EDITORIAL: Regional conflicts have been impacting on the global economy in recent years – beginning with the Russian attack on Ukraine on 24th February 2022 that compromised Ukrainian grain supply to the rest of the world, raising food prices the world over, and the 7th October 2023 Hamas attack on Israel and the subsequent disproportionate response of Israel evident from a little over 1400 Israeli casualties to-date, including soldiers, against a little under 34,000 Palestinian casualties (over half among them are women and children) and 76,664 wounded (struggling to access medical treatment) which accounts for disruption in crude oil supply by the Houthis, that upped the insurance rates and therefore oil prices, and higher still after the Iranian retaliatory strike against Israel on 14th April 2024 in response to Israel’s attack on Iran’s consulate in Damascus, with reports indicating Israel will respond (though it has already launched a “limited and calibrated” strike on Iran).
The US and allies rendered Iran’s strikes a failure though Chatham House argues that “when judged solely by its strategic goal from Iran’s perspective – to bolster Iranian deterrence and attempt to rewrite the rules of engagement with Israel – Iran’s attack was largely successful.
Iran showcased more capability in its attack than its detractors would like to admit. Iran forced Israel, and the United States, to spend more than a billion dollars to counter its attack. That’s not an insignificant outcome, considering that Iran paid roughly one tenth of that to mount its attack.
In a fiscally-constrained and politically-charged environment in Washington, increasing US military assistance to Israel is not guaranteed.” The latter observation is no longer relevant as the US House Republicans unveiled three bills on 17 April, including a $26.38 billion package for Israel.
Chatham House further observed that “Iran violated a Napoleonic dictum to ‘never interrupt your enemy when he is making a mistake’. Israel was making huge and unforgivable mistakes in Gaza with its collective punishment of the Palestinian people, but following Iran’s attack, the West has rallied behind Tel Aviv.”
This opinion reflects ground realities; however, it fails to take account of another prevailing factor, notably the scheduled elections in the United States, the European Union (6 to 9 June), and yet to be scheduled though expected this year in the UK and Japan.
A key factor in electorate support for an incumbent government in a developed economy is the cost of borrowing (with many paying a mortgage and/or interest on car loans) as that determines a typical householder’s liquidity.
With the rise in oil prices the projection of a decline in the inflationary spiral was revised and therefore not echoed in the decision to keep rates unchanged by the (i) Federal Reserve in the US on 20 March 2024 at a 25-year high of 5.25 to 5.5 percent as it assesses their impact on cooling inflation and the wider economy.
With the post-Iran attack, the uptick in oil prices may well compel the Fed to renege on its pledge to cut the rate three times during the rest of the year; and (ii) the Bank of England keeping it unchanged at 5.25 percent, no doubt further dashing the hope of a conservative win under Rishi Sunak.
The linkage between a much superior military power effortlessly prevailing over weaker adversaries has been debunked by the Houthis with technologically unsophisticated weaponry through their success in disrupting the supply of oil that is having direct implications on the eroding incomes of householders in the rest of the world.
In the case of Pakistan where reliance on borrowing by householders is almost non-existent the impact of a rise in international oil prices would no doubt fall squarely on the general public which would result in a rising clamour to end the 60 rupee per litre petroleum levy, thereby impacting negatively on the amount that is likely to be budgeted under this head for next fiscal year (expected to be higher than the 787 billion rupees budgeted for the current year).
One would of course ideally hope that the next year’s budget envisages a massive reduction in current expenditure as opposed to reliance on raising revenue on existing taxpayers, as has been the practice in the past, though disturbingly till date the government has been long on rhetorical pledges and short on implementation of measures.
Copyright Business Recorder, 2024
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