Africa Economic Compass: MCB assesses Middle East conflict’s impact on sub-Saharan Africa

Africa Economic Compass: MCB assesses Middle East conflict’s impact on sub-Saharan Africa

The MCB Group Ltd has launched the inaugural edition of its Africa Economic Compass, introducing a new flagship publication as part of a broader overhaul of its economic research output. The initiative is designed to deliver more structured, coherent and accessible insights into regional and global economic dynamics, at a time when external shocks are increasingly shaping Africa’s outlook. The first edition is set against a backdrop of heightened geopolitical tensions in the Middle East and provides a detailed assessment of their potential spillover effects on sub-Saharan Africa. 

Africa’s firmer macro footing is being tested by the ramifications of the Iran war

African economies entered 2026 on comparatively stronger macroeconomic footing, with inflation beginning to moderate in several countries, external balances improving and a number of frontier markets regaining access to international capital markets. However, the recent escalation of tensions in the Middle East has introduced a fresh layer of uncertainty to the global outlook at a time when markets had begun to anticipate a gradual shift towards monetary easing. Oil markets reacted swiftly, with Brent crude briefly peaking close to USD 120 per barrel. At the time of writing, prices have retreated below USD 100 following the announcement of a temporary ceasefire, though volatility remains elevated.

For Africa, the ongoing war is most likely to materialise as an adverse terms-of-trade shock transmitted primarily through higher energy prices. While many Sub-Saharan African economies enter this episode with stronger macro buffers and are better placed to absorb a period of elevated oil prices and a firmer US dollar, structural vulnerabilities remain. The region’s heavy reliance on imported refined fuel – much of it sourced from the Gulf – means that higher oil prices could worsen trade balances, raise fuel import bills and slow the ongoing disinflation process across the region’s many net oil-importing economies. Early policy responses are already emerging, as governments move to manage the immediate inflationary and fiscal impact of higher fuel costs. South Africa and Egypt have both allowed fuel prices to rise while Ethiopia has relied on fuel subsidies and authorities in Mozambique have committed to keeping retail fuel prices unchanged until the end of April given that they have enough reserves. Meanwhile, Madagascar has declared a 15-day national state of energy emergency in response to mounting energy supply constraints. Beyond these direct effects, heightened geopolitical uncertainty could weigh on global risk appetite, potentially widening sovereign spreads, increasing capital flow volatility and renewing pressure on regional currencies. Indirect spillovers could also emerge if higher energy costs begin to slow activity in key partner economies, weighing on demand for African exports, while rising airfares are already signalling emerging pressure on tourism flows.  Moreover, supply chain disruptions and higher fertiliser costs could aggravate the region’s vulnerabilities.

The war is set to hamper the region’s economic growth outlook

Prior to the onset of the war, we expected the Sub-Saharan African region to grow at 4.5% in 2026 – broadly in line with the IMF’s January 2026 WEO forecast of 4.6% – under our assumption of Brent crude averaging around USD 60-62/barrel. As previously stressed, the escalation represents an external shock for the region, notably through higher and more volatile energy prices and a deterioration in global financial conditions, thus exacerbating pressures on growth, external balances and currencies in more vulnerable economies. In recent years, Gulf economies have strengthened their economic footprint driven by growing investment and remittance flows. These inflows have supported infrastructure development, energy projects and external financing across several African economies, particularly in North and East Africa. The onset of the Iran war, however, raises the risk of delays or reprioritisation of some Gulf-backed investments, while weaker remittance flows could weigh on consumption in countries with strong financial ties to the region, such as Egypt and Kenya. That said, the impact of the war is likely to be uneven. Economies operating under fixed exchange-rate regimes, such as those in the CFA franc zone, are likely to experience a more contained short-term inflation pass-through, while commodity exporters may benefit from higher energy prices, partially offsetting the broader regional drag.

Given the volatile and highly uncertain nature of the situation, we have adopted a scenario-based approach to assess how a sustained oil price shock could affect Sub-Saharan Africa’s growth trajectory relative to the pre-escalation baseline. This allows us to distinguish between temporary volatility and a more persistent shock, and to capture the uneven impact across economies with differing energy exposure, exchange-rate regimes and external financing structures. We present our forecasts for SSA’s growth under two scenarios: one in which the conflict results in moderate disruptions, and another where disruptions are more extensive and last longer.

