Geopolitical Implications on the Economies of the Global South

Talal Abu-Ghazaleh

With geopolitical tensions re-emerging at the center of the energy market, countries of the Global South appear to be entering a new phase of heightened and overlapping vulnerability. Energy crises are increasingly now intersecting with persistent financial imbalances, giving rise to a multi-dimensional crisis that extends far beyond simple price fluctuations. Long queues for cooking gas in Nepal, factory closures in Sri Lanka due to energy rationing, and the shift to remote learning in Pakistan; all these indicators represent only early expressions of deeper disruptions caused by a tightening in energy supply chains that has directly impacted overall economic activity. 

Yes, when fuel becomes scarce or expensive, the impact is not limited to household consumption. It extends to paralyzing production and transport chains, while simultaneously pressuring both government and household budgets. This dynamic is not entirely new. The energy crisis that followed the 2022 war in Ukraine highlighted a clear pattern where wealthy countries are able to absorb shocks through financial support, while lower-income countries are left to confront open markets with limited resources.
For example, Europe was able to sustain high demand levels thanks to government support, which prolonged the rise in global price and effectively shifted the burden of the crisis to countries with more limited fiscal capacity. Therefore, the outcome was inevitable: sharp discrepancies in balance of payments and rapid reduction of foreign reserves, and in some cases leading to debt defaults, as happened in Sri Lanka.

These events are not exceptions; rather, they reveal the operating mechanism of the global energy market during crises, where purchasing power (not actual need) becomes the decisive factor in resource distribution. Today, with growing risks associated with energy supplies from the Gulf region, a similar dynamic is being repeated, but with greater intensity.
Partial or near-complete closure of critical corridors such as the Strait of Hormuz would not only lead to higher prices; it would also trigger a comprehensive repricing of risk in energy and financial markets. Here, the gap between countries emerges not only in the degree of their exposure to shocks, but also in their ability to absorb their consequences.
To make it clear, this gap can be understood through two interlinked dimensions. First, structural dependence on energy imports, and second, the financial capacity to sustain this dependence. Consequently, once high dependence meets weak reserves; the ideal conditions form for the outbreak of a macroeconomic crisis.
In this context, countries like Jordan, Egypt, and Pakistan exemplify model cases of dual vulnerability. These economies rely not only on energy imports from the Gulf, but also on their financial inflows originating there; whether through expatriates’ remittances or investments.

For example, in Pakistan the energy imports represent 4% of the Gross Domestic Product (GDP), with 90% dependence on the Middle East, and remittances reaching 5-6% of GDP. These figures indicate that any regional disruption would negatively affect the economy from two sides simultaneously, such as rising import costs and falling financial inflows.
This would create a pressure loop that is difficult to break, especially with high oil prices that widen current account deficits, which would contribute to currency depreciation. Once the currency depreciates, the cost of petrodollar-priced imports effectively increases, intensifying inflationary pressures.

Accordingly, economies enter a spiral of inflation and financing stress that requires sustained dollar inflows to stabilize; whether through reserves or external borrowing. However, these tools themselves have become more expensive and less available. As global monetary policy tightens, even with interest rates remaining steady, the market now no longer asks whether rates will rise, but instead focuses on the timing of potential rate cuts. Consequently, capital flows are increasingly moving away from emerging markets, making it harder to finance deficits.

In Egypt, where short-term external obligations exceed half of foreign reserves, the ability to absorb additional shocks remains highly limited, even with external support. The situation is similar in Bangladesh and Sri Lanka, where dependence on imported energy overlaps with weak export bases. In Bangladesh, which relies heavily on the clothing sector, higher fuel costs can undermine export competitiveness, pressuring the trade balance from two sides:  higher import expenditures and reduced export revenues. Sri Lanka, still in the process of recovering from its previous crisis, remains highly vulnerable to a new shock that could significantly affect its recovery process; and ultimately reversing their progress entirely and pushing them back to square one.

Over the medium term, higher energy prices may accelerate investment in alternative energy sources.
Some cases, however, highlight the importance of reserves as a strategic buffer. For example, Thailand, despite its dependence on energy imports, holds sufficient reserves that provide a wider margin of maneuver. Similarly, India combines strong reserves with diversified import sources, including the ability to absorb lower-quality oil from alternative markets. While these factors do not eliminate risk, they reduce the likelihood of a full-scale crisis.

What this demonstrates is that energy crises do not operate in isolation; they affect every aspect of economic activity; from industrial production to consumption, from inflation to exchange rates, and from investor confidence to fiscal stability. They therefore represent a significant examination of the resilience of economic models in the countries of the Global South.

Yet this bleak picture also includes opportunities. Major crises often catalyze structural shifts in consumption and production patterns. Therefore, rising energy prices over the medium term may accelerate investment in alternative energy sources, stimulate innovation to improve efficiency, and prompt governments to reconsider unsustainable subsidy policies. These shocks may also drive governments to build strategic reserves and strengthen income diversification. However, benefiting from these opportunities is not automatic; it requires institutional capacity to turn pressure into reform.

The key question is whether the most vulnerable countries can shift from crisis management toward long-term strategic planning.
Finally, what we are witnessing is not simply a passing energy crisis, but a revealing moment that underscores the limits of prevailing economic models across much of the Global South. When energy; the fundamental input of all economic activity, becomes a source of uncertainty, it reshapes economic priorities. While some countries have the time and resources to reposition, others face difficult trade-offs, where economic stability itself becomes an objective rather than merely a means to growth.