Preconceived Policies: How to Deal with the Repercussions of a Potential Israeli-Iranian Escalation

Introduction – The General Context of the Crisis

The Middle East has recently witnessed a dangerous escalation in the intensity of the military confrontation between Iran and Israel, directly and indirectly impacting the stability of the region and the economic and strategic interests of its countries. Egypt, by virtue of its geographical location and pivotal role in the region, is deeply concerned with assessing these repercussions and formulating proactive policies to address the various scenarios that may arise.

This study aims to address the outcomes and repercussions of this conflict and its impact on vital sectors of the Egyptian state (trade, investment, supply chains, energy and gas, maritime transport, and tourism), develop scenarios to address these repercussions, and anticipate the potential repercussions on vital sectors of the Egyptian state should the scenario of escalation and military confrontation recur. This study aims to develop practical mechanisms and policies to address each potential scenario, ensuring that losses are minimized and opportunities are maximized.

1) Geopolitical Implications: Iranian-Israeli military operations have broad regional implications, potentially impacting maritime security in the Arabian Gulf and the Red Sea and the stability of global oil and gas markets.

2) Economic Intertwinement: The region represents a vital corridor for approximately one-third of global energy trade, and any disruption to shipping would impact energy prices and supply chains, posing direct challenges to Egypt as an energy and gas hub and a shipping lane through the Suez Canal.

3) Investment Implications: The uncertainty resulting from the war could lead to a redirection of foreign investment in the region, posing both a threat and an opportunity for Egypt.

First: The Impact of Iranian/Israeli Military Operations in the Previous Confrontation

The impact of Iranian-Israeli military operations on the Egyptian economy is tangible through several major channels. Its magnitude can be estimated through recent figures and direct impacts on foreign exchange sources, supply chains, and energy, with the severity of the impact varying between sectors:

1- Suez Canal – Net loss of hard currency amounting to billions of dollars: Tensions in the Red Sea since late 2023, which have worsened with the escalation of the confrontation between Iran and Israel, have led to the diversion of a large number of ships, increased insurance, and increased transit costs. This has had a direct impact on Egypt: Suez Canal revenues fell in 2024 to approximately $3.99 billion, compared to $10.25 billion in 2023, a decrease of approximately 60-65%, representing an annual difference of more than $6 billion in foreign exchange. International institutions estimate that transit trade through the canal declined by about 50% in early 2024, and that the passage of some ship categories (such as dry cargo) shrank by up to 80% in mid-2024, before showing signs of gradual improvement in 2025. However, without a sustainable alternative to the canal, this loss represents the largest direct numerical component of the overall impact on the Egyptian economy.

2- Gas and Energy – Pressure on the energy balance and industry, and additional funding for imports: The escalation affected gas flows in the Eastern Mediterranean, reducing the quantities of Israeli gas destined for Egypt via the EMG pipeline during periods between 2024 and 2025. In June 2025, limited quantities were resumed, with Jordan as its primary destination. However, according to official statements, only "small volumes" reached Egypt, maintaining pressure on the liquefaction plants (Idku and Damietta) and gas-dependent industries, prompting Cairo to activate contingency plans and import additional LNG shipments during 2025 to fill the gap. This shift means a higher energy import bill and more volatile LNG export revenues compared to the boom years, affecting the chemical, fertilizer, and electricity sectors.

3- Oil prices, import costs, and shipping – a short-term but volatile price shock: Each wave of escalation between Tehran and Tel Aviv has raised the risk premium in energy markets. In mid-June 2025, Brent jumped between 7% and 10% following mutual attacks on energy infrastructure, before later retreating with reassurances from the International Energy Agency that the market was "well-supplied." In practice, this translates into higher import costs (fuel, production inputs), higher shipping costs, and insurance, with a partial benefit if Egypt is able to export gas/petroleum products at higher prices. However, the overall picture is one of inflationary pressure on imports, with limited and variable gains.