Rising inflation pressures

Geopolitical tensions are reshaping Africa’s inflation outlook, with tanker freight rates climbing sharply and insurance costs rising as war-risk premia for vessels transiting the Persian Gulf increased. Fertiliser prices are also rising amidst supply disruptions in the Strait of Hormuz, through which around one-third of the global seaborne fertiliser trade passes. This is likely to impact costs in agriculture, particularly in East African economies such as Tanzania, Kenya and Mozambique, which rely heavily on imports of fertilisers from the Gulf region. While recent IMF estimates suggest that a 10% increase in oil prices raises global headline inflation by around 0.4 percentage points, the impact in Sub-Saharan Africa is likely to be significantly larger given the structure of consumption, where food and energy account for roughly 50% of the CPI basket, allowing for faster and stronger pass-through. Overall, this could slow or partially reverse the disinflation process and prompt central banks to proceed more cautiously with monetary easing. Should the conflict be prolonged, central banks will be faced with a delicate balancing act regarding policy direction, with interest rates hikes possible to prevent inflationary pressures from becoming entrenched.

Pre-conflict: Supportive environment for African FX

African currencies broadly held firm against the USD since the start of the year, benefiting from a softer dollar backdrop. This external tailwind was reinforced by domestic policy measures, with earlier monetary tightening helping to ease inflation, while stronger FX reserve buffers and ongoing reform efforts have further helped to anchor currency stability. In parallel, steady remittance inflows and resilient commodity export revenues improved FX liquidity in a number of markets, supporting a gradual return of portfolio and foreign direct investment. As a result, currencies such as the Kenyan shilling, Ghanaian cedi and Nigerian naira have shown signs of stabilisation.

Post conflict: Higher oil prices and risk aversion shifting African FX dynamics

As the war unfolds, African currencies are already coming under pressure. Under our moderate case, we see African currencies facing short-term volatility, with pressures expected to eventually ease. However, in our protracted case, we expect a more sustained and broad-based depreciation, as outlined in the table below. 

Higher commodity prices and the race to critical minerals could create some winners in the region

With oil prices already elevated, the near-term impact varies across African economies—supporting exporters such as Nigeria, and to a lesser extent Angola given subdued production. Dangote refinery is emerging as a regional supplier, with increased demand from African countries. Meanwhile, gold started the year at elevated levels following a sustained rally. In the immediate wake of the war, heightened volatility prompted profit-taking and position trimming, resulting in a pullback in prices as some investors shifted toward liquid assets amidst a firmer US dollar. In our moderate case, we expect prices to recover gradually and settle around USD 5,500 – 6,000 by year-end. This will likely support export revenues for producers such as Ghana, South Africa and Tanzania, although gains depend on domestic value retention. South Africa captures more value through its refining capacity, while Ghana exports much of its artisanal output to hubs such as Dubai, and Tanzania is gradually expanding local refining but continues to export part of its unrefined production.

Rising copper demand to create tailwinds for the DRC and Zambia 

Copper prices remain firm at around USD 12,000–12,800 per tonne, supported by tight supply and strong demand from electrification and renewable energy infrastructure projects. The London Metal Exchange forward curve also points to slightly higher prices in the coming months, signalling continued market tightness. In this context, African producers are well positioned to benefit. The DRC generates roughly 3 million tonnes annually, while Zambia produced about 890,000 tonnes in 2025 and aims to raise output to 3 million tonnes per year by 2031. Ultimately, we believe the gains will depend on producers’ ability to improve mining infrastructure, expand output and strengthen local processing to retain more value domestically.

Introducing our Macroeconomic Pressure Index: A forward-looking tool for gauging the economic signals

In an environment marked by elevated uncertainty, multiple external shocks and persistent domestic constraints across African economies, we have developed a Macroeconomic Pressure Index (MePI) to gauge underlying macroeconomic pressures. Put simply, MePI is designed to show whether economic pressures in a country are building up or easing over time, based on that country’s own underlying fundamentals. The MePI combines a set of core macroeconomic indicators – covering public finances, external balances, economic growth and debt, amongst others – into a single, standardised measure of macroeconomic pressure. The index draws on projections from the IMF’s World Economic Outlook alongside our own internal analysis, and is calibrated to reflect each country’s structural characteristics. This ensures that the assessment is relative to a country’s own economic realities, rather than based on a one-size-fits-all benchmark. The maps below illustrate projected MePI readings for year 2026 across 27 African economies both prior to the war and under our moderate war scenario (see page 7 for detailed assumptions). Green shaded regions denote lower-than-average pressure, yellow moderate pressure, and orange/red indicate elevated pressure. 

