Iran Crisis Forces Stagflation Reckoning Across Emerging Markets
Oil at $105, fertilizer up 49%, remittances threatened — EM policymakers face a triple squeeze with no room to maneuver.
Brent crude at $105.33 per barrel as of April 25 has triggered cascading macroeconomic shocks across approximately 80 emerging markets dependent on energy imports, creating a stagflation trap for countries already managing 6-8% inflation before the Iran conflict began.
The crisis transmits through three interconnected channels. Energy import costs have surged for commodity-dependent nations, with Brent jumping 60% year-over-year and reaching a peak above $120 during the worst days of Strait of Hormuz disruptions in March, according to Trading Economics. Fertilizer prices have climbed 30-49% as the strait’s effective closure choked off urea, ammonia, and phosphate shipments, per Energy News Beat. Remittance flows from Gulf economies — which sent Pakistan alone $1.7 billion in February — now face contraction as Qatar and Kuwait brace for GDP declines of 5.7% and 6.4% respectively.
Food Inflation Amplifies Energy Shock
Egypt’s food inflation exceeded 28% in March, with meat and poultry up 15-20%, cooking oils up 12%, and dairy up 10%, data from The Middle East Insider shows. Urban inflation reached 19.4% overall. The fertilizer price shock — spot prices now running $650-800 per ton versus $470-516 before the conflict — creates a lagged second wave. The FAO estimates fertilizer costs could average 20% higher in the first half of 2026 if the crisis persists, feeding directly into harvest costs for Q2-Q3 crops across South Asia and North Africa.
The energy-to-food transmission operates through multiple pathways. Diesel price increases raise transportation costs for agricultural inputs and finished goods. Natural gas disruptions affect ammonia production in LNG-dependent fertilizer plants across India, Bangladesh, and Pakistan. Cooking oil imports face both higher freight costs and supply chain bottlenecks as shipping routes reroute around the Strait of Hormuz.
The waterway handles approximately 20% of global oil trade and 25% of LNG exports. Its effective closure since late February represents the largest oil supply disruption in history according to the IEA. Initial military operations between February 27 and March 2 drove Brent from $71.32 to $77.24 per barrel, with subsequent escalations pushing prices above $120 before settling near current levels around $105.
Remittance Corridors Under Pressure
Pakistan received $696 million from the UAE, $685 million from Saudi Arabia, and $317 million from other Gulf states in February — a $1.7 billion monthly total that underwrites the country’s external account stability, according to 24 News HD. A study by the Pakistan Institute of Development Economics warns the conflict could reduce annual remittances by $3-4 billion and prevent roughly 500,000 new workers from migrating to Gulf labor markets.
The Philippines faces similar exposure. De La Salle University economists warned in March that “the conflict threatens to significantly disrupt the Philippine economy by fueling inflation, weakening growth prospects, and threatening remittance flows from overseas Filipino workers.” The peso hit a record low of 60.1 per dollar on March 19, forcing an energy emergency declaration five days later as the government confirmed crude supplies sufficient only until June 30.
“Inflation is already high and if the conflict in the Middle East continues, and Oil Prices remain elevated, this will sustain upward pressure on inflation.”
— Harry Chambers, Capital Economics
Nepal’s vulnerability runs deeper still — 92% of labor migration targets GCC countries and Malaysia, with remittances comprising 66% of convertible foreign exchange earnings since 2021, per The Diplomat. The first six months of fiscal year 2025-26 saw 207,000 new migrants depart; that pipeline now faces disruption as construction, logistics, and service sectors contract across the Gulf.
Currency Defense Drains Reserves
Vietnam’s dong faces acute pressure from its 85% dependence on Kuwaiti crude imports. MUFG Research projects the USD/VND exchange rate could reach 27,000 if oil sustains at $100 per barrel, compared to a base case of 26,600. The State Bank of Vietnam faces mounting pressure on its FX ceiling as import bills surge while export competitiveness deteriorates.
Turkey has sold or swapped approximately 60 tons of gold — roughly $8 billion — by early April to secure foreign exchange liquidity, according to Wells Fargo Investment Institute. The move signals a broader pattern: emerging market central banks are tapping gold reserves and Treasury holdings at the Federal Reserve to manage tightening liquidity conditions as import costs escalate.
| Country | Growth Forecast | Prior Expectation |
|---|---|---|
| Qatar | -5.7% | ~4% (2025 actual) |
| Kuwait | -6.4% | ~4% (2025 actual) |
| Saudi Arabia | 3.1% | 4.3% |
| UAE | 2.4% | 5.1% |
India has repatriated over 220,000 nationals from the GCC and Iran as of March. Each $10 per barrel increase in oil prices adds $10-12 billion to the import bill, threatening a two-percentage-point expansion of the current account deficit. Forex reserves standing near $728 billion face sustained drawdown pressure.
Stagflation Trap Tightens
The International Monetary Fund revised global growth down to 3.1% in its April World Economic Outlook, a 0.2 percentage point reduction. Emerging market inflation concentrates in commodity importers with preexisting vulnerabilities. A severe scenario projects 5.8-6% inflation across Emerging Markets — well above the 6-8% baseline many were already managing before the Iran crisis began.
An IMF spokesperson warned that “you don’t want to let an energy shock turn into an ongoing inflation problem,” citing the need to prevent “wage-price spirals and de-anchoring of inflation expectations.” But emerging market central banks face impossible trade-offs. Raising rates to combat inflation risks currency crises and debt cascades in countries like Egypt and the Philippines, where fiscal space remains severely constrained by existing debt burdens and narrow deficits.
- Philippines: Record peso weakness (60.1/USD), energy emergency declared March 24, crude supplies until June 30, inflation projected 7.5%
- Egypt: 28% food inflation, Suez Canal revenue down 38% YoY to $1.5B, energy import costs doubled from $1.2B (Jan) to $2.5B (March)
- Pakistan: $3-4B annual remittance loss risk, 500k worker displacement threat, reliance on Gulf flows ($1.7B/month)
- Vietnam: 85% crude dependence on Kuwait, dong pressure toward 27,000/USD, interbank rate stress to 9%
Egypt’s central bank has revised its inflation forecast upward to 13.5% for fiscal 2025/26 from 11.6%, 93.3 The Drive reported, citing a Reuters poll. Meanwhile, Suez Canal revenue dropped 38% year-over-year in Q1 2026 to $1.5 billion as shipping routes diverted, compounding current account deficit pressures at precisely the moment energy import costs doubled.
What to Watch
Currency stability hinges on the duration of Strait of Hormuz disruptions. If the waterway remains effectively closed beyond June, the IMF’s adverse scenario — 2.5% global growth and 5.8% emerging market inflation — shifts from downside risk to baseline expectation. Pakistan’s April-May remittance data will reveal whether Gulf employment adjustments have begun materialising beyond preliminary warnings.
Egypt’s June harvest will test whether the fertilizer price shock translates into domestic food supply constraints or remains primarily an import cost problem. Vietnam’s FX ceiling pressure and the State Bank’s intervention capacity offer an early-warning indicator for whether Southeast Asian currencies can withstand sustained $100+ oil without abandoning managed exchange rate regimes.
Central bank gold sales and Treasury drawdowns bear monitoring as a liquidity stress gauge — Turkey’s $8 billion intervention in early April may mark the beginning of a broader pattern if energy costs remain elevated. The two-week ceasefire announced by President Trump on April 24 provides temporary relief, but its fragility — Trump stated he may not extend it — means markets price in renewed escalation risk. For the 80 countries caught in the stagflation squeeze, policy options narrow with each week the crisis persists.