4- Foreign Trade and Supply Chains – Disruption to Timelines and Costs, Limited Substitution Opportunities: Maritime diversions around the Cape of Good Hope have increased travel times, shipping costs, and insurance costs, increasing prices of intermediate and consumer goods locally and delaying deliveries. Conversely, the regional turmoil opens a window for Egyptian products to replace imports via affected routes. However, realizing this opportunity requires production capacity, available gas for industry, and stable logistics channels—all of which will be under pressure in 2024–2025.

5- Tourism – Relative Resilience with Moral Risk: Despite tourism's sensitivity to regional turmoil, the sector recorded strong performance in 2024, with revenues estimated at $14–15.7 billion and record visitor numbers, with continued improvement expected in 2025. Risks remain if the escalation continues, but so far, the data shows remarkable resilience, supported by promotional and infrastructure investments (such as the Grand Egyptian Museum). Therefore, the net impact of tourism until mid-2025 remains less severe than the impact of the canal and energy.

Second: The Potential Impact of Any Future Conflict on Vital Egyptian Sectors and Responses

Potential Impacts

1. Trade Sector: The trade sector may witness fluctuations in commodity flows, with opportunities to increase exports of some Egyptian goods to markets seeking safe alternatives.

2. Investment Sector: The state of instability may present an opportunity to attract investments seeking a relatively stable environment, provided the local business environment improves.

3. Supply Chains: The most prominent challenge lies in securing food and energy imports, which requires diversifying supply sources and increasing strategic reserves.

4. Energy and Gas: Egypt is likely to benefit from higher gas prices by increasing its exports, but the pressure on import costs will intensify.

5. Maritime Transport and the Suez Canal: Security threats may temporarily reduce shipping traffic, but they may also increase if trade is redirected away from the Gulf.

6. Tourism: The potential for a decline in tourism in the event of a widespread escalation, requiring promotional campaigns to boost tourist confidence.

General Measures

• Temporarily redistributing industrial loads and scheduling maintenance in high-intensity plants to avoid peak demand, with flexible gas supply contracts for export industries in exchange for an export commitment backed by purchase contracts.
• Operating an auction window to allocate additional gas quantities to industry at pricing that balances cost with the ability to maintain jobs and exports.
• Increasing the strategic reserve of wheat, oils, and sugar for 5–6 months, while incentivizing joint government-to-government purchasing contracts and diversifying sources.
• Time-bound and planned customs exemptions for selected production inputs to reduce inflationary contagion to the consumer basket.
• “Fast-track” automated service agreements for major lines, including berth, maintenance, bunkering, and marine bunkering licenses, with discounts conditional on traffic volume and the number of trips during the quarter. • A Receivables Securitization platform to finance working capital for affected exporters, with partial guarantees from the Micro, Small, and Medium Enterprise Development Agency and the General Authority for Investment.
• Calling for Chinese-Gulf investment packages for import-substituting industries (electrical components, intermediate chemicals, packaging) within the Canal Zones and Special Free Zones.

Measures of success: Containing monthly food inflation below 1.5% on a quarterly average, net non-oil export growth despite higher shipping costs, and gradual improvement in vessel traffic relative to the new baseline.

Third: Future Military Escalation Scenarios and Response Mechanisms

1- A Limited, Containable Tension Scenario

Description: Limited, mutual strikes, high but manageable maritime risks, partial disruption of supply chains, and short-term energy price increases.

Response Objectives: Stabilize local market expectations, secure gas for industry and electricity, and maintain investor and tourist confidence.

Key Measures and Responses:

• Energy Sector: Arrange to blend domestic gas supplies with limited spot LNG shipments under flexible, short-term contracts, prioritizing supply to power plants and value-added export industries.

• Navigation and Logistics: A package of selective and immediate rebates and transit fees (time-bound rebates) for the most affected groups, along with enhanced guidance and maritime security services and daily disclosures by shipping lines.

