ADDIS ABABA – The closure of the Strait of Hormuz has caused severe price spikes, which are hitting the world’s most vulnerable people the hardest.

Since the start of this year, the price of Brent crude has risen by at least 41% (topping $100 per barrel), that of urea (a component in fertilizer) by about 50% and container freight rates by 21%. Maritime insurance premiums have surged up to ninefold, and 29 African currencies have depreciated. And as if these shocks were not bad enough, the global financial system’s response has made matters worse.

Just when many economies need liquidity, financing conditions have tightened, risk premia have widened and key tools for such emergencies are scheduled to be phased out. Mechanisms designed to absorb stress have instead amplified it. The global economy is not only more volatile than in the past, but also structurally vulnerable to geopolitical conflict, trade fragmentation, climate shocks, technological shifts and other broad forces that are overlapping and compounding in real time.

The current financial architecture was supposed to ensure stability by providing liquidity when capital retreats, cushioning economies when shocks hit and encouraging investment when uncertainty rises. But we have just witnessed the opposite. As capital has fled to safety, borrowing costs have climbed and many countries have found themselves with even less fiscal capacity to respond to the shock.

For........

© The Japan Times