How can our region overcome the effects of prolonged Red Sea disruptions?

Middle East markets need to diversify trade and grow resilience amid potential losses of nearly 10% on exports for Red Sea ports if disruptions persist into 2025, a recent IMF report has found. Countries with ports on the Red Sea could lose around 1% of GDP on average if disruptions persist till the end of this year, mainly affecting countries like Egypt, Jordan, Saudi Arabia, Sudan, and Yemen.

A quick look at where we stand: Suez Canal trade dropped by 50% y-o-y in the first two months of 2024 and further afield, Panama Canal trade dipped 32% during the same period, according to a separate report. The Suez Canal accounts for around 15% of global trade transits, while the Panama Canal accounts for about 5%. At the same time, reroutes around the Cape of Good Hope boosted trade volumes along that route 74% y-o-y.

Trouble is rippling across our regional ports: Red Sea attacks have caused cargo volumes at Red Sea ports to plummet, including Jordan’s Aqaba Port and KSA’s Jeddah Port. EU and Middle Eastern ports witnessed a 5.3% decline in port calls in the first two months of 2024, due to longer journeys on the back of rerouted trade, the report finds.

What can be done? Trade could be boosted by up to 17% on average in the medium term by loosening regulatory constraints, upgrading trade infrastructure and cutting down on trade barriers, according to data from the report. Applying such targeted policy reforms could also grow economic output by around 3%.

Jordan is already taking steps: In a recent application of such a policy, Jordan’s cabinet extended exemptions on custom duties and sales tax on maritime freight till 30 June, last week. The exemptions — which were issued on 21 January — come in a bid to control rising prices of basic commodities on the back of Red Sea disruptions.

Mitigating aftershocks: Jordan set up a task force to handle the sudden drop in volumes at Aqaba following the start of Red Sea disruptions. The body urged Aqaba Container Terminal to provide incentives for marine routes that continue to serve Aqaba Port in late January, while also suggesting waiving storage fees for shipping providers and owners of empty containers prepared for export.

Diversification is the word of the year: Regional countries are also looking into developing alternating shipping routes. KSA has reshuffled trade from Jeddah on the Red Sea to Dammam on the Persian Gulf. The move looks to maintain the flow of trade and avoid long reroutes, overland Saudi cargo routes are gaining momentum, with a 27% hike in overland trucking rates in March. A spike in spot rates is also making trucking between Dammam and Jeddah more competitive, and renewing hopes for a long-awaiting “Landbridge” project which would see Dammam and Jeddah linked by rail.

On a wider scope, there’s still work to be done: Fostering adaptable supply chain management, expanding suppliers, and evaluating air freight capacity alternatives would strengthen regional resilience to trade disruptions, the report finds. The region has also benefited from changes to trade patterns in other contexts, with G7 sanctions on Russian crude shifting EU energy exports towards the region, to match the spike in demand for non-Russian energy products, the IMF report finds. Kuwait, Oman, Qatar and Algeria almost doubled their energy exports to the EU between 2022 to 2023.