Developing economies in Asia, Africa and the Middle East are bearing the brunt of surging energy costs.
As the United States-Israeli war with Iran sends tremors through the global economy, the poorest members of the Global South are the most exposed to the fallout.
In Asia, Africa and the Middle East, developing economies are bearing the brunt of surging energy costs prompted by the closure of the Strait of Hormuz and attacks on oil and gas facilities across the Gulf.
From Pakistan to Bangladesh and Sri Lanka, through to Jordan, Egypt and Ethiopia, policymakers are facing the double whammy of being both heavily dependent on imported energy and having limited financial firepower to absorb the shock of spiking prices.
In Pakistan, which imports about 80 percent of its energy from the Gulf and has lurched between economic crises for years, authorities have scrambled to roll out measures to conserve fuel.
Facing the depletion of the country’s petrol and diesel reserves within weeks, officials have closed schools, introduced a four-day working week for government offices, ordered half of the country’s public sector employees to work from home, and slashed fuel allowances for official business.
Pakistani Prime Minister Shehbaz Sharif said last week that he had decided against a proposed hike in petrol and diesel prices before the Eid Al-Fitr celebration, saying the government would “bear the burden” of rising costs.
Sharif’s announcement came after the government had earlier this month approved a 55 rupee ($0.20) rise in the price of a litre (0.26 gallons) of petrol or diesel.
While government subsidies have helped cushion the blow for the public, there are fears that petroleum prices will surge and bring economic activity to a halt if the war drags on, said S Akbar Zaidi, the executive director of the Institute of Business Administration in Karachi.
“The overall shock is quite severe, although it has not been fully passed on to consumers and to industry,” Zaidi said.
“I expect the next few weeks to make things far worse once the disruption and price factors pass through.”
Currency depreciation
The weakening of many developing countries’ currencies against the US dollar – the result of investors buying the greenback amid heightened geopolitical uncertainty – has compounded the situation by further driving up costs.
“Countries such as Indonesia and the Philippines have already seen their currencies at near record lows even before the start of the conflict, making imports, including oil, much more expensive,” said Azizul Amiludin, a non-resident senior fellow at the Malaysia Institute of Economic Research in Kuala Lumpur.
Much as the fallout of the war poses particular challenges for governments in developing countries, the effect on citizens is disproportionate, too.
In less advanced economies, citizens spend much more of their pay cheques on fuel and food, leaving them more exposed to rising living costs.
At the same time, governments in developing countries have less capacity to provide a safety net for those at risk of falling through the cracks.
“In vulnerable economies, governments often attempt to shield their populations from price hikes by subsidising fuel and food,” said Yeah, the Jeffrey Cheah Institute professor.
“However, with depleted fiscal buffers and shrinking revenues, this becomes unsustainable. The ensuing austerity, combined with hyperinflation, can trigger widespread social unrest and a full-blown fiscal crisis.”
Khalid Waleed, a research fellow at the Sustainable Development Policy Institute in Islamabad, said rising transport costs would soon be felt at supermarket checkouts.
“Diesel is the backbone of Pakistan’s freight and agricultural economy,” Waleed said.
“Trucking costs have started climbing, and that will feed into everything from flour to fertiliser in the weeks ahead.”
Once Pakistan’s wheat harvest gets under way in April, food prices could spike well beyond their current levels, Waleed said.
“Combine harvesters, threshers, tractors for haulage from field to market, and the trucks that move grain from fields to flour mills and storage facilities all run on high-speed diesel,” he said.
“For a country where wheat flour is the single largest item in the food basket of the bottom two income quintiles, this is not a marginal concern,” Waleed added.
“If diesel prices stay elevated through April and May, Pakistan will harvest its wheat at the most expensive input cost in years, and that cost will transmit directly into food inflation at a time when households have almost no capacity left to absorb further price shocks.”