Which country is the biggest loser from the energy shock?

ACROSS THE poor world, the third Gulf war has set off a scramble for energy. In Nepal, long queues for cooking gas have forced rationing. In Sri Lanka, firms have been urged to shut on Wednesdays to conserve fuel. In Pakistan, schools have been closed and universities moved online. Households and governments are preparing for what the head of the IMF, Kristalina Georgieva, has called “the unthinkable”.

The unthinkable has, in fact, happened before. When global energy supply is squeezed, the poorest suffer most. The pattern was clear after Russia’s invasion of Ukraine in 2022. As Europe subsidised energy to shield households, demand held up and prices stayed higher for longer, shifting the burden onto importers with fewer reserves and less fiscal space. The result was crisis. Sri Lanka, already under severe financial strain, exhausted its foreign-exchange reserves and defaulted. Pakistan, facing a similar squeeze, slid into a balance-of-payments crisis, turned to the IMF and slashed imports.

With the Strait of Hormuz all but closed, the latest hit could be worse. Which places are most vulnerable to a macroeconomic crisis? To answer this, we have compiled data on two dimensions: exposure to the shock and capacity to absorb it. The first captures countries’ reliance on imported energy and Gulf-linked flows; the second reflects their financial buffers. Combining the two yields a ranking of the emerging markets most at risk (see table above and chart below).

Jordan is badly exposed and thinly buffered, though its ties to Western allies and Gulf donors make it a candidate for emergency support. Pakistan and Egypt are also high on both lists. Pakistan spends some 4% of GDP on oil and gas imports, sourcing nearly 90% from the Middle East; Egypt spends about 3% of GDP and gets nearly half its supplies from the region. Both also depend heavily on remittances from the Gulf, worth around 5-6% of GDP, which could fall if the war disrupts labour markets or forces workers to return home.

As energy prices rise, import bills swell just as remittance inflows come under pressure—widening current-account deficits and putting currencies under strain. A weaker currency, in turn, makes dollar-denominated oil dearer still. The dollars to cover those wider deficits must come from somewhere: reserves, foreign borrowing or cuts to other imports. Yet in Pakistan and Egypt, buffers are limited.

Pakistan’s reserves cover less than three months of imports, below the IMF’s recommended minimum. Egypt, despite recent external support, still carries a gargantuan external debt burden. Around $29bn is due this year—more than half its foreign-exchange reserves. This limits its ability to absorb another shock. As financing conditions tighten and capital flows reverse—global investors are already pulling money from emerging-market debt funds—a higher fuel bill can quickly tip into a balance-of-payments crisis.

Bangladesh and Sri Lanka also look vulnerable despite only middling exposure. Bangladesh’s reserves barely cover three months of imports and it is already on an IMF programme. Its garment factories—the backbone of its export economy—run on imported fuel, so higher energy costs worsen the trade balance from both sides. Sri Lanka is in a similar position. It only recently emerged from its default in 2022, triggered in part by that earlier energy shock, and its buffers remain thin.

Other countries are highly exposed but better placed to weather the shock. Thailand spends about 7% of GDP on oil and gas imports—more than any country in our sample—yet holds nearly 100 days of imports in strategic oil reserves and more than seven months of import cover in foreign exchange. These buffers should buy time. Nepal stands out for its reliance on remittances. A staggering 8% of GDP comes from workers in the Gulf, according to the most recent World Bank estimates, and it has little oil stashed away. But it holds plenty of hard currency.

India should be able to cope. It spends about 3% of GDP on energy from abroad and gets roughly half from the Middle East (cooking gas is already in short supply). But its buffers are strong. Foreign reserves cover about seven months’ imports; official and commercial oil stocks would last 70 days or so. It can also shift away from the Gulf. Its refineries are set up to process lower-quality crude, allowing it to take in Russian oil that many others cannot. And unlike much of Asia, India generates little electricity from imported gas, favouring local coal. So it avoids a big way higher energy prices feed through to the economy.

Even if countries avoid a macroeconomic crisis, the humanitarian toll could still be severe. Nitrogen fertiliser, made from natural gas, is becoming more expensive, raising the cost of food production across poor countries. The World Food Programme warned this week that the number of people facing acute hunger could reach record levels in 2026 if the conflict does not end soon. Stabilising currencies and financing imports may avert a financial crisis. Keeping food affordable is another matter. ■