if the government fails to comply, the tap could be turned off. In any event, meeting Egypt’s financing needs would prove difficult in the event of tariff wars, higher global interest rates, or continued dollar appreciation.

The risk that a full-blown crisis could return is clouding Egypt’s economic and political horizon. Another downturn could have severe consequences for the entire Middle East, given the region’s current conflicts and geopolitical tensions. While the international community must maintain its financial support for Egypt, pushing the authorities to implement long-overdue governance and economic reforms is equally, if not more, important.