The Fallout of the Hormuz Crisis for North Africa’s Green Transitions

The war that the United States and Israel initiated against Iran at the end of February 2026 continues to have pronounced effects on global economic activity. In North Africa, these most immediately convey through the energy channel. For energy importers like Morocco, Tunisia, and Egypt, bills coming due for crude oil, natural gas, and fuel products increased significantly over the course of the year. Heightened (and unplanned) expenditures on subsidies, meanwhile, weigh on each country’s fiscal books, if to differing degrees.

In the case of Morocco, it is diesel fuel that stands at the heart of things. Since the American-Israeli campaign against Iran turned kinetic, the spot price of diesel has remained elevated, trading at roughly double the prices prevailing in 2025. Due to weak domestic refining capacity, securing product in these conditions sufficed to lift energy import costs by $2.2bn between March and August.¹ This has impacted the fiscal ledger as much as Morocco’s current account. As of summer, emergency supports were projected to cost the treasury 1.2% GDP for the year.² (Funds have been allocated to shield households from higher electricity costs and transport operators from higher butane prices). And those estimates are almost certain to be conservative. Forward looking indicators suggest prices for diesel are to skyrocket across the autumn: On September 10th, US diesel futures contracts traded at the highest level in their history, while those marketed in London also eclipsed prior peaks.

In Egypt, additional energy import costs brought on by the Hormuz crisis had topped $5.2bn as of August.³ The sourcing of liquefied natural gas and crude oil—made more challenging by Israel’s suspension of production at the Leviathan and Karish fields in early spring—was largely responsible. Comparative to Morocco, though, the fiscal upshot has been marginal: After pledging to honor a fuel price indexation mechanism during its latest reviews with the International Monetary Fund (IMF), Cairo is allowing the population to shoulder the burden of fossil fuels’ bull run.⁴

Tunisia’s struggles under the energy squeeze are also quite real. The National Institute of Statistics recorded a trade deficit of $4.2bn for the first half of 2026, a year-on-year increase of more than 25%. Driving the gains were oil and gas imports, despite the country’s arrangements with Algeria—which sees natural gas prices reset every six months—providing something of a reprieve.⁵ On the fiscal side of things, the damage suffered in order to (partially) insulate households from the Hormuz shock is to be determined in the year’s final accounting. What is known at this stage is that energy subsides were allocated within the Loi de Finances on the assumption that on average, a barrel of crude oil would cost $63.⁶ As of September, the annual average was north of $90 and headed higher. By FitchRatings’ calculations, closing this gap will lift the fuel subsidy bill by 0.8% GDP (compared to what had been budgeted), pushing the overall fiscal deficit to 6.4% GDP.⁷ And amid this all, electricity rationing, expressed in the form of rolling blackouts, is becoming a fixture of social and economic life.⁸

But if energy is the primary artery through which the effects of war flow into North African economies, it is hardly the only conduit. Capital flows represent a second channel of note. Here, the consequences of the Hormuz crisis are varied and compounding. And if July and August sell-offs on American, Japanese, British, German and French treasuries tell us anything, the turmoil may only be getting started.⁹

For the countries of North Africa, the Hormuz crisis has unsettled international capital markets in several ways, and the prospect of a major financial storm looms. To begin, war-induced uncertainty has complicated the selling of fixed-income instruments on external markets. As of mid-September, Morocco was the only one of the three countries in-focus here to brave a traditional bond issuance, selling two tranches of notes for a total of €2.25bn in London this past May.¹⁰ Tunisia is unlikely to follow suit any time soon: Mindful of the external debt burden and having only just redeemed €700mn worth of Eurobonds in July, Kais Saied’s lieutenants have expressed little interest in issuing new hard currency treasuries.¹¹ Egypt, meanwhile, is striking something of a middle ground. With the support of guarantees from the African Development Bank, Cairo issued 80bn ($500mn) in Japanese yen-denominated sustainable samurai bonds in June,¹² Contingent on improved market conditions, policymakers also still intend to offer an additional $3bn in hard currency bonds later this year.¹³ But these are small sums at the end of the day, and ones that reflect the extent to which sentiment in the world’s major financial centers is not inviting to major debt raises out of North Africa. Downstream effects of this development on fixed capital formation should be expected going forward.