• Trade and Supply Chains: Rescheduling supplies of strategic goods through alternative ports (Alexandria/Damietta/Port Said) and activating partial hedging contracts for grains and oils.

• Investment and Promotion: Professional reassurance messages from the Investment Authority to the Chinese, European, and Gulf markets confirm the continuity of operations in industrial zones and the incentive rules.

2- Scenario of Widespread Escalation and Prolongation of Tension

Description: Expansion of the conflict regionally, a relatively sustained rise in energy and shipping prices, and significant fluctuations in Suez Canal traffic.

Response Objectives: Protect purchasing power and production capacity, maximize returns from Egyptian gas, and localize as much of the supply chain as possible.

Key Actions for 90 Days:

• Energy and Gas:

- Temporarily redistribute industrial loads and schedule maintenance in energy-intensive plants to avoid peak demand, with "flexible quantity" gas supply contracts for export industries in exchange for an export commitment backed by purchase contracts.

- Operate an "auction window" to allocate additional gas quantities to industry at pricing that balances cost with the ability to maintain jobs and exports.

• Food and Basic Commodities:

- Increasing the strategic stockpile of wheat, oils, and sugar for 5–6 months, while stimulating joint government-to-government procurement contracts and diversifying sources of supply.

- Timely and planned customs exemptions for selected production inputs to reduce inflationary contagion to the consumer basket.

• Navigation and Logistics:

- "Fast-track" automated service agreements for major lines, including mooring, maintenance, bunkering, and marine supply licenses, with discounts conditional on traffic volume and the number of trips during the quarter.

• Investment and Financing:

- A "Receivables Securitization" platform to finance working capital for affected exporters, with partial guarantees from the Micro, Small, and Medium Enterprise Development Agency and the Investment Authority.

- Calling for Chinese-Gulf investment packages for import-substitute industries (electrical components, intermediate chemicals, packaging) within the Canal Zones and Special Free Zones. Measures of Success: Containing monthly food inflation below 1.5% on a quarterly average, net non-oil export growth despite higher freight costs, and gradual improvement in vessel traffic relative to the new baseline.

3- Severe Disruption/Protracted Regional War Scenario

Description: Widespread disruption to shipping in the Gulf and Red Sea, sharp and sustained increases in energy and freight prices, a significant and prolonged decline in Suez Canal traffic, with inflationary and social pressures.

Response Objectives: Protect economic and social security, compensate for lost foreign exchange, and maintain the continuity of industrial operations and essential services.

Key Actions and Responses (Economic Emergency for 6–12 Months)

• Foreign Exchange and Public Finance:

- Absolute priority is given to providing foreign exchange for imports of fuel, wheat, medicine, and critical production inputs, with centralized management of priority lists through the Central Bank and the Ministries of Finance and Trade.

- Issuing a short-term sovereign financing instrument targeting Egyptians at home and abroad, with an attractive return and a simplified subscription window. The return will be partially linked to the energy price index to absorb shocks.

• Energy:

- Immediate and medium-term supply agreements with alternative LNG suppliers, and expanding floating storage and unloading (FSRU) capacity if necessary, with an internal pricing mechanism that balances the social impact through more targeted support for vulnerable groups.

- Mandatory energy efficiency programs in the cement, chemicals, and ceramics sectors, including green financing incentives and substitution technologies.

• Supply and food chains:

- A multi-origin "logistics bridge" (Morocco, Spain, Romania, India, Indonesia) with a fixed weekly schedule for ships carrying strategic goods, with group policies for partial government insurance.

- Doubling storage capacity for wheat and oils through mobile silos and specialized storage solutions in partnership with the private sector.

• Social Protection and Communication:

- A phased expansion of safety nets (Takaful and Karama/transitional cash transfers) funded in part by savings from the restructuring of untargeted subsidies, and seasonal price adjustment packages through state outlets.

