African policymakers should be clear-eyed about the short and medium term impacts of the U.S./Israel-Iran war
Policymakers should prepare for the fact that the coming economic shocks will have long lags; and that the cadence of global crises will likely pick up.
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I: A long war is very likely on the cards; and its (negative) impacts will have long lags
It’s been over two weeks since Israel and the United States attacked Iran. So far the war has followed patterns mirroring what most sober analysts had feared — and Iran had warned about. Despite the ferocity of the opening decapitation strikes, the government and state of Iran have both proven to be relatively resilient. Tehran’s decentralized escalatory posture (“mosaic defense”) has sucked the wider Middle East into the war, and in so doing closed a critical chokepoint for the global energy trade — the Strait of Hormuz. Meanwhile, the scale of the attacks, which have included deliberate targeting of civilian infrastructure, appears to have produced a rally around the flag effect in Iran. People don’t like state collapse; or the idea of bombs falling on their cities and killing civilians, including kids, even when they happen to strongly dislike their authoritarian government.
Overall, the cold hard facts of the case point to a long war. Despite the amount of pain they are absorbing from the extensive U.S./Israeli bombing campaign, the government of Iran might have just enough political space to fight a long asymmetric war. Ominously, hurting the global economy will be a significant component of the guerrilla tactics involved in such a campaign. From Tehran’s perspective, the best way to establish credible deterrence against future unprovoked attacks would be via exacting a high cost on the U.S./Israel alliance, disrupting energy exports from Gulf countries that host U.S. military bases, and causing chaos in the wider global economy. Iran’s government wants to avoid locking in a “mowing the grass” pattern in which they get bombed every so often to degrade their socio-cultural infrastructure as well as economic and military capabilities (as has been the case in Palestine, Syria, and Lebanon). To reiterate, there is a high likelihood that this will be a protracted war.
This will translate into a lot of pain for the global economy (not to mention the civilians in the wider Middle East who are directly impacted by the war).
Notice that much of the damage has already been done. Even if the war ends immediately, it will take weeks if not months to get to a new normal after all the necessary repairs on damaged infrastructure; and prices in that new normal will reflect concerns over an elevated risk environment. Consequently, the upward pressure on prices of oil, fertilizer, and other seaborne bulk goods will likely last for months to come. And if the war drags on beyond six months, or if more oil infrastructure get damaged in attacks, the problem will worsen from high prices to shortages.
These are the likely outcomes for which African policymakers must prepare. The coming inflationary pressures will be felt throughout the Continent’s economies for months, or even years. Some estimates suggest that if oil prices average $85 per barrel throughout 2026 inflation might rise by 60 bps and growth to take a hit of up to 0.4 percentage points. The likely monetary policy response in most African economies — high interest rates — will cut out domestic credit that’s available to households and private firms.
Growth will slow down, and with that governments’ ability to expand fiscal space through better tax administration on both the intensive and extensive margins. For some, a rising import bill will create balance of payment problems, just when governments were beginning to find their way out of the most recent fiscal squeeze. Cash from the Gulf, which has recently become a major source of both public and private liquidity flows into the Continent, will dry up as GCC countries focus on recovery efforts and military spending. There will be less money for future-oriented pro-growth investments in mining, agriculture, energy, roads and other critical infrastructure.
This means that regional growth in 2026 will most likely be lower than the 4.4% that was projected earlier this year.
That said, there are good reasons not to engage in the usual catastrophizing about the Continent’s economic prospects. First, there will be variation across the Continent, with some countries faring better than others. For example, oil producers should get a windfall from higher prices (although I worry that higher prices might get in the way of much-needed reforms and diversification in countries like Angola and Nigeria). Second, this oil shock is not your grandparents’ oil shock. So far market movements suggest that prices may not skyrocket. As Tyler Cowen likes to point out, never underrate the elasticity of supply. Thanks to new oil and gas discoveries (and technological advancements in extraction), global dependence of Middle Eastern hydrocarbons isn’t what it used to be. Recent investments in renewables also help. Which is to say that the inflationary pressures won’t present too steep a climb; and that good policymaking might mitigate against the worst effects of the crisis.