The cautious posture that Kevin Warsh, the Chair of the U.S. Federal Reserve, has adopted in steering the Federal Reserve through the Hormuz crisis is also impacting financial conditions. The causal mechanism at play is interest rate policy. By pressing pause on the rate cut cycle which Jerome Powell set into motion in late 2024, Warsh—as steward of the key currency in the international monetary system—has forced central bank governors across the world, including those presiding over the Bank al-Maghrib (BAM), Banque Centrale de Tunisie (BCT), and Central Bank of Egypt (CBE), to swim in the same direction. Materially, the result is relatively lesser amounts of liquidity coursing through national financial systems, which has immediate consequences for the cost of debt and equity capital.

In Morocco, effects on credit creation have been comparatively modest. At 2.25%, the benchmark interest rate prior to Warsh’s pivot was low enough that holding the line on additional rate cuts has not meaningfully disincentivized borrowing. By the BAM’s count, overall lending rates ticked up just 15 basis points in the second quarter of the year, and as of June, outstanding bank credit was up 10.9% year-on-year. Encouragingly as well, lending to private non-financial companies had grown at 8.2%.¹⁴

In Egypt, contrarily, Warsh’s decisions have had substantive and deleterious repercussions. Of course, troubles in Egypt’s credit market precede both Warsh and the US-Israeli war on Iran. A mix of high inflation, recurring currency devaluations and shifts in the composition of bank balance sheets—principally, growth in bank holdings of sovereign liabilities—has long since kept borrowing costs elevated. Nevertheless, in leaving Hassan Abdullah, the governor of the Central Bank of Egypt (CBE), little choice but to maintain the overnight lending rate at 20%, it can minimally be said that Warsh’s tenure has not improved life for an Egyptian borrower: Indeed, by mid-summer, bank lending rates in Egypt were still ranging between 22-23%. In the face of such terms, the vast majority of firms were continuing to steer clear of the banking sector, even if real growth in lending to private businesses ticked up in the second quarter by 7.7%.¹⁵ As documented in World Bank survey data, the expensiveness of credit is such that only 3% of Egyptian companies are presently taking out bank loans to fund investments.¹⁶ Just as distressingly, financial reporting shows that many of Egypt’s largest private businesses are currently coming under immense debt-derived pressures.¹⁷ As Egypt’s long-running trend of industrial disinvestment presses on, the persistence of high interest rates is set to eat ever further into the country’s productive capacity.¹⁸

Conditions are little better in Tunisia. Responding to Warsh’s cue, Fethi Zouhair Nouri at the BCT has thus far decided to keep the policy rate at 7%. In view of the inflation risks that international commodity markets are introducing—as well as those brought on by the BCT financing the 2026 budget to the tune of TND 11bn¹⁹—it is hard to critique him for doing so. But that offers little consolation to private borrowers, at once squeezed by the monetary regime and the banking sector’s deepening entwining with the Ministry of Finance. Concerning the latter, the banking sector’s net claims on the state have grown more than six-fold since 2019, jumping from TD 7.5bn to TD 47.5bn.²⁰ Yes, the relative decline in state borrowing at the start of 2026 allowed bank lending to private businesses to inch up in quarters one and two. At just TND 2.2bn (or $760mn), though, the level of credit being mobilized was still peanuts.²¹ And saliently, credit extended to the country’s agricultural, extractive and manufacturing industries was effectively flat as compares to 2025.²² Furthermore, by virtue of the BCT’s stance and non-competitive practices in the banking sector, repayment obligations on fresh lines of debt financing continue to be punitive. The non-competitive practices in question are well-documented and evinced in the fact of banks being able to maintain lending margins of 3.25-6.5%.²³ Their vise grip is especially confining for small and medium-sized enterprises, which tend to rely on factoring and bill-backed overdraft facilities, where interest rates are running ~12.5%.²⁴ Down the road, a recent Presidential decree dictating that banks transform at least 8% of annual profits into interest-free, unsecured loans for small businesses could offer some relief.²⁵ However, a number of legal and procedural hurdles will need be cleared first, and even in the best case scenario, the scale of financing made available will be relatively small.

