Middle East War: ‘Salone’s’ Inflation Under Threat

By Dr. Mohamed Ibrahim Justice Ganawah

Introduction

The escalation of military hostilities between Israel and Iran in June 2025 has reignited global fears of an energy supply crisis. What began as a series of targeted retaliations has rapidly evolved into a broader regional conflict, with implications far beyond the Middle East. At the core of this crisis lies the global oil market, with the Strait of Hormuz—through which nearly one-fifth of the world’s oil passes—sitting precariously at the intersection of geopolitics and economic vulnerability.

Although Sierra Leone is geographically distant from the epicenter of the conflict, it remains economically exposed. As a petroleum-importing country with a fragile exchange rate regime, minimal strategic reserves, and high inflation sensitivity, Sierra Leone stands to face multiple macroeconomic risks should global oil prices continue their upward trajectory. This article presents a rigorous analysis of the mechanisms through which the Israel–Iran war is influencing the global oil market, and the potential consequences for inflation, exchange rate dynamics, and household welfare in Sierra Leone.

The Middle East’s Strategic Importance in the Oil Economy

The Middle East remains the fulcrum of global petroleum supply. The region accounts for approximately 30% of global crude oil production and controls nearly half (48%) of the world’s proven oil reserves, according to the BP Statistical Review of World Energy 2023. Key players include Saudi Arabia, Iran, Iraq, the United Arab Emirates, and Kuwait.

Central to the current crisis is the Strait of Hormuz, a critical maritime chokepoint. On average, more than 20 million barrels per day (bpd) of crude oil and refined petroleum products transit through the strait, representing almost 20% of global daily consumption. Iran’s threats to block the Strait in response to Israeli and U.S. airstrikes have driven a risk premium on oil futures markets.

This pattern is not unprecedented. Historically, geopolitical instability in the Middle East has led to oil price spikes and global economic dislocations. In 1973 Oil Embargo – Arab producers cut supply in retaliation for Western support to Israel, quadrupling oil prices; Iran-Iraq War (1980–88) -Reduced output in the Persian Gulf drove a sustained price surge and in 2022 Russia–Ukraine Conflict -though geographically separate, it drove Brent crude to over USD 130 per barrel due to supply disruptions and sanctions.

As of 22 June 2025, Brent crude has surged to USD 79 per barrel from USD 65, representing an 18% increase in just two weeks—a signal of heightened market anxiety.

How Oil Price Shocks Trigger Global Inflation

Oil price hikes act as a global tax on both production and consumption. Their inflationary impact is transmitted through multiple channels:

Direct Fuel Price Increases: Higher costs for petrol, diesel, and kerosene directly affect transportation, electricity (especially in countries reliant on generators), and industrial production.

Cost-Push Effects -Rising input costs raise the prices of goods and services, especially those with high energy intensity (e.g., manufacturing, mining, and logistics). Second-Round Inflation -Wages and expectations adjust upwards, embedding inflation in the economy.

The IMF World Economic Outlook (2023) notes that a 10% rise in global oil prices typically adds 0.3 to 0.4 percentage points to global inflation. In low-income countries, this effect is amplified by -high energy expenditure shares in household budgets.

Total Dependence on Imported Petroleum

Sierra Leone does not produce or refine crude oil. The entire domestic demand for petroleum products is met through imports. In 2024, the country imported over USD 350 million worth of fuel, representing a significant share of total import payments and exerting pressure on the foreign exchange market (Bank of Sierra Leone, 2024).

Fuel Pricing Formula and Transmission Risks

Sierra Leone uses an automatic pricing formula that adjusts domestic fuel prices in line with international oil price trends and exchange rate fluctuations. While this promotes transparency, it exposes consumers to global price volatility.

Without price stabilization mechanisms such as strategic reserves or subsidies, increases in Brent crude inevitably lead to pump price adjustments. This triggers cascading effects across all sectors of the economy.

4.3 Inflationary Pressure on Food and Transport

According to Statistics Sierra Leone (2024), food and transportation contribute over 60% of the national Consumer Price Index (CPI). Thus, fuel price hikes translate directly into-

increased public and private transport fares.

Foreign Exchange and Import Cost Effects

The petroleum sector accounts for a significant share of Sierra Leone’s forex demand. Rising international oil prices will widen the trade deficit, deplete reserves, and exert depreciation pressure on the Leone. As of Q1 2025, gross international reserves covered only 3.2 months of imports, a level below the 3.5-month threshold recommended by the IMF for fragile economies.

Fiscal Strain and Policy Trade-offs

Although the government has phased out universal fuel subsidies, renewed price surges may spark demands for:

Scenario A: Controlled Escalation

If the conflict remains contained and oil shipments through the Strait of Hormuz are not disrupted, Brent may stabilize between USD 80–90 per barrel.

Severe Disruption

If Iran restricts passage through the Strait of Hormuz, global supply could fall by up to 20 million bpd. Brent crude could soar to USD 100–130 per barrel.

Short-Term Measures

Establish a Fuel Price Stabilization Fund -use windfall revenues or concessional finance to buffer temporary shocks.

Medium-Term Strategies

Diversify Energy Sources -accelerate investments in solar, hydropower, and biofuels to reduce diesel reliance.

Long-Term Structural Reforms

Strengthen strategic reserves -establish national petroleum stockpiles for crisis management.

Conclusion: Global Crisis, National Exposure

While the ongoing war between Israel and Iran is a geopolitical conflict, its reverberations are profoundly economic. For Sierra Leone—a net importer of petroleum, with fragile public finances and a high food-import dependency—the threat of oil-induced inflation is not hypothetical; it is imminent.

The absence of immediate domestic price increases should not induce complacency. Instead, it should serve as a narrow window of opportunity for pre-emptive policy action. Governments, development partners, and civil society must act together to protect the vulnerable.