ME conflict and the economic iceberg

With the Middle East conflict broadly ongoing for almost two months, with a fragile ceasefire holding for the moment, yet the high level of uncertainty – not to mention huge loss to life during the conflict – and a significant time lag in terms of fuel supply disruption already well entrenched due to virtual closure of Strait of Hormuz by Iran, and siege on a wider scale of the Strait of the Hormuz by the United States has been pushing the global economy to the brink of major catastrophe, with some comparing that likely economic collapse to the ‘Great Depression’ of the 1930s; where the oil crisis has been reportedly called ‘more serious than the ones in 1973, ?1979 and 2022 together’ by International Energy Agency’s (IEA’s) head, Fatih Birol. Four comments virtually hit the nail on the head with regard to the economic consequences of the currently ongoing Middle East conflict. The first comment gives an overall deep impact of the ME conflict on economy, whereby renowned political scientist, Prof. John Mearsheimer at the University of Chicago pointed out, ‘Fact is, the international economy is like the Titanic heading toward an iceberg, and we have to shut this war down yesterday, so that we don’t hit the iceberg. ’ Secondly, calling the impact of the ME conflict as a ‘perfect storm’, director of the University of London’s SOAS Middle East institute, Adam Hanieh indicated, ‘I think it’s really important to understand this coming food crisis as an intersection of multiple crises. We are of course. .. going to see price rises in food, and in fuel, but we are also experiencing the moment, the climate, and debt crises in much of the global South. So, it’s a perfect storm if you like, of this food, fuel, climate, and debt crises that are all very deeply connected to one another. In that sense it’s different from earlier food crisis like the 2008, or 2022 following Russia’s invasion of the Ukraine. ’ Moreover, in a March 26 published article ‘FAO Chief Economist warns of severe global food security risks from disruption to Strait of Hormuz trade corridor’ by Food and Agriculture Organization (FAO), highlighted the comments of its chief economist, Máximo Torero, indicating the impact of closure of Strait of Hormuz, as follows: ‘“This is not only an energy shock. It is a systematic shock affecting agrifood systems globally, ” Torero said. He emphasized that the Gulf region accounts for nearly half of global sulfur trade, a critical input used to produce sulfuric acid for processing phosphate rock into fertilizers. Disruptions to sulfur supply risk fracturing global phosphate fertilizer production, including in major producing countries. ’ In addition, the article quoted FAO chief economist’s comments with regard to supply shock impacting prices of fertilizers as follows: ‘The Chief Economist pointed out that the disruptions are already translating into higher costs for farmers worldwide. Fertilizer prices have risen sharply, with Middle East granular urea increasing by 19 percent in the first week of March, while Egyptian urea prices surged by 28 percent. Given that natural gas is the primary feedstock for nitrogen fertilizers, elevated energy prices are expected to sustain upward pressure on fertilizer costs. FAO projections indicate that global fertilizer prices could average 15 to 20 percent higher in the first half of 2026 if the crisis persists. ’ Thirdly, executive director of United Nations Office for Project Services (UNOPS), Jorge Moreira de Silva highlighting the impact of closure of the Strait of Hormuz, indicated the following: ‘The disruption of the Strait of Hormuz can push 45 million more people into hunger, and starvation. ’ In its March 23 published report ‘Projected increase in acute food insecurity due to the Middle East conflict’ World Food Programme (WFP) links the impact of energy shortages to the availability, and affordability of food, pointing out in this regard ‘Arguably, the most important impact pathway from the conflict in the Middle East to world hunger runs through the conflict’s impact on global energy markets. The Middle East remains the backbone of the global energy system because it accounts for a dominant share of the world’s oil and gas supply. The region produces over 30 percent of global oil and holds around 20 percent of global gas reserves. As the energy price increases transmit to local markets in poor countries, food becomes less affordable. Energy is a direct input into agriculture through fuel, fertilizer and transport. Oil shocks transmit quickly into food prices, particularly in import-dependent economies. ’ Moreover, this is substantiated in a April 18 Financial Times (FT) published article ‘The coming global food crisis’ by Adam Hanieh, whereby he traces the routes of increased dependence of food production to fossil fuel in the wake of the ‘Green Revolution’, which while substantially enhanced crop yields, not only created significant food production vulnerability in the face of energy supply disruption, but also increased impact on environment in terms of greater use of fossil fuel. This, in turn, calls for actively moving towards green technologies in agricultural activities, given the fast-unfolding problems of a world in ‘polycrisis’ including climate change. He pointed out in this regard in the article the following: ‘Few 20th-century transformations did more to remake the world than the “Green Revolution”. From the 1950s onwards, new high-yielding crop varieties, synthetic fertilisers, chemical pesticides and large-scale irrigation drove a sharp increase in the output of staple crops such as wheat and rice. In its more celebratory accounts, this transformation pushed back famine and helped support rapid population growth across much of Asia and Latin America. .. .As numerous critics have noted, the Green Revolution also came with enormous ecological and social costs. But one of its less discussed consequences was the link it established between food production and the fossil fuel industry across every stage of farming. .. .The new high-yielding varieties of the Green Revolution, by contrast, could only deliver their promised output through large and repeated applications of industrial fertilisers, especially nitrogen-based products such as urea and ammonium nitrate. Since many of these fertilisers