Strait of Hormuz Disruptions: Beyond reopening - lasting impacts on vulnerable economies

The reopening of the Strait of Hormuz would bring much-needed relief for many economies.

This is a first step toward a progressive recovery of energy markets and international trade. However, during more than 100 days of shipping disruption, negative effects have already rippled through the global economy.

Vulnerable economies have been particularly exposed to oil and fertilizer price shocks. These shocks can result in persistent inflation. People suffer from inflation, especially the poor. It squeezes household budgets and makes necessities–such as food and healthcare–less affordable.

The reopening paves the way for recovery. But for vulnerable economies, the path can be longer, uneven and costly. International support is needed to improve their ability to cope.

These shocks will be felt for many months – with developing countries bearing the heaviest impacts. I call on all parties to honour the ceasefire and redouble efforts.
António Guterres
Secretary-General of the United Nations

After 100+ days of disruption, trade through the Strait is set to resume

The prospect of the Strait of Hormuz opening is calming energy markets down

Strait of Hormuz reopening: In some sectors like transport prices take longer to adjust

The shockwaves have already rippled through the world economy.

Circular flow diagram titled "Past input price shocks remain a risk to future food security," illustrating a seven-step cycle: (1) traffic through the Strait of Hormuz was disrupted, (2) limiting availability and raising costs of oil, gas, and nitrogenous fertilizers, (3) higher energy prices increase transport costs, (4) further fueling inflation and slowing the global economy, (5) agricultural production costs increase, (6) food production may be affected, pushing domestic food prices up, and (7) vulnerable populations may face greater food insecurity and hunger.

Most vulnerable economies are exposed to oil and food price shocks

Small island developing states are notably dependent on oil imports

For many least developed countries imports of staple food are crucial

Trade shocks hit hardest where the ability to cope is limited.

Tighter public finances mean less room to cushion shocks, especially when vulnerable countries face:

Difficulties to mobilize resources, domestically or externally.
A heavy debt servicing burden and exchange rate risks associated with high levels of external debt.
A drop in remittances that could cut off a financial lifeline for some economies.
Declining international aid.

Short-lived energy shocks can have long-term consequences

In a fragile global economy, energy shocks fuel lasting higher inflation

Food price inflation may keep climbing even after the triggering shock fades

Short periods of unaffordable food can have lasting consequences

Issues for consideration

Normalization of trade will take time. International energy prices can adjust fast, but shipping and value chains need time to adapt.
The impact of the energy shock will continue to be felt unevenly. Many vulnerable economies have limited ability to cope with soaring import bills. Countries dependent on oil imports face particularly strong domestic inflationary pressure.
Food production risks remain. Input price hikes that may have persistent impacts on production and trade, coupled with an expected strong El Niño, increase concerns about food insecurity.
International support is needed. Decreasing official development assistance and mounting debt servicing burdens risk slowing down recovery.
Investment in resilience is key. This includes diversification of trade sources, as well as other domestic resilience measures, conditional on financial constraints.