Country spotlight: Kenya

Kenya’s recent stabilisation gains are being threatened by energy shocks and climate events

Kenya has moved from a period of acute refinancing stress in 2023–24, marked by Eurobond-related default fears and weak external buffers, to a more sustainable fiscal footing. Successful Eurobond refinancing and strong remittance flows have restored market access and rebuilt reserves, with Moody’s upgrade to B3 in January 2026 reflecting reduced default risk and improved financing flexibility. However, the Iran–Israel conflict introduces a new risk: around 60% of Kenya’s fuel imports originate from the Middle East – largely from the UAE – and  attacks on energy infrastructure highlight the potential for supply disruptions and higher oil-driven inflation pressures. In addition, recent severe flooding, notably in and around Nairobi, has imposed growing economic costs through damage to transport infrastructure, disruptions to logistics and aviation and losses to businesses and households, adding near-term pressure on growth, inflation and public spending needs.

Recent moderation in inflation to reverse amidst adverse weather conditions and rising energy risks 

Prior to the war, we expected around 75 bps of cumulative easing in 2026, with 25 bps already delivered in February. As the effects of the conflict and recent floods unfold, we now see headline inflation averaging slightly above the midpoint of the CBK’s target range (5% ± 2.5%), with additional pressure from higher global energy prices and renewed external volatility. Given this backdrop, we see limited room for further easing this year and expect the CBK to take a cautious, data-driven approach, delivering only one additional 25 bp cut towards the end of the year under our moderate case.

External liquidity has strengthened, reflected in higher FX reserves and more stable exchange rate

The Kenyan shilling has traded in a relatively narrow band of KES 129.2-129.3/USD for much of 2025 following the sharp depreciation experienced in 2023. This stability reflects an improving current account position, supported by diaspora remittances alongside foreign participation in local-currency government bonds. Since the onset of the conflict, we noted a small dip in the KES towards the USD 130/USD level. In our moderate case, the KES is expected to trade around 129/USD noting that the Central Bank is in a better position to defend the currency.

Keeping fiscal discipline and refinancing needs under scrutiny

Kenya’s near-term refinancing risk has eased, reflecting proactive debt management and renewed external financing, which have strengthened liquidity and reduced immediate rollover pressures. This shift has supported investor confidence and contributed to a recent sovereign rating upgrade, marking a clear improvement from the acute refinancing concerns seen in 2023–2024. The authorities are also pursuing alternative funding channels, including the Kenya Pipeline Company Privatisation and a potential diaspora bond, to broaden financing sources.

However, the war-related spillover is now testing these pre-war improvements, prompting the authorities to introduce measures to cushion households from the impact. In this context, the government plans to review the 16% VAT on fuel and deploy KSh 17 billion from the Fuel Stabilisation Fund, steps aimed at tempering the pass-through of higher international prices. While these measures provide targeted relief, they could add pressure to an already constrained budget envelope.

In this context, the trajectory of a successor IMF programme has become increasingly important, with the authorities’ inability to complete the final review of the previous arrangement—amidst domestic resistance to tax measures and the need to recalibrate consolidation—highlighting the complexity of advancing adjustment at a time when external vulnerabilities have been amplified by the conflict. Securing a renewed IMF engagement will be essential to anchor credibility as the war heightens fiscal risks and complicates the trade-off between household support and consolidation, even if an agreement is unlikely to be reached prior to the 2027 elections. 

Macroeconomic pressures appear broadly balanced at this stage

Kenya is confronting the impact of the war from a relatively stronger position, supported by FX reserves build-up and recent liability management operations which has helped enhance fiscal dynamics. Ongoing consolidation efforts have contributed to improve the primary balance position. However, the conflict is increasingly feeding into the macro-outlook, with higher fuel and fertiliser costs adding to inflationary pressures and weighing on the external position. These strains come against a backdrop of elevated amortisation needs, while measures under consideration to cushion households from war-related shocks are likely to weigh on the fiscal outlook. Overall, these factors are contributing to heightened pressures, although they remain at moderate level, as gauged by the MePI. 

Country spotlight: Nigeria

Higher oil prices and domestic refining provide near-term support

Nigeria’s economy is transitioning towards macroeconomic stabilisation following a decisive policy reset under President Tinubu. Exchange rate liberalisation, fuel subsidy removal and tighter monetary policy have helped restore external balance and rebuild credibility, as reflected in recent sovereign rating upgrades. Nigeria appears well- positioned from the rise in oil prices triggered by the war, as higher oil prices support export revenues while the ramp-up of domestic refining – led by the Dangote refinery – reduces reliance on imported fuel and helps ease FX pressures.