Also important from the perspective of North Africa are the effects that the US-Israeli war on Iran—and the war’s management by economic policymakers in the United States—exert on investor risk appetite when it comes to emerging markets. In this regard, it is perceived geographic proximity to the conflict, and in Egypt’s case, direct exposure to the Red Sea theater, that factors most prominently.

By dint of investor skittishness, announced greenfield FDI projects in the wider Middle East and North Africa slid by two-thirds between March and May.²⁶ Just as consequently, the pace of financial closes for previously committed investments has slowed across Morocco, Egypt, and Tunisia.²⁷ The slowdown on financial closes is partially due to the three countries being more exposed than global peers to the unique troubles befalling Gulf-based firms and financial houses. With drone and ballistic missile strikes rocking the home front, outbound greenfield FDI flows from the UAE during the first half of the year reached just $11bn after totaling $92bn during the first half of 2025. FDI issued from Saudi Arabia, meanwhile, was a mere $3.3bn.²⁸ And all this was before Saudi allies collapsed in the face of an Ansar Allah assault in September. Given the role Gulf capital has assumed in North African economies—and its indispensability to energy transition plans—these are unnerving developments to say the least.

In addition, in Egypt’s case, the financial effects of the US-Israeli war emanate via hot money flows, too, which have sizable downstream impacts on the currency. Unlike in 2022, when the Russian invasion of Ukraine prompted foreign investors to rapidly exit Egypt’s local treasuries, the conflict in the Gulf is yet to provoke a mass deleveraging event. That said, portfolio outflows in February and March were sufficient to cause the exchange value of the pound to fall by nearly 20%.²⁹ Though recovering a touch thereafter, the pound has traded at a rate of more than 50:1 to the US dollar for most of the past six months, and at the time of writing, shows signs of weakening again.

The fate of the currency weighs heavily and immediately upon the welfare of the Egyptian people. The exchange rate is a principal determinant of the inflation rate, after all, and as such, mediates households’ purchasing power. But the pound also structures financial conditions. It does so through two primary mechanisms. Firstly, the currency’s exchange value alters the liabilities’ side of public and private balance sheets: When the pound loses value, liabilities-denominated in foreign currency grow commensurately. For those holding such liabilities, the effect is to raise repayment obligations and reduce the capital that can be deployed for investment. Secondly, through boosting inflation, the currency’s depreciation tends to indirectly tighten credit conditions. This is because a spike in inflation brought on by increases in import prices hamstrings officials at the central bank, making them less likely to resume interest rate cuts. Data from August shows price pressures as yet being contained.³⁰ That said, the war’s escalation in September—the reopening of the Yemen front most of all—points to an imminent breakout. For businesses, the upshot is that the costs of raising capital will remain prohibitively high going forward.

For North Africa, then, the economic effects of the US-Israeli war on Iran have already proven meaningful. And the longer the war continues, the more intense and wide-ranging will those effects grow. Two areas are deserving of special attention in this regard: renewable energy deployment and the broader greening of industrial capacity. The former’s importance is made plain in the import bills Morocco, Egypt, and Tunisia are presently being forced to foot for fossil fuels. The latter’s is also hard to miss. Whether one considers regulatory interventions such as the European Union’s imposition of the Carbon Border Adjustment Mechanism (CBAM) or the ongoing geopolitical fracturing of the world market, enhancing and greening national productive capacities is becoming a categorical imperative.

