Middle East crisis raises economic risks for East Africa

Since the United States and Israel launched coordinated military strikes against Iran, an escalation widely viewed as a consequential turning point for regional security dynamics, the risk of wider economic and geopolitical spillover has increased across adjacent strategic corridors. The joint campaign, followed by retaliatory exchanges, has opened what many observers describe as a volatile new phase of confrontation in the Middle East, raising fears of maritime disruption and broader regional instability.

Against this backdrop, any Iranian attack or sustained military escalation in the Arabian Sea or the Bab al-Mandab Strait would likely generate a significant economic shock for countries across the Horn of Africa and wider East Africa. The consequences would extend far beyond military considerations, transmitting through trade and energy supply chains to drive higher import costs, intensify currency pressures, slow economic growth, and heighten risks of domestic instability. Should the crisis persist over an extended period, already fragile economies — particularly Sudan, Somalia, and Ethiopia — could face acute inflationary pressures and economic crisis.

The Arabian Sea and the Bab al-Mandab Strait represent critical arteries within the global trade and energy system. An estimated 10–12 percent of global maritime trade passes through Bab al-Mandab, alongside approximately six to eight million barrels of oil per day under normal conditions. Any military escalation or targeting of commercial shipping in these waterways would likely drive an increase in shipping and insurance costs, push global oil prices higher, and disrupt supply chains. Countries in the Horn of Africa and East Africa — especially Djibouti, Ethiopia, Somalia, Eritrea, Sudan, and Kenya — would be among the most exposed, given their heavy dependence on imports and limited fiscal buffers.

These maritime corridors serve as a key link between the Gulf region, Europe, and East Africa. During periods of heightened tension, maritime insurance premiums typically rise from below one percent to between two and three percent. Shipping costs may increase, while some vessels reroute around the Cape of Good Hope, extending travel times by 10 to 15 days. Under a medium-level escalation scenario, global oil prices could increase by 15 to 30 percent.

Djibouti’s economy relies heavily on port operations and logistics services tied to Red Sea and Bab al-Mandab trade flows, with more than 90 percent of Ethiopia’s external trade passing through its ports. A 40 percent decline in vessel traffic caused by escalation in either Bab al-Mandab or the Arabian Sea could reduce port and related service revenues by an estimated five to 15 percent annually, directly affecting the balance of payments and increasing pressure on public finances and the local currency.

Ethiopia, a landlocked country that depends almost entirely on Djibouti’s ports for external trade, would face significant import cost increases if shipping or insurance prices rise. Import expenses could climb by 25 to 40 percent, translating domestically into additional inflation estimated at eight to 15 percent, particularly in fuel and food prices. If the crisis were prolonged, annual economic growth could decline by one to two percentage points due to higher production costs and weakening purchasing power.

Somalia’s economy, which relies heavily on imported food and fuel, would also face immediate consequences from disruptions to maritime routes. Fuel prices could increase by 30 to 40 percent, directly raising transportation costs and food prices. Inflation could rise by as much as 10 additional percentage points, heightening the risk of social and security tensions in an already fragile economic and security environment.

Eritrea, with a smaller economy and limited foreign currency reserves, would likely experience increases in basic commodity prices ranging between 15 and 25 percent. This would intensify pressure on foreign exchange availability and constrain the country’s ability to finance imports, potentially resulting in a sharp economic slowdown if the crisis continues.

Sudan, which relies on Port Sudan on the Red Sea for external trade, would face higher shipping and energy costs that could increase fuel and wheat import bills by 20 to 35 percent. Given the country’s already fragile economic conditions, inflation could rise by more than 10 percentage points above current levels, alongside increased pressure on the trade deficit and government subsidy costs.

Kenya, East Africa’s largest economy and a regional commercial hub anchored by the Port of Mombasa, would likely see fuel costs rise by 15 to 30 percent. This could add between three and six percentage points to inflation and reduce economic growth by roughly 0.5 to one percentage point, while also increasing pressure on the local currency due to stronger demand for dollars to finance higher-cost imports.

Higher external borrowing levels could emerge as governments seek to finance essential imports. Disruptions to navigation or increased insurance and shipping costs through Bab al-Mandab would directly raise prices for essential goods in countries such as Djibouti, Somalia, and Ethiopia. Given their dependence on imported food and fuel, widening trade deficits could force governments to increase external borrowing, raising public debt levels and further exposing their economies to external shocks.

Foreign investment could also decline amid heightened geopolitical risk. In recent years, the Horn of Africa has attracted investment in ports, infrastructure, and logistics zones due to its strategic location. However, escalating tensions linked to Iran or other regional actors could lead investors to reclassify the region as high risk, delaying or freezing new projects and increasing insurance costs for existing investments. The result would likely be slower growth and fewer job opportunities at a time when governments are seeking to reduce poverty and unemployment.

Security disruptions could also increase the risk of renewed maritime piracy. Instability along major shipping lanes may create opportunities for organized criminal networks to exploit gaps in maritime security. The Gulf of Aden has previously experienced waves of piracy, and any decline in international coordination or diversion of major powers toward broader conflicts could allow such activity to re-emerge. A resurgence would not only affect global trade but also undermine local port-dependent economies and increase coastal militarization, further heightening regional tensions.

Finally, rising prices, shortages of essential goods, and declining employment opportunities could intensify domestic political tensions. In countries already facing institutional fragility and internal conflicts, economic pressures may translate into protests and social unrest. Both domestic and external actors could exploit these conditions to expand influence, deepening divisions and undermining stabilization efforts.