Nigeria’s oil sector is showing clearer signs of normalisation after years of underperformance, supported by improved pipeline security and more stable operating conditions. As crude output gradually recovers, a more structural shift is unfolding downstream: the Dangote refinery is reducing Nigeria’s dependence on imported refined fuels. Recent expansion plans reinforce this trajectory. Dangote has secured USD 750 million in agreements with partners in China and India to expand refining and petrochemical capacity over the coming years.

The recent rise in global oil prices has improved Nigeria’s near-term fiscal outlook, with our moderate case now assuming USD 80 – 85/barrel, above both our earlier USD 60–62/barrel view and the 2026 budget oil assumption. More recently, the Nigerian Upstream Petroleum Regulatory Commission highlighted that daily crude oil production rose above the OPEC quota, reflecting efforts to meet increased demand amidst the ongoing war. If this proves durable against a backdrop of elevated oil prices, the authorities would be better positioned to meet the 4.5% of GDP fiscal deficit target—an outcome that appeared much less plausible under our pre-war prognosis.

All in all, Nigeria’s fiscal dynamics remain shaped by a structurally narrow revenue base, with interest payments absorbing over 30% of government revenue. The 2026 budget includes measures to strengthen non-oil revenue mobilisation, including higher capital gains taxes and a minimum effective tax rate on multinationals. If implemented effectively, these reforms – alongside stronger oil receipts—could help gradually improve fiscal buffers, although sustained progress will depend on consistent policy execution, especially in a context of election next year.

The war alongside election-related spending could disrupt the disinflation trend seen of late 

Prior the war, the decline in inflation had strengthened the case for a gradual easing cycle, supported by improved FX stability and tight monetary conditions. Reflecting this, the Central Bank has cut policy rate from 27% to 26.5%, at its February meeting. However, the scope for additional cuts will likely remain limited, as pressure from higher fuel price (up by 40% amid the war) feeds through inflation figures. Prior to the conflict, expectations were for the policy rate to fall to around 20% by end-2026. We now see upside risks to this outlook, reflecting war-related spillover alongside increased fiscal spending ahead of the 2027 general elections which could slow the disinflation process. As a result, we expect the Central Bank to adopt a more cautious approach and slow the pace of rate cuts, with policy rate at 23.5% by year-end.

Naira to remain resilient supported by higher oil prices and improved FX reserves 

The naira entered the year with improving FX liquidity, supported by exchange-rate reforms and a gradual return of portfolio inflows. However, some pressures emerged as the USD strengthened in the wake of the war, prompting the Central Bank to intervene in the market, with the naira trading around 1,380/USD at the time of writing. Meanwhile, the ramp-up of the Dangote refinery – now beginning to export refined products to other African markets –marks a structural shift in Nigeria’s external position. Beyond reducing fuel import demand, this is starting to generate FX inflows and improve trade dynamics, thereby easing pressure on reserves over time. In our moderate case, stabilising sentiment should allow the naira to trade below 1,350/USD.

Macroeconomic pressures appear contained for now

Nigeria’s near-term outlook is favourable, with the MePI pointing to broadly positive conditions, largely reflecting tailwinds from higher oil prices alongside reform momentum. Stronger domestic savings provide a structural buffer that was largely absent during earlier episodes of pressure, while the external position has improved materially as the ramp-up of domestic refining capacity begins to ease both the import bill and FX pressures. Investment levels remain firm, adding further stability. The main area to watch remains fiscal dynamics: interest payments – absorbing over 30% of government revenue – are the single largest source of upward pressure and have risen markedly in recent years. While the reform momentum and oil tailwinds provide a solid foundation, the interest burden remains the binding constraint. Meaningful progress on revenue mobilisation will therefore be critical to keeping macroeconomic pressures contained over the medium term.

Country spotlight: Egypt

Egypt faces increased challenges as key sources of foreign currency come under pressure

At a time when Egypt was beginning to regain macro stability following IMF-backed reforms and sizeable inflows from GCC partners, tensions in the Middle East have introduced downside risks. Since the onset of the war, the Egyptian pound weakened beyond EGP 50/USD, with roughly USD 7 billion in portfolio outflows reported, although this remains below the USD 20 billion that exited the country during the 2022 Russia–Ukraine shock. Heightened regional tensions could weigh on tourism flows and keep Suez Canal revenues subdued amidst ongoing disruptions to Red Sea shipping. While some mitigation may come from the SUMED pipeline, its capacity of around 2.5 – 2.8 million b/d means any uplift is likely to be modest and insufficient to offset weaker canal revenues.

