The intensifying Iran-Israel conflict has created ripples across the globe, affecting economies far removed from the battle zones. Bangladesh is no exception. While oil prices rise amid instability in the Middle East and key sea routes such as the Suez Canal and Strait of Hormuz become insecure, Bangladesh is confronted with multiple economic stresses, from inflation and crippling import bills to declining remittances and strained foreign reserves.
The most immediate concern is rising oil prices. Bangladesh, which imports most of its crude oil from the Gulf states, is especially vulnerable. Higher fuel prices feed directly into production costs across the economy, from manufacturing to agriculture. The mechanism is straightforward: cost-push inflation, where businesses pass on rising costs of purchase and transport to consumers. The inflation rate has already crossed double digits, and higher fuel prices are likely to push it further. Supply-side inflation will be difficult to manage, especially as fiscal space has tightened under the interim government.
For all latest news, follow The Daily Star’s Google News channel. Bangladesh’s economy has long relied on expatriate remittances, largely from the Gulf. In 2024, the country earned around $27 billion in remittances, about 6 percent of GDP, with most receipts coming from Saudi Arabia, the UAE, Qatar, Kuwait and Oman. Any major escalation in hostilities could trigger mass job losses or force expatriates to return home, adding pressure on families and local consumer demand.
Remittances also sustain foreign reserves, which have fallen from a peak of about $45 billion in 2021 to around $25 billion today, equivalent to some four months of import bills. If remittance inflows weaken and export earnings fall, reserves will decline further, forcing the Bangladesh Bank to let the taka depreciate further. Even if a weaker taka boosts export competitiveness, it will raise import costs and foreign currency obligations, straining the current account and the budget’s capacity for debt repayment.
Exporters, especially in the ready-made garments sector that generates over 80 percent of export earnings, face additional headwinds. Rerouted shipping to avoid the Red Sea would add shipping time and costs, cutting into profit margins. Delays could erode Bangladesh’s reputation for timely delivery. Combined with muted consumer spending in the US and EU, as inflation bites in those markets, demand for Bangladeshi goods may falter. Rising costs and falling demand could dent export volumes, reduce foreign currency inflows and pressure GDP growth.
Agriculture and domestic industry are not insulated. Fuel powers mechanised farming, irrigation and transport. Manufacturers facing higher input costs must either absorb losses or pass them on, contributing to food price inflation. The government could be forced to reinstate subsidies, further straining the budget.
Bangladesh’s financial sector, already struggling with high non-performing loans, faces fresh risks. Capital adequacy is thin, and credit growth could stall as lenders become cautious. Sustained high inflation and a weaker currency would likely increase defaults, weakening bank balance sheets. The stock market, already under strain, could see deeper losses as investors retreat amid growing uncertainty.
Bangladesh must act swiftly. Policies could include setting up fuel hedging arrangements or long-term contracts to limit price shocks, strengthening reserves management, creating a remittance stabilisation fund, subsidising shipping for garments and food, and offering targeted aid to vulnerable sectors. These steps, alongside fiscal discipline, could protect livelihoods and sustain growth.
The Iran-Israel war may seem distant, but its financial shockwaves have already reached Dhaka. To steer through this storm, Bangladesh needs coordinated action, visionary leadership and bold policymaking to avert deeper economic distress.
The writer is an associate professor of economics at Dhaka University and research director at RAPID.