Predictably, realization of the climate policy agendas put in place in Morocco, Egypt, and Tunisia has been made a great deal more difficult by the American-Israeli war on Iran. Factoring most prominently here are the war’s effects on two preceding trends. The first trend is reliance on the financing of multinational development banks (MDBs): If industrial greening efforts and the development of renewable energy in North Africa were highly dependent on MDB capital deployments prior to the war, they are even more so now. The second trend is reliance on derisking measures: Where foreign firms have long shown themselves hesitant to invest in the absence of public backstops and guarantees, the last few months show them to now be even more reluctant.

Pertaining to the MDBs, the trend referenced should not be read to suggest that without their institutional capital, no projects are today getting off the ground. Grace of deepening investment relations with China, Morocco and Egypt in particular have managed to advance a few key venture over recent months without the involvement of MDB capital. In Egypt, for instance, a number of Chinese-led manufacturing ventures within the wider industrial line of solar panel and cell production have gone ahead sans the MDBs.⁴³ But the general pattern is still one of MDB ubiquity, as is attested in Figure 1. Furthermore, the evidence suggests that the vesting of the MDBs in climate projects is increasingly needed in order to convert private investment pledges, concessions awarded, and memoranda of understanding into actually deployed capital.

On the integral role the MDBs are playing in getting investors to put real skin into the game, a few examples may be clarifying. In Tunisia, progress on the Sidi Bouzid II solar plant—a project awarded in December 2024 and one that was to be developed by Norway’s Scatec in partnership with a Japanese consortium—was only made after European MDBs stepped up as the project’s senior lenders in June.⁴⁴ That same month, the board of the World Bank’s for-profit lender, the International Finance Corporation (IFC), approved a €36.5mn loan to France’s Voltalia to support development of a solar plant in Menzel, a project awarded as part of the same round of 2024 concessions, though one likewise stalled out thereafter due to similar financial troubles.⁴⁵ MDB financing has also proven a sine-qua-non for the advance of concessions signed off on this spring. Notably, in April, the World Bank’s Multilateral Investment Guarantee Agency (MIGA) established a $300mn facility to cover currency, expropriation, breach of contract, and war & civil disturbance risks for prospective investors in independent solar, wind, and battery storage projects. This facility has already streamlined Voltalia’s construction and operation of a 132 MW solar plant in Gabes.⁴⁶ And though Morocco and Egypt’s dependence on MDB capital is lesser than Tunisia’s, recent months establish that in these countries, too, projects often stall out prior to MDB commitments. Absent the AfDB and World Bank furnishing lead financing for a 300MW pumped storage hydroplant in northern Morocco, it is difficult to envision that things might have moved forward. The same can be said of the battery gigafactory being developed by China’s Gotion High Tech and Volkswagen in Kenitra, or the high-speed rail links built between Kenitra and Marrakech, both of which were backed by AfDB.⁴⁷ Over in Egypt, huge solar and wind concessions in Minya, Dandara, Qena, and the Suez likewise stood little chance of advancing without the anchor capital that the AfDB, MIGA, and European Bank for Reconstruction & Development (EBRD) provided. Nor is this dynamic ripe to change soon. Virtually the entire pipeline of concessions for battery energy storage systems in Egypt sits upon commitments of debt financing from the IFC, EIB, and EBRD.⁴⁸ In this context, the financing package of up to €690 million under the freshly launched Trans-Mediterranean Renewable Energy and Clean-Tech Cooperation Initiative (T-MED)—comprising a €600 million EIB Global loan and up to €90 million in EU grants, with the Egyptian government borrowing through the CBE—will only deepen the link between Egypt’s green transition and the MDBs.