are derived from natural gas, the Green Revolution meant that the world’s food production became ever more closely tied to a constantly increasing supply of hydrocarbon inputs. ’ Fourth is the comment by renowned economist, Prof. Richard D. Wolff, but first some background to that comment needs to be provided. As a consequence of the Middle East (ME) conflict, there is possibility of a US dollar supply shortage issue, at the back of lack of oil exports, reportedly pushing, in turn, not only Gulf countries that are more directly linked to the ME conflict, but also Asian countries, to request currency swap lines from United States, as an April 22 FT published article ‘US allies in Gulf and Asia have requested swap lines, Scott Bessent says’ pointed out in this regard, ‘The US is considering providing currency swap lines to the United Arab Emirates and other allies in the Gulf and Asia whose economies have been by the fallout of Donald Trump’s war with Iran. US Treasury secretary Scott Bessent said the UAE and “numerous” other countries had requested support from Washington as the conflict sends shockwaves through economies in the Middle East and beyond. ’ Another article ‘The dollar swap puzzle’ by FT published on April 24, indicated in this regard the following: ‘As a rule, it’s not a good sign when officials start talking about deploying central bank swap lines. It usually happens when the dollar is screaming higher and there’s a shortage of greenbacks in the system. .. .earlier this week, US Treasury secretary Scott Bessent said Gulf and Asian allies had requested access to swap lines in the event of a prolonged Iran war. The only confirmed request came from the United Arab Emirates. .. .One possibility is that Gulf countries are about to experience recessions or fiscal crises. They are energy rich, but when their oil and gas cannot pass through the Strait of Hormuz, cash flow problems probably ensue. This matters to Washington because many of the dollars those nations earn from oil and gas exports flow back to the US, in the form of investments in Treasuries and equities. If that flow were to stop, US markets would come under pressure. ’ Moreover, noted economist Prof. Richard D. Wolff in an interview recently highlighted concerns over reported currency swap requests in the wake of the ME conflict, whereby he indicated, ‘Mr. [Scott] Bessent is now going to have to decide, he may already have done it, on the request of the Gulf States for what are called dollar swaps. This is not unimportant. A dollar swap is usually an agreement between the United States, either the Treasury or the Federal Reserve on the one hand, and foreign central banks on the other. And the reason you establish it is you have reason to believe that the global supply and demand of dollars is going to be disturbed, and mostly there’s going to be a shortage of dollars. .. .if you worry about a shortage, you will enhance, you will increase your swaps. Why? .. .all the swap means is that a foreign central bank doesn’t have to go into the market and buy dollars if it’s short of them. It can simply grab a bunch from a swap agreement. It used to be that this was done on a weekly basis. Now it is done with these latest ones on a daily basis, which is already a warning sign. ’ In addition, he pointed out that a lack of oil exports related dollar inflows may likely be pressuring Gulf countries with regard to payment of their debts, for instance. Prof. Wolf in the same interview indicated in this regard the following: ‘. .. the Gulf States. .. they, I don’t know whether each of them is, but many of them have now put pressure on the United States to give them, when they don’t have them, credit swap facilities, or if they do have them to make them much larger. Okay, now why would they do that? And the only reasonable answer is that they depend on receiving income in dollar form from selling oil, and natural gas. They have borrowed over the years to invest in many countries. So they have dollar-denominated debts. ’ This situation overall highlights a possible coming of shortage of US dollars, likely pushing its price up in the international markets, creating possibility of heightened problems in particular for net oil importing countries to build foreign exchange reserves. So, there is likelihood of both the quantity of US dollars, and greater competition therefore, in terms of higher price, which calls for putting in place swap lines with US Federal Reserve for instance by Pakistan, which has high dollar needs, and low level of reserves. Hence, Pakistan should also approach US with similar currency swap line request for greater predictability of US dollar flows, both in terms of quantity, and higher swap frequency, given it is a net oil importer along with being highly prone to climate catastrophes, having significant gross financing needs, especially given it is already under difficult debt distress, not to mention the fact also looking to maintain three months of import cover under ongoing extended fund facility (EFF) programme with the IMF. In addition, this situation of possible US dollar shortage in the wake of ME conflict calls for enhanced SDR allocation by International Monetary Fund (IMF), and on needs basis as balance of payments support, and even as budgetary support to cushion already strained fiscal space, and high debt distress situation for a number of developing countries, especially built-up in the wake of Covid-19 pandemic, and the Ukraine War caused supply shock related crisis; in particular for those that have been facing additional challenge in the shape of acute, and quite frequent climate catastrophes. It also needs to be indicated that lack of oil exports in Gulf countries in general would likely negatively impact economic growth in these countries, a number of which are those from which a significant amount of workers’ remittance usually come to Pakistan, and a possible fall in that would further enhance dollar gap facing the country, raising further needs for loans, not to mention being an added reason for securing meaningful level of credit swap line with the USA. This makes all the more important for IMF to allocate enhanced level of SDRs to countries facing difficult balance of payments situation. Copyright Business Recorder, 2026

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