East African Companies Facing Mounting Trade Disruptions from Red Sea Instability

Since November 2023, Yemen’s Houthi rebels have attacked more than 50 ships carrying goods through the Red Sea. Although the original intention was to target vessels affiliated with Israel, the activity has struck fear in all who use the route. Africa Export-Import Bank has warned of potentially devastating impacts on African economies, especially those in the north and east of the continent due to their reliance on Red Sea routes. Commercial vessels have been bypassing the Suez Canal for lengthier routes around South Africa’s Cape of Good Hope, resulting in losses of close to 40% for the Suez Canal Authority compared with the $9.4bn made during the 2022/23 fiscal year.

East and Horn of African countries that rely on the Suez Canal for most of their machinery and chemical imports are facing significant price increases, with Ethiopia especially vulnerable. This huge landlocked country is currently largely dependent on the Port of Djibouti for imports and exports. It does a small portion of trade via Somaliland’s Berbera port and is exploring other viable options in the territory, but the volatility in the Red Sea and Horn of Africa presents major challenges. Despite projections for Ethiopia to become one of the world’s top 10 fastest-growing economies this year, the country faces many obstacles. Still reeling from the aftermath of the war in the northern region of Tigray and the worst drought in recent history, price fluctuations, long waiting times and ongoing instability are taking a toll on local businesses. Amidst rising inflation and international supply challenges, Ethiopia needs more than ever a reliable trading partner in the region.

Somaliland, which is relatively democratic and stable, and has low import-export taxes, has the potential to become a promising host for investment in the Horn of Africa. It too is concerned about maritime instability in the region. A press release from the Ministry of Internal Affairs stated that the government “is concerned about the economic and social impact that may result from the illegal activity that has increased in the Red Sea, which may cause inflation… given the possible increase in ship insurance cover." Industries across the region are feeling the blow of rising inflation and shipment delays; Somaliland’s construction sector is no exception.

The impact of these challenges on Pharo Ventures is clear. In Ethiopia, where the construction of a new sesame oil factory is underway, the Managing Director stated, “As our business is set up to cater for the export market worldwide, we are concerned about the crisis in the Red Sea that will affect our potential to deliver our products to our customers in a safe and timely manner”. At Pharo Ventures Somaliland, profit margins have been cut following a 10% increase in construction material prices, with national production slowing substantially. What was normally a 30 to 45-day journey through the Gulf of Aden now takes four months or more, circumventing the entire African continent. Since the start of the Red Sea conflict, companies that supplied Somaliland with essential materials for roofing, electrical piping and concrete structures have halted all international shipments until further notice. In addition to these trade challenges, the Ethiopian government has begun efforts to crack down on unregulated goods going through Wajaale on the Somaliland border, hitting industry leaders hard. Like most construction suppliers in Somaliland, one of Pharo Ventures’ largest suppliers, Buux Building Material, has experienced a 20% reduction in its goods being exported to the Ethiopian market, according to the company’s owner Mohamed Saeed.

This downward trend highlights not only the sensitive nature of markets in the Horn of Africa, but the growing need for intra-regional trade and cooperation. The LSE’s David Luke is one of those advocating for increased intra-regional trade on the continent. Pharo Ventures is already engaging in the practice, working across Somaliland and Ethiopia to create jobs, improve infrastructure and better the livelihoods of people across the Horn of Africa. This is not only to address the economic needs of today, but to build a more promising Africa for generations to come. The aim is to make Africa less reliant on external exports, encouraging self-reliance by boosting internal trading and markets.