II: The emerging crisis in four charts
As shown below in Chart 1, the war has stopped most cargo traffic through the Strait of Hormuz, a vital passage for significant shares of global trade in petroleum products, chemicals, and bulk goods. Chart 2 highlights the fact that Asian markets are the worst affected so far (as a share of exports from the Gulf).
However, this does not mean that African countries are immune. First, the figures belie the fact the share of African imports that originate from the Gulf can be pretty high. Kenya, for example, gets upwards of 80% of its refined petroleum products from the Gulf. Furthermore, many African countries lack strategic fuel reserves (the wages of elite complacency). Unless things change, biting shortages — like what we’ve already seen in some Asian economies— will hit some countries in about two to three weeks. Second, Asia is the world’s factory. And so we should expect that the inflationary pressures on Asian economies will soon find their way into the global goods markets, and into African economies.
One of the biggest challenges for African economies and households will be the potential impact on food prices (see Chart 3 and Chart 4). The closure of the Strait of Hormuz will hit the price of food via two channels — rising fuel costs (which impacts processing, transportation, storage, etc) and rising fertilizer costs/shortages (which will impact productivity and supply). As shown below, Sudan, Tanzania, Somalia, Kenya, and Mozambique are some of the countries most exposed to fertilizer markets in the Gulf.
Given the political cost of high food prices, we should expect governments to try and soften the blow via costly subsidies (especially in countries that have elections around the corner). That will get in the way of prudential public finance management. Subsidies are rarely temporary, and come with lots of leakages.
III: Regional resilience is the only way forward
There is very good reason to believe that the cadence of global crises will increase. As noted above, there is every little likelihood that the Gulf will not quiet down until Iran gets ironclad guarantees that they won’t routinely get bombed. Getting there will be a tough slog. Beyond the Gulf, potential flashpoints include the Red Sea, China-Taiwan, and escalation of the Russia-Ukraine war. In addition, one of the biggest risks to the global economy is continued (and seemingly accelerating) strategic atrophy in the West. We should expect that Western governments with significant global influence will keep stumbling into mistakes that end up hurting the global economy.
The only way for African countries to prepare for this reality is through regional resilience. This is not a naive call for Pan-Africanism (see my thoughts on this here). Instead, it is a call for the more ambitious African countries and their respective private sectors to build resilient systems that rely on African supply chains and markets. For example, African countries are net exporters of petroleum products — by a lot. Dangote has demonstrated that it’s possible to expand regional refining capacity. The region also has the capacity to produce enough fertilizer for its own markets, with spare capacity for export (see examples here, here, here, and here). If all policymakers achieve over the next five years is figure out a path to regional self-sufficiency in fuels and fertilizer, then they will not have let the current crisis go to waste. They will then be able to build on the lessons learned in other sectors. This is the way to turbocharge the ongoing push against export of raw materials across the board.
The crisis in the Gulf also opens up an opportunity for a network of the Continent’s ports to market themselves as a more reliable alternative route for global trade. Again, such an effort doesn’t require endless summits in Addis Abbas, and could be championed by a few ambitious governments (or network of privately-managed ports).
Finally, the U.S./Israel-Iran war presents the possibility of a geopolitical reset. As noted in my previous post, countries in the wider Horn made a grave mistake in letting themselves play host to Gulf geopolitical rivalries and related wars. Perhaps this war will convince policymakers in the Gulf, especially in Abu Dhabi and Riyadh, that instability is bad for all involved; and that their policy towards Africa should be primarily grounded in legitimate investments and trade — as opposed to revisionist military misadventures (one hopes that the first sign will be a shift on Sudan policy). Either way, policymakers on the Continent should avoid the temptation to take sides in conflicts that do not involve them. In an increasingly dangerous world, pursuit of their own national interests, and in a manner that strengthens their strategic independence, should be all that matters.
I recognize that this might be asking too much, given the deplorable quality of human capital among the current crop of African leaders. But it’s worth stating for the record. A world that is less aspirationally rule-bound will not be kind to societies that are led by reflexively complacent leaders.
There will be no prizes for playing “conscience of the world,” being perennial hapless victims of global events, or for being misused as pawns in others’ fights.
Especially from a foreign exchange perspective!
All this talk about fertilizers makes we lust for a review of studwells How africa works. Can you please write one? 😬