Red Sea disruption risks on inflation persist despite slowdown – experts

Despite the slowdown in consumer prices on the Rwandan market at 5 percent as of January data, the National Bank of Rwanda (NBR) remains concerned about the risks posed by Red Sea disruptions on international commodity prices. The Red Sea, a seawater inlet lying between Africa and Asia, separates the coasts of Egypt, Sudan, and Eritrea to the west, from Saudi Arabia and Yemen to the east. Since November 2023, it has been faced with attacks linked with Houthi militants in Yemen, causing shipping diversion to longer routes. ALSO READ: Central Bank Governor warns of inflation risk due to Red Sea disruption According to the United Nations Conference on Trade and Development (UNCTAD), there are far-reaching economic implications of prolonged disruptions in container shipping, threatening global supply chains and potentially delaying deliveries, causing higher costs and inflation. It adds that the full impact of higher freight rates will be felt by consumers within a year. NBR Chief Economist, Thierry Kalisa, said the delay and increase in transport prices caused by the re-routing of cargo shipping has affected international trade and prices since January and beginning of February. Asked whether this has had an impact on Rwanda’s economy, during the quarterly Monetary Policy Committee update, he said that it will depend on how long the situation persists; however, January figures do not indicate any significant impact. “If this continues, it might affect inflation. What will happen on the Red Sea will influence international commodity prices and therefore, we will see if there will be an impact on the domestic economy, so far, it remains as a risk,” Kalisa added. However, talking to some players in the local market, they indicated that there has been relatively low price increase for some of imported products in addition to delivery delays experienced. For instance, Fred Seka, Managing Director of Gorilla Logistics, said that understandably the rerouting is causing import delays and price increases at discharge ports which affects the commodity prices as well. However, he said that they are yet to have study outcomes of the exact changes in import costs incurred for the past two months. In a recently released UNCTAD report themed ‘Navigating Troubled Waters’, there has been a decrease in global trade volumes by 42 percent, with shipping rates surging by $500 in average container spot freight rates. This is due to a combination of escalating attacks on ships in the Red Sea, disruptions in the Black Sea caused by the war in Ukraine and in the Panama Canal due to climate-induced droughts. The Suez Canal, a key waterway connecting the Mediterranean Sea to the Red Sea, has remained a big worry for shippers, resulting in the rerouting of the vessels to a longer route by over 1,300km through Southern Africa. “Weekly container ship transits have fallen by 67 percent, tanker transits and gas carriers have also seen major declines. The number of specialised car-carrying ships using the Red Sea dropped by more than half in December 2023 compared to December 2022,” the report said. Additionally, the Panama Canal, a critical artery linking the Atlantic and Pacific Oceans, is confronting a separate challenge of low water levels caused by drought, underscoring the fragility of the world's trade infrastructure. To save on water, the Panama Canal Authority reduced the number of vessels that can transit. The total transits through the Panama Canal declined by 49 percent compared to its peak. Foreign trade for several East African countries is highly dependent on the Suez Canal, stated the report, whereby approximately 31 percent of foreign trade by volume for Djibouti is channeled through Suez Canal, 15 percent for Kenya and 10 percent for Tanzania. This, consequently, influences intra-EAC trade whereby Rwanda imports many goods through ports in these countries. The report further noted that the Red Sea crisis has the potential to disrupt supply chains of industries, such as construction, automotive, chemicals and machinery, that rely on intermediate imports from the Asia–Pacific region. The disruption could also affect energy supply and security, food security and environmental sustainability, it added. ALSO READ: Regional business body roots for improved transport logistics Speaking to The New Times, John Bosco Kalisa, CEO of East African Business Council, said the price impact has been noticed for most imported goods in the region such as fuel and food items including wheat, barley, sunflower, and machinery and other equipment. “Europe accounts for approximately 26 percent of imports destined to EAC. This means the shipping cost per tonnage will increase to a tune of $6 or 8 percent, and the importers of these commodities will bear the brunt of these trade and transport disruptions.” Kalisa added while food-related inflation is slowing down, the region needs to build strong food reserves to mitigate related shocks. Impact on environment For more than a decade, the shipping industry has adopted reduced speeds to lower fuel costs and address greenhouse gas emissions, however, the report indicates that the disruptions are leading to increased vessel speeds to maintain schedules which is resulting in higher fuel consumption and greenhouse gas emissions. The UN trade agency estimates that higher fuel consumption resulting from longer distances and higher speeds could result in up to 70 percent rise in greenhouse gas emissions for a Singapore-Rotterdam round trip.

News

Red Sea disruption risks on inflation persist despite slowdown – experts