The Middle East Conflict and Ethiopia's Macroeconomic Stability: What the 2026 Shock Revealed
On 28 February 2026, a joint US and Israeli campaign against Iran triggered the restriction of shipping through the Strait of Hormuz, the chokepoint for roughly 20% of global oil flows. Within five months, the consequences were visible in Ethiopian pump prices, the federal budget, and the CPI. Our new report traces that transmission from the Gulf to Addis Ababa, and sets out what it implies for policy.
The global shock
Brent crude rose 45% between February and March 2026, averaging USD 103.13 per barrel and peaking at USD 117.29 in April. Vessel transits through Hormuz collapsed by approximately 96% in March, and remained 93.5% below pre-conflict averages in August despite the June memorandum of understanding signed in Islamabad. More than 500 million barrels of crude and condensate were removed from the global market in the first 50 days of the crisis.
Why Ethiopia was exposed
Exposure was structural, not incidental. Ethiopia imports essentially all of its refined petroleum, with approximately 91% attributed to Gulf suppliers led by Kuwait (50.4%) and Saudi Arabia (35.4%). The fuel import bill reached USD 3.32 billion in 2024/25, equivalent to 17.7% of total imports, with diesel accounting for 61% of volume. When Kuwait Petroleum Corporation declared force majeure in early March, procurement shifted to the spot market at the peak of the price cycle.
Three further constraints compounded the exposure: 96.71% of external cargo moved through Djibouti's main terminals in EFY 2025/26; gross reserves stood at 1.7 months of import cover entering 2025/26, against the conventional three-month threshold; and EPSE's 13 depots provide 425.2 million liters of aggregate capacity, an upper bound of roughly 30 days of average imports rather than a measure of stocks held. A second, parallel Gulf dependence runs through fertilizer, where the Eastern Europe urea benchmark moved from USD 472 per ton in February to USD 856.9 in April.
The price effect
Headline inflation had reached 9.7% in December 2025, single digits for the first time in nearly a decade. It fell further to 9.4% in March 2026, then reversed: 11.7% in April and 15.3% in July, a 5.9 percentage-point swing in four months. Non-food inflation rose by an average of 2.0 percentage points per month over that period, ahead of food at 1.2 points, identifying energy and transport costs as the primary driver.
Administered fuel prices moved sharply between February and early May. Petrol rose 30% and white diesel 40%. Kerosene, a primary lighting fuel for rural and off-grid households, rose 148% to 320.66 birr per liter, a regressive outcome falling hardest on households least able to absorb it.
The fiscal cost
Emergency subsidies were reinstated in March, just as the IMF-agreed phase-out was due to complete. In April the state was absorbing 71 birr per liter of diesel and 32 birr per liter of petrol, implying unsubsidized prices of approximately 234.09 and 174.41 birr. Ethiopia secured USD 200 million in additional ECF financing. The EFY 2026/27 budget lifted the EPSE allocation to 136.4 billion birr, 36% above the prior year, and the EABC allocation to 100 billion birr from 84 billion.
The implication
The response demonstrated real institutional capacity: partial pass-through, targeted subsidies, prioritized allocation, and restoration of diesel supply to roughly 9 million liters per day within two months. But the episode is a stress test, not an anomaly. A future disruption to energy, fertilizer, or any concentrated import would transmit through the same channels. The report sets out seven measures, including a diesel-specific and location-specific reserve expansion benchmarked against the estimated 270 million liter shortfall of March to April, supplier and corridor diversification, and a rules-based subsidy adjustment mechanism with a pre-authorized funding envelope.
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