At the time of writing, Suez Canal traffic has declined by about 50% since the war began, and if the experience of the Houthi attacks is any guide, the current conflict will keep receipts subdued. Tourism had been a bright spot, with arrivals rising by around 21% last year, but ongoing regional tension is likely to weigh on travel – both through potential travel advisories from key source markets in Europe and the Gulf and also through reduced air connectivity should current disruptions to regional air traffic persist or intensify. Remittances remain the most stable source of foreign currency, rising by 40.5% year on year in 2025, although their outlook remains closely tied to economic conditions in Gulf economies, where a large share of Egyptian expatriates are employed.

The March 2024 shift to a flexible exchange-rate regime led to a sustained depreciation of the EGP, before the currency began to firm in the second half of last year as investor confidence and capital inflows improved. The pound traded largely within the EGP 47–48/USD range in 2025, but the recent conflict has reversed these gains, with the currency approaching EGP 55/USD amidst portfolio outflows. In our moderate case, sentiment could recover quickly and support a return towards pre-war levels, while under a protracted scenario further depreciation is likely. Even so, with FX reserves at USD 52.7 billion – around 30% higher than at the start of the Ukraine war – the Central Bank retains sufficient buffers to manage volatility.

War-related spillovers also complicating the disinflation trend while fiscal risks persist

Prior to the onset of the war, Egypt’s easing inflation had enabled the Central Bank of Egypt (CBE) to begin a gradual rate-cutting cycle. However, the recent surge in global energy prices may reverse this trajectory. The government has already raised domestic fuel prices by around 14 –17%, citing higher oil and shipping costs, a move that could slow the pace of disinflation. Meanwhile, elevated debt-servicing costs – reflecting structurally weak revenues and the still high interest burdens – continue to weigh on Egypt’s credit profile.

Inflation had been on a steady downward path prior to the recent escalation in regional tensions. Reflecting this trend, the CBE cut policy rates by 100 basis points (bp) to 19% on 12 February, and we expected the easing cycle to continue, with the policy rate reaching 15% by end-2026. However, the outlook has since shifted. Currency depreciation and rising LNG, energy, and shipping costs linked to the conflict are now expected to push inflation higher. This could delay further monetary easing and prompt the CBE to proceed more cautiously and adopt a wait-and-see stance. Under our moderate case, we expect a 100 bp cut in the second half of the year, bringing the policy rate to 18% by year-end, as inflation pressure lingers.

While Egypt’s debt-to-GDP ratio remains above 80%, the more pressing concern lies in debt affordability. The interest-to-revenue ratio – estimated at 60–70% – remains exceptionally high, reflecting a narrow revenue base, elevated domestic interest rates and reliance on short-term local-currency debt. In the current context of increased inflationary pressures, the scope for further monetary easing is likely to narrow, keeping interest rates higher for longer and limiting relief on debt-servicing costs. As a result, a meaningful improvement in debt affordability will depend largely on stronger revenue mobilisation, with a return to the 40% interest-to-revenue levels seen in 2023 unlikely over the medium term.

Rising macroeconomic pressure signals

Prior to the war, our model outcome pointed to an easing of economic pressures, reflecting reform momentum and robust GCC inflows. The conflict has since reintroduced significant external headwinds, tempering the near-term outlook. As mentioned, disruptions to key foreign-currency inflows – most notably Suez Canal receipts, alongside heightened risks to tourism and portfolio flows -are unfolding at a time when the economy remains reliant on external financing amidst a persistent domestic savings shortfall. At the same time, recent increases in fuel and electricity prices are feeding directly into inflation, intensifying cost-of-living pressures and complicating macroeconomic management. While the primary balance has been kept in surplus since 2019 and revenue mobilisation continues to improve, elevated debt-servicing costs – with interest payments absorbing a large share of government revenue – continue to constrain fiscal space. Taken together, the durability of both the fiscal and external positions appears more fragile, with regional tensions likely to erode buffers further and worsen the risk profile.

About Africa Economic Compass

Africa Economic Compass is the result of the coordinated efforts of MCB Group’s economic research team. The team has recognised expertise in analysing local, regional, and international macroeconomic dynamics. It conducts continuous monitoring of sectoral developments, financial market trends, and the structural forces shaping African and global economies. Through a rigorous, data-driven approach enhanced by economic models, the team contributes to strengthening the understanding of economic challenges in an environment that is constantly evolving.

If you have questions about the findings or would like to dive deeper into the data, you can reach out to our team on [email protected]