The illegal attacks by the US and Israel on Iran and Lebanon have caused massive destruction, claimed thousands of lives and put countless more at risk. And the closure of the Strait of Hormuz is having devastating economic impacts across the world. This is being felt especially in countries already suffering from high debt payments. Even if the Strait reopens, these impacts will continue to be felt for many months and years to come.
A sudden fall in oil supply means a reduction in oil consumption. Many countries, particularly in Asia, have taken drastic steps to reduce oil use. Pakistan closed schools in March and asked people to work from home. Sri Lanka declared every Wednesday a public holiday to conserve fuel.
Globally, everyone is impacted as our economic system is built on price being used to reduce consumption when supply falls. Because oil remains a necessity for many, the price must rise a lot to reduce consumption, and those on the lowest incomes are hit the hardest.
Some governments try to cushion the impact, reducing taxes or increasing subsidies. It is costing Zambia $200 million to suspend duty on petrol and diesel imports for three months. This is the equivalent of 15% of Zambia’s annual health spending and will be paid for by Zambia taking on more debt.
Even more devastating than the fall in oil supply could be the impact on food. Gas is a key input to the production of chemical fertilisers, with around 10% of global fertiliser supply coming from the Persian Gulf. Countries in Asia and East Africa are heavily dependent on fertiliser from the region, while gas price increases push up the cost of fertiliser everywhere. Less available and more expensive fertiliser will mean less available and more expensive food.
This energy and food crisis comes after a succession of such shocks in recent years. These have helped push lower-income country external debt payments to the highest level since 1990.
Paying external debt and importing fuel, fertiliser and food requires countries to earn money from the rest of the world. A country can only buy something from the rest of the world, or pay debts to them, if they sell something in return. But countries have a limited amount of things they can sell.
This means that as debt payments increase, and the cost of energy, fertiliser and food rises, there is less money to pay for other necessities as well, such as medicines. The deadly combination of a shortage of necessities at the same time as high debts could cause large-scale suffering and turmoil. More debt may be taken on to cushion the blow, which will ensure that the costs are felt now and in the future.
And that debt comes at an increasingly high price.
Global interest rates have risen, as speculators expect central banks to raise rates in an attempt to limit future inflation. Some lower-income country debt has floating interest rates, which means the amount paid in interest increases immediately. All debt borrowed since the attacks on Iran began will have higher interest rates than previous borrowing.
The current crisis is being exacerbated by the impacts of the climate emergency, higher interest rates following Russia’s invasion of Ukraine and the Covid pandemic.
The need for debt cancellation is greater and more urgent than ever.
Read more: Statement by global civil society organisations “Stop the war, support impacted countries and cancel the debt”