Red Sea-related disruption to global trade is seen as an inflationary risk and might result in a rise in transport costs for imported goods if the situation is not contained within the shortest time possible, according to Rwanda’s Central Bank Governor John Rwangombwa.

He made the observation on Tuesday, January 16, in an interview with CNBC Africa, at the World Economic Forum (WEF) in Davos, a mountain resort in the eastern Alps region of Switzerland.

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The Red Sea, a seawater inlet of the Indian Ocean, lying between Africa and Asia, separates the coasts of Egypt, Sudan, and Eritrea to the west, from Saudi Arabia and Yemen to the east. US forces on Tuesday carried out fresh strikes on targets linked with Houthi militants in Yemen, amid disruption to global trade caused by cargo ships diverting to avoid the group’s attacks in the Red Sea.

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Rwangombwa said the National Bank of Rwanda (NBR) started engaging economic actors to look at inflationary risks.

"Last week we had a session with many economic actors discussing the inflation outlook, and what they think. We know we had it as a risk, especially the issue of the Red Sea, and some of the businesspeople told us they are already seeing it as a challenge to them, though some of the manufacturers were not yet sure whether they are going to increase their prices because of this,” he said.

"So, it is seen as a risk now, expecting that it will be overcome in the shortest time possible. But if it persists, then it might affect especially the transport cost. How much that will impact the goods that are being imported we are yet to see.”

Why the Red Sea matters to global trade

Most of the world's largest shipping firms, including Danish container freight giant Maersk said they would avoid the Red Sea, the quickest path between Europe and Asia through Egypt's Suez Canal, and instead, take the longer South Africa's Cape of Good Hope route around southern Africa.

Suez Canal rerouting to the Cape of Good Hope implies that a vessel’s journey will take more than a week longer and will add about 3,500 nautical miles (6,482 kilometers), estimates ACS Logistics Co., a logistics and freight forwarding services company based in Egypt.

Approximately 12 per cent of global trade passes through the Suez Canal, representing 30 per cent of all global container traffic, and over $1 trillion worth of goods per annum, according to the New Zealand Ministry of Foreign Affairs and Trade.

Rwanda’s economy projected to remain resilient

Meanwhile, Rwangombwa pointed out that Rwanda's economy is expected to grow by 6.6 per cent in 2024, and underscored that the National Bank of Rwanda is closely monitoring potential headwinds.

Amid the concerns that the global economy may weaken, he said that Rwanda’s economic performance remains strong in terms of the global context, considering the current projections.

"But in our own terms, we are used to growing average 8 per cent for quite some time. We are not projecting that this time, but still we are projecting a 6.6 per cent growth for 2024,” he said.

According to the United Nations World Economic Situation and Prospects 2024, global economic growth is expected to go down to 2.4 per cent in 2024 from 2.7 per cent in 2023.

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Based on all the components the country has today, Rwangombwa expressed optimism that the 6.6 per cent growth forecast is attainable, minus all the risks at hand, including geopolitical issues.

He was optimistic that the agriculture sector would register better performance in 2024.

He said: "Despite the good performance we had over the last two years, agriculture didn’t perform well. And that also affected our inflation. We expect and project this year to see better performance in agriculture.

"Already [farming] season A [of 2024] is doing well, and agriculture is a good contributor to the economy, not just as a share of GDP, but also in terms of the purchasing power of the population that is fully engaged in agricultural services.”