These relations of financial dependence are not inconsequential. In the first instance, they subject policymakers to political extortion of various kinds. This is observed most nakedly in Tunisia and Egypt, where funding from EU-associated organs has been (implicitly or explicitly) tied to arrangements for externalizing border control operations.⁴⁹ But just as critically, financial dependence is hitching green transitions to institutions boasting very real flaws. The World Bank Group (WBG) is steadily reducing the share of its portfolio devoted to concessional lending while degrading whatever remains of its original developmental missions: With each passing year, the WBG cedes more floor to its for-profit lender, the IFC, and places even bigger bets on blended finance, a spurious venture if there ever was one.⁵⁰ For those relying on WBG support, this augurs little good. Both the IFC and the wider project of blended finance have robust records of failure when it comes to mobilizing either the volume or quality of capital that is demanded to fend off climate disaster.⁵¹ Nor, unfortunately, are these troubles limited to the WBG. The secular trend shows MDBs across the world (and the European Union⁵²) moving away from concessional lending. It also shows that these climate partners systematically avoid less bankable (but deeply essential) climate adaptation projects.⁵³ For the likes of Morocco, Egypt, and Tunisia, this makes for a troubling set-up.

“The combination of blended finance and state derisking does not offer a path to socially just climate resilience.”Colin Powers

As for the trend on state derisking, it is every bit as pronounced as that of MDB financing, even if long predating the outbreak of hostilities in the Gulf. Across the board, regulatory regimes and investment codes are continuing to extend private corporations a wide range of benefits in hopes of coaxing capital expenditures. These include income tax holidays and rebates, customs and VAT exemptions, subsidies on capital expenditures, and land acquisitions and/or leases at submarket rates. In the case of renewable energy projects, a variety of derisking measures have also been specified in power purchase agreements contracted over recent months. Among other things, the 2026 concessions of the Egyptian Electricity Transmission Company has accepted pay-as-produced clauses (also known as “take-or-pay” clauses) and compensation arrangements denominated in US dollars, the joint effect of which is to offload grid and currency related risks onto the state. A majority of renewable projects commissioned in Egypt this year are also structured as public-private partnerships of the build-own-operate kind, which is leaving the ownership of key utilities in the hands of private, profit-oriented actors. Concessions awarded and approved in Tunisia this year also contain take-or-pay clauses. In addition, as in Egypt, the power purchase agreements approved by the parliament in the spring burden the state with risks related to currency depreciation: Though not denominated in Euros, the five concessions in question index the electricity price that the STEG is obligated to pay to the Euro/Dinar exchange rate, plus the European inflation rate.⁵⁴ In Morocco, contrarily, beyond the assortment of tax breaks being offered up, the derisking measures put in place this year are relatively light. If problematic, relevant state organs (principally, the Moroccan Agency of Sustainable Energy, or MASEN) accepting international arbitration clauses in contracts with power producers is par for the course in 2026.⁵⁵

The pervasiveness of such derisking measures offers little to be excited about. In the past, fiscal losses suffered by way of tax holidays and exemptions have been substantial in North Africa. In view of Egypt and Tunisia’s debt situations, accepting even more in the years ahead is a tough pill to swallow. The recklessness of the tax rebates being bandied about to boost investments in renewables is also affirmed in recent history: Just last year, the Egyptian government had to come up with $1.2bn in hard currency to cover tax-related investment incentives owed to oil and gas companies.⁵⁶ The hit to central bank reserves was meaningful. And then there are the contingent liabilities being taken on by way of currency derisking. If Morocco’s dirham is not especially liable to shed exchange value in the short to medium-term, the same cannot be said of the Tunisian dinar or Egyptian pound. That public utilities are on the hook in the eventuality where the currency slide is a recipe for danger.

To summate, it would be overstatement to say that the US-Israeli war on Iran has rerouted North Africa’s course when it comes to renewables and green industrialization. But the war is accelerating the speed with which these countries advance down previously charted courses. With the crisis in the Gulf conveying risk aversion across international capital markets, dependence upon the financial resources of the MDBs is further consolidating. So too a reliance on derisking measures. Both developments bode ill: The former suggests climate financing is to continue missing the mark in terms of scale and allocation. The latter points to the accrual of new fiscal dangers, dangers made even more dangerous by their not showing up on public balance sheets.

