As the war rages on in the Middle East, it is important to reflect on the likely consequences for Kenya. These include the following;
- High fuel prices – fuel prices could more than double, straining households and businesses. In Kenya, we use Murban crude as a benchmark. The price for Murban crude futures is $146 per barrel. This is a 132% rise from February. The actual cash prices for Murban crude are way higher than this.
- Fuel shortages – the war has resulted in a blockade on the Strait of Hormuz, which carries 20% of global fuel supplies. Infrastructure damage has also reduced capacity. The logistical challenges mean that fuel tanks are filling up fast. With nowhere to store fuel, production is bound to stop. Fuel shortages effectively mean a partial shutdown of the economy, with catastrophic consequences
- High inflation – fuel is used in logistics and other activities such as farming. The Strait of Hormuz also carries 30% of some of the much-needed fertilisers. The cost of importing goods will also increase. The result of all these is high inflation.
- High interest rates – when inflation rises, central banks raise interest rates to lower demand for goods and services. This won’t even solve the situation since it is a supply-side shock, but central banks are wired to respond in a textbook fashion. The high interest rates could even make matters worse.
- Depreciation of the shilling – high prices mean we will need to spend more to import goods. This will deplete forex reserves. This is at a time when some of our exports have also been curtailed by the war. Besides, we have a lot of workers in the Middle East who contribute to diaspora remittances. These workers might lose their livelihoods. Tourism will be highly impacted by the escalating cost of jet fuel. In a nutshell, the demand for forex will be rising while the supply will be declining, hence depreciation of the shilling.
- Job losses and loss of livelihoods – fuel shortages have a direct impact on livelihoods for workers in the logistics sector. The second round impact will be the closure of businesses, as without fuel, there can be no supply of goods and services needed to keep enterprises open.
- Stockout of essential goods – this doesn’t need explaining, but the consequences can be life-threatening.
- Deepening fiscal crisis – the impact of all these will be a reduction in tax revenues. The cost of servicing debt will skyrocket due to a weaker shilling and rising interest rates. The reduced tax revenues might escalate debt accumulation. This will move us closer to debt distress and the associated economic mess
- Economic collapse – we have been warning about economic collapse for years. Economies don’t collapse overnight. It is usually a long drawn-out process. Economic shocks that hit an already weakened economy can accelerate economic collapse. We haven’t even recovered from the pandemic shock and the Gen Z demonstrations
- Political instability – this is not a direct consequence of the war, but it is a possibility. The economic hardships from the war could lead to demonstrations and riots. This can destabilise the political stability, especially given that this is happening close to a general election.
This is not a prophecy but an analysis. These things might happen or not happen depending on how the situation eventually unfolds. The important thing is to remain alert and prepared. It is better to be safe than sorry.
