How US-Iran war ripple effects endanger Tanzania’s economic trajectory

DAR ES SALAAM: AS military assaults on Iran by the United States and Israel intensify, in my view, the situation is the most significant conflict in the Middle East in decades. Looking at the war’s economic impact, global markets are already responding with higher risk premiums and sharp volatility.

For instance, the gold price moved from 5277.9 US dollars to 5414 US dollars within a day. For those who are not economists, the reasons include ongoing global tensions, safe-haven demand, central bank purchases, broader forecasts and trends. This is because gold does not pay interest, which is why its price increases.

For those with cryptocurrency training, these are not good news, since the price is falling.

The fall in cryptocurrency is driven by geopolitical risk and global fear, a sharp crash in a short time, fear-driven selling across crypto, a broader sell-off and market weakness. Fear spreads through the market, even affecting coins without direct news and all are affected.

Although the United Nations Security Council and global financial markets have given emergency attention to the unfolding confrontation, which was precipitated by a significant attack on Iranian military and strategic targets, including the reported assassination of Iran’s Supreme Leader, the manner in which the financial markets will shake is without precedent in recent history.

For those who are not familier with these issues, the immediate impact of a US-Iran conflict is evident in commodity markets, particularly oil, for the majority of the global population. Iran is at the epicentre of the global energy network, straddling the Strait of Hormuz, a narrow corridor through which approximately 18–20 million barrels of crude and fuel products travel daily. This amount represents nearly one-fifth of the world’s oil.

Supply shortages and price increases can occur rapidly due to disruptions in that region. Brent crude and other benchmarks have already risen significantly in response to the conflict. Analysts have cautioned that prices could rise to 80 US dollars to 100 US dollars per barrel, or higher, if tensions persist or critical routes are closed.

This increase in energy prices has immediate implications for global inflationary pressures. Energy expenditures are a fundamental component of transportation, manufacturing, agriculture, and logistics. Countries that import fuel will face the potential for balance-of-payments pressure, higher consumer prices and widening import bills when oil prices rise, as markets are currently pricing in.

These global commodity price fluctuations are particularly detrimental to the economies of Eastern and Southern Africa, as many of them are net fuel importers. Although not directly linked to the conflict, in my view the consequences for Tanzania would be multifaceted.

The nation continues to rely on fossil fuel imports for industrial and transportation use, despite recently expanding its hydropower capacity and developing substantial natural gas resources. A substantial increase in domestic pump prices, resulting from an abrupt rise in global oil prices, would directly affect the cost of transporting goods and people.

The inflationary pressures arising from higher petroleum prices would push up consumer food prices and input costs, potentially eroding living standards, particularly for low-income households, in a country where agricultural supply chains are heavily reliant on road transport. Increased global energy prices may also influence government fiscal planning.

The national budget and medium-term plans of Tanzania frequently assume stable commodity prices. However, a sustained energy shock would necessitate the government to either increase fuel taxes, which would further burden citizens, or subsidise prices to safeguard the public, which would further strain public finances.

This dynamic also complicates monetary policy, as the Bank of Tanzania may be compelled to tighten interest rates to maintain price stability, which could slow domestic credit growth and investment, as it faces higher imported inflation. The influence on foreign exchange markets is another critical channel.

Tanzania, like numerous African economies, depends on foreign exchange revenues from remittances, exports, and tourism. The trade deficit would be exacerbated by a conflict-induced increase in energy import costs, which could potentially weaken the Tanzanian shilling and increase demand for foreign currency.

A cycle that can unsettle financial markets and confound debt servicing, particularly for external debt denominated in foreign currencies, is established when a weaker currency feeds back into higher domestic inflation.

The conflict is affecting global aviation and logistics, as well as energy. Due to safety concerns, significant portions of Middle Eastern airspace have already been closed, necessitating airline rerouting and cancellations that affect tourism linkages and cargo flows.

This takes into account that ATCL also flies to Dubai, which is temporarily closed. Higher air transport costs and reduced flight frequencies can dampen tourism receipts and increase business travel costs in East African economies, where connectivity through Middle Eastern centres is significant.

The prices of commodities and staple goods may also become more volatile. Global shipping disruptions, higher petroleum costs, and increased insurance premiums on maritime routes all contribute to the cost of transporting agricultural inputs and exports.

Tanzanian producers may face elevated freight rates, which could result in agricultural products destined for the external market failing to reach their destination on time.

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This is where insurance matters a lot in international trade. It can be concluded that the shifting US.-Iran relationship also has geopolitical consequences, particularly in the Middle East and Africa. Iran’s re-engagement with the global economy could lead to changes in diplomatic alignments, which could, in turn, affect Tanzania’s foreign policy.

The potential shift in US.- Iran relations, particularly after this war, presents both opportunities and risks for Tanzania. While lower energy prices, increased trade, and investment opportunities could significantly benefit Tanzania, the risks posed by geopolitical tensions and market competition must also be weighed.

The key for Tanzania will be to carefully navigate its foreign policy and ensure that any opportunities arising from a changing global landscape are leveraged to support the nation’s economic growth while minimising the risks associated with deeper ties to Iran.

Although it is challenging to anticipate the precise trajectory of the US.-Iran relationship, some probable scenarios for the global economy.

If tensions persist, global energy prices would likely rise. Energy-importing nations would face the most significant economic consequences. The broader Middle East could be destabilised if the situation worsens, leading to increased military expenditure and disruptions to trade and investment flows.

The potential for a broader economic downturn, rising inflation, and reduced consumer spending worldwide stems from ongoing geopolitical instability, particularly in a critical energy-producing region. Ultimately, the persistent tension between the United States and Iran has the potential to disrupt global markets, with far-reaching economic consequences, particularly for energy markets, global trade, and investor sentiment.

The course of the situation will be significantly influenced by the responses of global powers, military actions and diplomatic efforts, which, in my view, will take time to settle.