The recent reopening of the Strait of Hormuz, which was closed for over 100 days, may not bring immediate relief to the Least Developed Countries (LDCs) and other vulnerable economies facing oil and food price shocks, as highlighted in a new report by the UN Conference on Trade and Development (UNCTAD).
Released yesterday, the report emphasized that while the reopening of this crucial maritime passage in the Gulf could benefit 61 countries, including 35 LDCs, the road to recovery for vulnerable economies might be prolonged, erratic, and costly, according to UNCTAD’s Trade and Development Insights.
For instance, Bangladesh heavily relies on imports to meet 95 percent of its oil demand and 30 percent of its gas requirements, with major suppliers being Middle Eastern nations like Saudi Arabia and Qatar.
The report revealed a significant drop in daily ship transits through the Strait of Hormuz from over 100 to below 50 following its closure due to the US-Israel conflict with Iran. However, transit numbers began to rise again after the recent agreement between the United States and Iran.
While the prospect of the Strait reopening has helped stabilize energy markets, certain sectors like transportation may experience delayed price adjustments, according to the UNCTAD report.
During the period of shipping disruption, the global economy already felt adverse effects, particularly impacting vulnerable economies with oil and fertilizer price shocks leading to potential inflation. This inflation could strain household budgets, making essentials like food and healthcare less affordable, especially for low-income individuals.
The report warned that rising oil, gas, and fertilizer prices could escalate agricultural production costs, potentially affecting food production and domestic prices, resulting in heightened food insecurity and hunger among vulnerable populations.
Even a minor 5 percent increase in real food prices can elevate the risk of child malnutrition, underscoring the critical link between food prices and health outcomes.
Furthermore, the report highlighted that while international energy prices can adjust swiftly, shipping and value chains may require more time to adapt, prolonging the uneven impact of the energy shock on vulnerable economies. Countries heavily reliant on oil imports could face significant domestic inflationary pressures.
With agricultural input price hikes and the looming El Niño phenomenon, concerns about food insecurity and trade disruptions persist, necessitating international support for vulnerable economies. The diminishing official development assistance and escalating debt servicing obligations pose additional risks that could impede the recovery process, as per the UNCTAD report.