Though time will tell, it looks increasingly likely that the campaign the United States and Israel launched against Iran in February 2026 shall represent a historic rupture in the history of the Middle East and North Africa. As with the Israeli genocide in Gaza before it, this war stands to alter everything from developmental trajectories to the regional balance of power. And in North Africa, it is undoubtedly poised to have outsize effects on the green transitions currently in motion, too. In affirming that the build-up of renewables pertains to national security as much as macrostability, some of these effects could be positive. But in the short-term, negative impacts abound as well.

Beyond what has already been discussed, most pressing at our present juncture are recent developments involving Saudi Arabia and Yemen. Ansar Allah’s lightning offensive in September will be of gravest concern to climate planners in Cairo. Prior to the group’s conquests, Egypt was projected to install the second-most solar capacity in Africa this year.⁵⁷ However, with passage through the Bab al-Mandab now subject to the logic of war and the discretion of Ansar Allah’s leadership, Egypt may soon face significant supply chain disruptions.

Things are less tenuous in Morocco and Tunisia, certainly. Nevertheless, there, too, the heating up of the Red Sea front promises to add little good to the climate policy mix. Increases to freight and insurance costs are imminent and set to be long-lasting.⁵⁸ Import-dependent as Moroccan and Tunisian renewable projects are, this will raise the costs of prospective solar, wind and battery deployment significantly. Any uptick in oil and gas prices in the weeks and months to come, meanwhile, will force a broader reckoning with current account management and state-financed capital investments. Nor, in Morocco’s case, should the possibility of substantial slowdown in Gulf-originating investment be discounted. In 2026 as before it, many of the projects being developed and/or commissioned in Morocco across the fields of renewable power generation, battery storage, desalination, grid upgrading, and green hydrogen prominently involve the likes of Saudi Arabia’s Acwa Power and the UAE's AMEA and Tara.⁵⁹ At the moment of writing, it is an open question whether these GCC firms, encountering so much turmoil at home, will be able to carry on as planned. If they cannot, a large spanner will be thrown in the works of Morocco’s transition plans.

Amid conditions as volatile and dangerous as today’s, prudence and reactivity should be the guiding principles for North African policymakers. In terms of actionable items, caution holds that ventures of more dubious economic and ecological standing be swiftly triaged. Export-oriented green hydrogen plots stand out in this regard. The prospects of green hydrogen (and green ammonia in particular) remain undermined by comparatively high production costs, ammonia’s non-viability as marine fuel, difficulty in securing off-take agreements, and the absence of a merchant market.⁶⁰ Despite this, planners in Morocco, Egypt, and Tunisia continue to devote hopes, time, and capital to the development of the industry. At our present juncture, minimally, this is an unwise allocation of resources. Focusing attentions and capital on projects that are most important to the build out of renewable power, be they bankable or not, offers firmer ground to stand upon. For all three countries, this means emphasizing grid upgrades above all else.

“For all three countries, this means emphasizing grid upgrades above all else.”Colin Powers

In the big picture, the structural restraints that are created through Morocco, Egypt and Tunisia’s subordinate position within the global financial system—and through their acute dependence on the MDBs—will also need to be recognized and better managed. Simply put, the combination of blended finance and state derisking does not offer a path to socially just climate resilience. Finding alternatives, difficult though the task is, will be necessary. A bigger premium must also be placed on localized benefits and technology transfer. On technology transfers, developing national capacities in the advanced chemistry processes involved in battery production and the complex manufacturing required to turn quartz into the silicon ingots and wafers is requisite for value capture.⁶¹ By extension, it is also requisite for enhancing the scale and speed of the energy transition. With all the clouds on the geopolitical and geoeconomic horizon, this could be no more important.