Africa Navigates Middle East Crisis: Better Prepared, Yet Still Vulnerable

The continent of Africa is once again confronting the repercussions of a significant global event. The current Middle East crisis represents the third major disruption to supply chains in less than a decade, following the COVID-19 pandemic and the 2022 conflict between Russia and Ukraine. Each of these external triggers has exposed underlying structural weaknesses in African economies, often leading to periods of economic strain.

The timing of this latest crisis is particularly challenging. Many African nations have spent the preceding two years striving to rebuild their economic buffers, which were severely depleted during the earlier shocks. Across the continent, efforts towards fiscal consolidation have yielded generally positive results, and central banks have implemented measures to curb inflation. In countries like South Africa and Egypt, there had been improvements in medium-term debt profiles and modest rebuilding of foreign reserves.

Despite these efforts, the continent remains inadequately shielded against such global shocks. Just as the macroeconomic outlook was beginning to improve, with anticipated interest rate cuts in developed economies, a stronger dollar, and firmer commodity prices, this new disruption threatens to halt that positive momentum.

The core issues at the heart of the present turmoil are fuel, fertiliser, and food. Escalating fuel costs inevitably increase transportation and production expenses. Shortages or price hikes in fertilisers directly diminish agricultural yields, thereby exacerbating food inflation. This, in turn, puts a strain on household budgets and can contribute to sociopolitical instability.

The mechanisms through which these shocks transmit are well-understood. Financial markets often react first, manifesting as currency pressures due to capital outflows and investor shifts towards safer assets. This dynamic increases the cost of imports and fuels inflationary trends. Commodity prices, especially for energy and agricultural inputs, tend to rise. Disruptions to supply chains eventually translate into slower production, consumption, and overall economic growth.

Five weeks into the Middle East crisis, these risks are becoming evident. Oil prices have surged by approximately 50 percent, and fertiliser costs have increased by between 35 and 50 percent. African currencies have experienced depreciation, with the South African rand, for instance, losing between 5 to 7 percent against the US dollar. Consequently, elevated inflation expectations have caused central banks to pause or slow down their policy rate reductions. Central banks in South Africa, Angola, Morocco, and Mozambique have halted rate cuts, citing the risk of imported inflation, with many others expected to follow suit.

In contrast to previous crises, the capacity of African countries to withstand these pressures varies significantly. Some nations, such as Kenya, demonstrate more robust cushioning mechanisms compared to 2022. Foreign exchange reserves have strengthened to a stable level, equivalent to 5.7 months of import cover, policy credibility has improved, and the government is actively managing its debt maturity schedule.

Nigeria is also in a comparatively stronger position. Enhanced reserve management, a move towards inflation-targeting principles, and improved coordination between fiscal and monetary policies indicate more robust governance. The government has eliminated costly subsidies and is actively managing its debt profile. These collective reforms provide a degree of latitude to navigate economic volatility.

However, the situation is less encouraging in other regions. Countries like Senegal, heavily reliant on energy imports, possessing limited reserves, and facing substantial external financing requirements, remain exposed. This vulnerability extends to several frontier economies, including Mozambique, where access to international capital is restricted, and domestic economic fundamentals are compromised.

The Center for Global Development suggests that a comprehensive assessment of vulnerability can be made by examining a combination of indicators. These include the degree of reliance on energy imports, the extent of fossil fuel subsidies, foreign debt service obligations, dependence on fertiliser imports, exposure to remittance flows from the Gulf region, and the adequacy of foreign reserves relative to import needs.

Nations that perform poorly across several of these metrics are likely to face more acute challenges. For example, Egypt imports a significant portion of its energy, with oil and gas constituting 30 percent of its goods imports. The country also faces approximately $29.18 billion in external debt servicing obligations and is a major recipient of remittances from the Gulf, accounting for over 4 percent of its gross domestic product.

Policymakers are already grappling with difficult trade-offs, offering no easy solutions. Monetary policy alone cannot adequately address the impending supply-driven inflation. Tightening monetary conditions to anchor inflation expectations risks hindering already fragile economic growth. Conversely, implementing subsidies to support households could jeopardise fiscal sustainability.

Yet, inaction carries the risk of intensifying social and political tensions. Historically, rising food and fuel prices have served as catalysts for unrest. In nations where the social contract is already strained, increased economic pressure could exacerbate existing divisions. Ethiopia, Egypt, and Nigeria have already witnessed instances of fuel scarcity and rationing, which often precede broader social disturbances.

African governments are adopting diverse strategies to manage the sociopolitical consequences. Egypt has implemented electricity rationing, encouraged early business closures, and mandated remote work arrangements to conserve fuel. Zambia has initiated investigations into suspected hoarding and panic buying of fuel. Namibia has reduced fuel levies by up to 50 percent for a three-month period.

While less frequently discussed, secondary effects of the crisis can be equally disruptive. Shortages of critical commodities like gas, helium, and sulphur impact a range of industries, from mining to manufacturing. In countries such as Zambia, where industrial activity is closely linked to global supply chains, these disruptions can have a disproportionately severe effect.

There are nascent opportunities, though their realisation is not guaranteed.

Commodity-exporting nations could experience short-term benefits. Nigeria and Angola both have oil benchmarks below $70 per barrel. If sustained higher prices, exceeding $100 per barrel, materialise, their export earnings could rise substantially.

Nigeria's energy trade dynamics might improve with increased domestic refining capacity from the Dangote Refinery. The refinery has reportedly received numerous orders from customers across Africa and Europe. However, Nigeria continues to face challenges in ensuring adequate fuel supply to the refinery due to contractual obligations for imported cargoes and underproduction.

Nations that can position themselves as hubs for aviation, logistics, and digital infrastructure could also see advantages. Ethiopian Airlines, for instance, is expanding its network to include six new international and domestic destinations. Kenya Airways and Royal Air Maroc are also increasing their existing flight routes. Ports along the Cape of Good Hope route witnessed a significant surge of 112 percent in ship diversions in early March.

The primary challenge, as is often the case, lies in effective implementation. Africa has frequently encountered opportunities but has struggled to convert favourable conditions into sustained investment and economic growth. Limitations in capacity, policy uncertainty, and governance issues tend to impede positive outcomes.

In the short term, the outlook is likely to be characterised by pressure rather than opportunity. Economic growth is expected to face strain, inflation may remain elevated in certain sectors, and financing conditions are anticipated to stay restrictive.

In the longer term, strengthening Africa's resilience is paramount. Investing in energy security, whether through domestic production, refining, or renewable energy sources, is crucial. Enhancing regional integration, encompassing both trade and infrastructure, can reduce reliance on external dependencies. Developing more stable financing mechanisms, including robust domestic capital markets, is essential for reducing exposure to volatile international financial flows.

External shocks are an inherent feature of the global economic landscape, and Africa's susceptibility is unlikely to diminish given the narrow economic profiles of many of its nations. The critical question is not how to entirely avoid these shocks, but rather how effectively they can be absorbed.