Philippines proclaiming an energy emergency. India powering down factories. Bangladesh rationing fuel. Pakistan closing schools.
The developing world is absorbing some of the worst fallout from the Iran war, with harsher and more-lasting economic shocks looming on the horizon.
The joint U.S.-Israel campaign in Iran has held the global economy hostage, as volatile markets swing frantically in response to reports of strikes on major energy infrastructure or military escalation. Global oil prices rise and fall in time with President Donald Trump’s often contradictory statements about the war’s objectives and possible end point.
As visceral scenes of death, destruction and turmoil play out in the Middle East, development experts are growing increasingly anxious that a protracted war risks social unrest and widespread economic contagion.
“The world right now is full of vulnerabilities and an economic shock of this extent could really cause some serious damage in its wake,” said Clemence Landers, vice president and senior fellow at the think tank Center for Global Development. “I think it is entirely plausible this could expand beyond the economic realm.”
No country is immune to the war’s economic impacts. Iran has effectively shuttered 20 percent of the world’s oil supply by closing the Strait of Hormuz, and attacks on energy infrastructure could mean prolonged supply disruptions. Oil prices, which are set globally, have hovered around $100 per barrel, spiking nearly 40 percent since before the war.
But cash-strapped and debt-crushed governments have fewer tools to manage the fallout from the conflict, which has foisted a beastly combination of fuel shortages and rising costs on emerging economies. Populations across South Asia, Sub-Saharan Africa, the Middle East and Southeast Asia are poised to suffer from soaring pump prices, scant fuel for home-cooked meals and higher-cost fertilizer that exacerbates food insecurity.
The Iran war’s pain could be felt by a far greater number of people globally than were affected by Russia’s 2022 invasion of Ukraine. That war quickly boosted grain prices, worsening inflation and food supply worries as the world repaired supply chains the Covid-19 pandemic ruptured.
But not everywhere.
“During Russia and Ukraine, not that many countries were badly impacted. Now the impact is huge,” said Vibhuti Garg, South Asia director at the Institute for Energy Economics and Financial Analysis. “They were already struggling — and now this has made their condition even worse.”
Few options
Nations are far more economically vulnerable now than before the pandemic or Ukraine war, said Christina Segal-Knowles, who served as the coordinator for international economic strategy in former President Joe Biden’s National Security Council. Interest rates that rose to tame inflation earlier this decade ballooned debt service obligations for low-income countries. The Iran conflict has dashed hopes that rates will continue to decline, she said.
Countries with low reserves of foreign exchange are most exposed. They use those more stable currencies to buy fuel on the spot market but now face competition from deeper-pocketed nations for dwindling, higher-cost oil and gas. Meanwhile, currencies like the Indian rupee have depreciated, eroding governments’ economic power.
As currencies weaken, countries’ external debt becomes harder to service, said Guatam Jain, who focuses on financial markets in emerging economies at Columbia University’s Center on Global Energy Policy. And because the price of oil and gas is in dollars, it gets more and more expensive for them to import.
That leaves many governments with few options to insulate their people from the pain of higher fuel costs. They can either pay from their modest international reserves, take on more debt or skimp on other imported goods, Jain said, like medicine.
Those are the trade-offs facing a diverse, geographically scattered collection of countries that includes Egypt, Pakistan, Zambia and Sri Lanka, among others, development officials said.
Financial institutions are already stepping in to ease the strain. The Asian Development Bank on Tuesday announced financial and technical support for developing member countries dealing with higher energy costs and supply chain disruptions to fertilizers and other goods. The bank said it would deploy guarantees and loans to help lesser-resourced countries purchase increasingly scarce and expensive spot market oil.
Many countries, particularly those that rely on fossil fuel imports, have seen their borrowing costs increase. That poses an acute problem for governments with high external debt and could impact their ability to find new financing just as their existing debts come due, say researchers at Boston University. Countries that subsidize fuel to lower costs for consumers will face an added burden.
“If they’re dependent on imports and they subsidize the consumption of oil, then they’re at a point where any supply disruption is going to be a massive shock, not only on standards of living of the population, but it turns the standard of living shock into a fiscal shock,” said Rebecca Ray, a senior researcher at Boston University’s Global Development Policy Center.
Governments are unlikely to skip debt service payments and risk a ruinous default, Segal-Knowles said. They will simultaneously attempt to absorb the higher costs for basic goods. That means fuel price caps that limit economic shocks to everyday people and using cash reserves to purchase pricier fertilizers and energy will erode national budgets and services.
“Instead of trying to cut back on fuel subsidies, countries will be very, very squeezed. They are likely to cut back on other things,” said Segal-Knowles, who is now managing director of international policy at The Rockefeller Foundation.
The costs could be significant. Subsidies or tax holidays for fuel to limit blowback for households would cost emerging and developing countries on average 0.9 percent of gross domestic product per year, the Center for Global Development estimated. Countries already have implemented a range of those measures: Brazil suspended a tax on diesel, Vietnam is ignoring duties on imported fuel, and China scaled back planned pump price increases.
Long-term impacts
It isn’t clear how long countries can act as a bulwark against price increases. Some states in India are facing elections, which puts added pressure on their government to contain prices, said Duttatreya Das, an energy analyst at Ember. “I think once the elections are over, it would fall on the plates of consumers.”
Managing supplies, however, is just as crucial as taming prices. It’s also a potentially more complicated problem given fierce competition that is pitting lesser-resourced governments against ones that can stomach pricier spot market shipments.
Liquefied petroleum gas supply and price disruptions may have the greatest poverty impact since food price shocks experienced during the Great Recession in 2008 and 2009, said Ashley Chang, a spokesperson for The Rockefeller Foundation, in an email. India has already prodded restaurants and commercial cooking operations to shutter in order to preserve that fuel for households.
Fertilizer prices and availability will rattle countries that depend heavily on subsistence farming and were already facing severe food insecurity, said Katy Crosby, senior director for U.S. policy at Mercy Corps. “When you add fuel costs, cost of transporting food and humanitarian funding cuts, you really get an unfortunately perfect storm,” she said.
About one-third of the world’s urea, which is widely used in fertilizer, passes through the Strait of Hormuz. Liquefied natural gas is also a primary feedstock for manufacturing fertilizer — and it may take months to years to restore Qatari LNG infrastructure and production Iran damaged in strikes earlier this month. Those disruptions come as many countries are heading into planting season, potentially tightening food supplies down the road.
The threats to agriculture worry some analysts about converging risks facing countries as global temperatures continue to soar and climate extremes impact agricultural yields. Volatility has become “a structural factor” for commodity markets that were already wrestling with climate shocks, said Olivia Lazard, a fellow at the Berggruen Institute, a think tank. Now they must do the same with geopolitical instability.
“The war in Iran has changed something fundamental,” she said.
