Israel-Hamas war takes wind from Uganda sails

The after-effects of the ongoing escalation of a conflict between Israel and Palestine is set to mirror that of Russia and Ukraine, putting Uganda in a difficult place.

While the reasons for this conflict are complex, its immediate and long-term consequences are clearer. A study by global macroeconomists, entitled ‘The Economic Effects of Violent Conflict: Evidence From Asset Market Reactions,’ notes that inter-state conflicts have significant effects on stock market indices, exchange rates, and commodity prices, sometimes driving prices to all-time highs.

Little wonder, there is a feeling of déjà vu insofar as the impact of the Russia-Ukraine conflict is concerned. It upped global food and fuel prices and prompted capital flight to Western economies.

Conflicts in the Middle East tend to drive up global oil prices because the region accounts for nearly one-third of the world’s oil supply. Economists argue that any instability in this region creates market uncertainties about global oil supply and raises risk premium in oil markets.

Brent crude, the global benchmark for oil prices, rose to Shs328,371 a barrel on Tuesday, up from Shs313,030 a barrel the day before the conflict erupted on October 6.

“The Israel-Hamas conflict has investors around the world worried about the repercussions, particularly as the implications of the Ukraine-Russia war are still coming through,” said Stephen Kaboyo, a Ugandan Financial markets analyst.

This global oil price increase is expected to put additional pressure on Uganda’s fuel prices, which are still hovering around Shs5,500 after skyrocketing from Shs3,300 prior to the Russia-Ukraine war. These fuel costs are incorporated into the economic dimensions. This raises the cost of doing business through increased logistics expenses that drives up inflation.

Inflationary pressures had headed to lows after surges brought on by recent economic headwinds that include the Russia-Ukraine war.

“As of now, we have not noticed any direct impact on the economy, but there are signs. Global financial institutions like the Islamic banking are so much involved [in the Middle East] and that diverts money that could be used to support [Uganda],” said Finance ministry spokesperson Jim Mugunga.

The Red Sea, a major global trade route that could disrupt supply chains, is located in part of the conflict area, which has the national treasury concerned that trade costs may increase.

Uganda’s trade balance with the Middle East is heavily skewed against it mainly due to petroleum products imports. Israel, for instance, exported Shs19.03 billion worth of goods to the country last year.

As of the 2022/23 fiscal year, Bank of Uganda figures show that Uganda imported goods worth Shs5.73 trillion from the Middle East compared to Shs5.25 trillion from the Common Market for Eastern and Southern Africa (Comesa).

In addition, the airline industry is also likely to be affected as was the case during the war in Sudan where routes farther away from the conflict area.

Conflicts between states often cause investors to become paranoid as they try to protect their money in economies that are considered safer, like the US and the UK. This causes capital to flee from emerging and frontier markets like Uganda.

The fact that Uganda does not have enough export revenue to offset the amount of dollars it brings into its borders further devalues the Shilling relative to the Dollar. Since July 2023, the value of the Uganda Shilling has depreciated by four percent.

Any trade disruption would compel Uganda to withdraw more Dollars, which would put additional pressure on the Shilling and propel imported inflation.

“Relating this to the domestic economy, higher energy prices limit the central bank’s efforts to tame inflation and in response the tightening of monetary policy will result in high interest rates and tighter financial conditions [which has] potential to push the cost of borrowing higher,” Mr Kaboyo said.

[email protected]