- A unified communications room issuing a “Weekly Transparency Bulletin” explaining decisions, supply routes, and price forecasts to reduce inflationary expectations and rumors.

4- A gradual de-escalation and de-escalation scenario

Description: A de-escalation path that steadily reopens shipping channels and calms energy markets.

Response objectives: Rapidly capture gains, recover lost revenues, and build structural resilience against similar future shocks.

Key Actions:

• Suez Canal: Smart re-pricing and temporary incentive fees to regain lost market share, in conjunction with a global marketing campaign promoting the safety of the canal and added services.

• Energy: Signing medium-term gas supply contracts at indicative prices that reduce immediate exposure to market volatility, and completing regional electricity interconnection projects.

• Investment and Industry: An updated “import substitution map” that links incentives to export commitments and local content rates, and hosting supply platforms for multinational companies seeking geographic diversification.

Fourth: Detailed sectoral policies (across all scenarios)

a) Energy and Gas

• Security of Supply: A contractual mix that combines limited spot shipments with medium-term contracts, while enhancing storage capabilities and managing industrial demand.

• Added Value: Preferring gas to high-margin export industries, and linking industrial pricing to production and export incentives.

• Green Finance: Soft loans for the replacement of energy-efficient equipment and expanding green hydrogen production in the Canal areas.

b) Trade and Supply Chains

• Diversification of Origins: Government procurement regulations require at least three origins for critical goods, with guaranteed weekly shipping lines.

• Digitization of Clearance: Universalization of pre-clearance and data-driven risk to reduce release times by 30–40% in times of crisis.

• Insurance and Guarantees: A Shipping Risk Guarantee Program in partnership with the Federation of Insurance Companies and Public Banks.

c) Navigation and the Suez Canal

• Smart Incentives: Discounts linked to volume and frequency, and value-added services (maintenance, catering, crew replacement).

• Maritime Security: Publicized protocols for offshore positioning and communication with vessels, and daily transparent reports from shipping lines.

d) Investment and Finance

• Working Capital Financing: Securitization of exporters' receivables, and bridge loans with subsidized interest conditional on maintaining employment.

• Targeted Incentives: Linking tax incentives to performance indicators (Export Credit Notes, local content ratios, energy sustainability).

• Attracting transformational investments: “rapid localization” packages for import-substituting industries in the Canal Zones and Special Free Zones.

e) Tourism

• Pricing and promotional flexibility: Incentives for charter airlines, group insurance for perceived risks, and promotional campaigns focused on safe cities and cultural and entertainment routes.

• Market diversification: Deepening markets in Eastern Europe, Asia, and Latin America to reduce dependence on one or two markets.

f) Social protection and price control

• More precise targeting: Expanding eligibility databases and linking them in real-time to consumption and energy data to direct cash support.

• Low-cost sales chains: Expanding government outlets and discounted sales partnerships, and direct supply contracts for specific goods.

Fifth: General recommendations

1. Form a crisis cell comprising the Ministries of Investment, Petroleum, Supply, Transport, and Foreign Affairs to monitor developments and formulate proactive policies.

2. Strengthen international partnerships with the European Union, China, and India to ensure diversification of trading partners and energy and food sources.

3. Develop flexible policies to attract investment by simplifying procedures and providing additional incentives in light of regional tensions.

4. Invest in energy infrastructure to enhance Egypt's gas export capacity and access European and Asian markets.

5. Prepare a comprehensive food security plan that includes supporting local production and expanding strategic storage.

6. Intensify economic diplomacy to market Egypt as a safe corridor for global trade and a center of regional stability.

Conclusion

The challenges posed by Iranian-Israeli military operations pose significant risks to the Egyptian economy, but they also present opportunities to strengthen Egypt's position as a pivotal investment and logistics hub. The extent to which these opportunities can be capitalized on or losses mitigated depends on the state's ability to adopt proactive, flexible, and comprehensive policies based on accurate assessments of potential scenarios and practical mechanisms for addressing them.