How is the conflict in the Middle East affecting developing economies?

Developing countries are often vulnerable to fuel price shocks caused by global geopolitical tensions. As well as raising the costs of key items such as petrol and food, conflicts like the Iran war can force affected governments into expensive subsidies, further damaging already weak economies.

The Gulf region remains central to the global energy system. At its centre is the Strait of Hormuz, a narrow shipping lane through which around 20 million barrels of oil pass every day – roughly one-fifth of global petroleum consumption. This narrow maritime corridor links major producers such as Iraq, Kuwait, Saudi Arabia and the United Arab Emirates to global markets. Qatar – the world’s second-largest exporter of liquefied natural gas (LNG) – is also heavily reliant on this passage.

The concentration of energy supply through a single geographical ‘chokepoint’ means that even limited disruptions can trigger large movements in global energy prices. These price shifts propagate quickly through food systems via higher costs of transport, fertiliser and production.

The current vulnerability comes at a time when many developing economies are still adjusting to the aftershocks of the Russia-Ukraine war. Prior to 2022, Russia and Ukraine together accounted for a large share of global wheat, maize and sunflower oil exports. Disruptions to Black Sea shipping routes triggered a sharp rise in global food prices, with the FAO (Food and Agricultural Organization) Food Price Index reaching record highs in 2022.

Figure 1: Annual Food Price Index

Source: Food and Agriculture Organization of the United Nations
Notes: Base index 100 consists of average 2014-2016 values.

Although food price growth has now calmed somewhat, costs remain elevated relative to pre-pandemic levels (see Figure 1). Many developing countries have subsequently spent billions on subsidies, depleting fiscal space, accumulating debt through aggressive external borrowing and even experiencing currency depreciation. Collectively, these factors place them in a weaker position in terms of responding to the geopolitical tensions between Iran, Israel and the United States.

While there has not yet been a sustained full closure of the Strait of Hormuz, there have been increased risks to maritime transport. Tanker traffic has experienced periods of decline or rerouting amid heightened tensions, while shipping insurance costs have risen sharply – increasing by more than 1,000% in some cases. This ‘war-time risk premium’ raises the effective cost of transporting oil, even when physical supply remains available.

Oil markets respond strongly to geopolitical risk. During recent escalations, Brent crude prices have been highly volatile, with prices ranging from $85 to $120 per barrel over short periods (see Figure 2). The key feature of current oil markets is not simply higher prices, but increased volatility. While major Gulf producers have maintained relatively stable export volumes, uncertainty has amplified price fluctuations.

Figure 2: Europe Brent spot price FOB

Source: US EIA (Energy Information Administration)

For developing economies, the consequences depend heavily on their exposure to imported energy. Countries such as Bangladesh, India and Pakistan source a large share of their crude oil and refined fuels from the Gulf. Similarly, economies in East Africa, including Kenya and Tanzania, are highly dependent on imported petroleum products.

In these economies, increases in global oil prices tend to pass through to domestic fuel prices, often amplified by currency depreciation since energy imports are priced in US dollars. Governments frequently intervene through subsidies, but this comes at a significant fiscal cost, with reduced spending on social services as a result.

These fluctuations in oil prices also create uncertainty for importing nations, complicating budgeting, pricing and investment decisions. This uncertainty feeds through supply chains, raising costs even in the absence of sustained price increases.

The effects are particularly visible in food markets. Fuel is a key input for agricultural production, transport and fertiliser manufacturing. As a result, increases in fuel costs tend to raise food prices, especially in agrarian economies with less efficient supply chains. For example, one study reports that the tensions between Iran and the United States can raise corn prices in sub-Saharan African countries by up to 25%.

For households in low-income countries, where food accounts for a large share of total expenditure, these increases have immediate implications for household wellbeing. Rising food prices reduce real incomes, increase poverty rates and heighten malnutrition risks.

The long-term consequences extend beyond short-term effects on wellbeing. Persistent exposure to external shocks can undermine economic growth by discouraging investment through higher interest rates aimed at curbing attendant inflation, worsening fiscal balances and increasing debt burdens. Monocultural countries (those that are largely dependent on one commodity for export revenues) and import-dependent economies (such as Micronesia, Nauru and Nigeria) are particularly vulnerable.

This raises the question of whether oil-exporting developing countries like Nigeria benefit from higher global prices. In principle, higher prices should generate windfall revenues. But while export revenues may increase, these gains are often offset by subsidy costs, exchange rate pressures, institutional constraints and local corruption – a classic case of what economists call the resource curse.

Conclusion

The economic impact of Middle East tensions operates less through outright supply disruptions, and more through heightened uncertainty and volatility in global energy markets. These effects are transmitted rapidly to developing economies, where they amplify existing vulnerabilities stemming from earlier shocks such as the war in Ukraine.

The result is a compounding crisis: higher and more volatile fuel prices feed into food inflation, erode household wellbeing and constrain long-term economic growth. Without greater diversification, stronger institutions and more targeted policy responses, many developing economies risk becoming increasingly exposed to recurring external shocks of this kind.

Where can I find out more?

This UNDP (United Nations Development programme) document explains the economic and humanitarian impact of the conflict in Iran.
The Bloomsbury Intelligence and Security Institute (BISI) outlines how the war in the Middle East is affecting South Asia.
This IMF (International Monetary Fund) blog provides an overview of how the war in Iran is disrupting the energy sector and trade globally.