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War is raging across the distant Middle East, yet Bangladesh finds itself on trial. The warplanes flying over Iran, the explosions shaking Tel Aviv, Qatar, Bahrain, Saudi Arabia, and the United Arab Emirates, these tremors will not remain confined within their borders. The shockwaves of war will travel thousands of miles and soon reach the markets of Dhaka, the port of Chattogram, and even the electricity connections in rural villages in Bangladesh. The country’s foreign exchange reserves will feel the strain. From energy shortages to dollar scarcity and monetary policy pressures, Bangladesh may face serious challenges on multiple fronts.
War is not only geopolitics. It means another round of rising oil prices, uncertainty in LNG supply, escalating pressure on the dollar, and higher costs of daily necessities for ordinary citizens. Wherever war erupts, its economic effects certainly ripple outward. But when conflict strikes the Middle East, the consequences are particularly deep. Bangladesh relies heavily on Middle Eastern oil markets for energy imports. Energy capacity is closely tied to production, exports, and dollar earnings. At the same time, Middle Eastern countries are among the primary sources of Bangladesh’s remittances. War in that region could therefore deliver a severe blow to remittance inflows.
Bangladesh’s energy imports, remittance earnings, and foreign trade are all deeply intertwined with the Gulf economies and dollar dependence. Instability in the Gulf region quickly transmits economic stress to Bangladesh, and this time will likely be no exception.
The country’s market system, power plants, foreign exchange reserves, and even bank interest rates could be affected. Since the economy stands on imported energy, any uncertainty in LNG supply from Qatar or drone attacks on oil facilities in Saudi Arabia and neighbouring states would directly penetrate our domestic economy. The question is: how should Bangladesh prepare to confront these alarming challenges? Three critical issues demand urgent answers.
First, should energy prices be raised in line with global markets? If so, by how much? In Bangladesh, fuel and gas prices are not fully market-based; they are determined by the government in consideration of economic realities. During crises, two main policy paths emerge: one is, increase subsidies to stabilise prices and the next one are, adjust prices upward in line with global trends.
Both paths carry risks. A sudden sharp increase in energy prices could complicate matters rather than resolve them. Higher fuel prices raise production costs, which in turn increase commodity prices, fueling inflation, specifically cost-push inflation. On the other hand, if energy shortages arise and supply drops, prices may increase further due to scarcity, intensifying inflationary pressures from another angle. Thus, inflation risks loom from both sides.
Instead of sudden jump, gradual and carefully planned reforms are recommended. Priority in fuel allocation should be given to critical sectors such as power generation, agriculture, and essential industries. High-consuming but less essential sectors could face phased tariff adjustments. Limited, moderate adjustments for lower- and middle-income households could help reduce waste. Peak-hour pricing mechanisms, higher tariffs during peak demand and lower during off-peak periods, may also be introduced. Above all, energy waste must be minimized, and penalties imposed where necessary.
If the government decides on more subsidies to avoid price hike another challenge emerges: pressure on foreign exchange reserves. Increased subsidies would deplete reserves, reducing import capacity. In wartime conditions, however, economic resilience is paramount.
The core objective in managing the energy crisis should be to enforce disciplined consumption without destabilising the economy. Whether through moderate price adjustments or limited subsidies, gradual and cautious measures that minimise public hardship appear most prudent.
Second, foreign exchange reserves pose a major challenge. Reserves that once stood at $13 billion rose to $29 billion, an achievement widely regarded as a significant success of the interim government. Remittance inflows also reached record levels during this period. However, prolonged war could sharply reduce remittance flows, placing renewed pressure on reserves. Meanwhile, rising energy import costs could accelerate reserve depletion.
Using reserves merely to defend the currency’s nominal value would be a grave mistake. The primary function of reserves is to stabilise the economy during major crises. Several urgent measures may therefore be considered, including prioritising imports of food, agricultural inputs, and fuel for power generation; temporarily restricting luxury and non-essential imports; strictly curbing under-invoicing and over-invoicing to prevent capital flight; gradually adjusting the exchange rate to encourage exports and remittances; and finally, seeking long-term payment arrangements for energy imports rather than relying heavily on expensive spot-market purchases that immediately drain reserves.
Even if slightly higher prices are paid under deferred payment terms, the immediate dollar pressure could be reduced. It must be remembered that the purpose of reserves is not to accumulate dollars indefinitely but to keep the economic engine running. In wartime, every step must be measured carefully.
Third, interest rate management becomes crucial. A rapid reduction in interest rates might be popular among business communities. However, in times of uncertainty, investment decisions are driven less by borrowing costs and more by risk perceptions. During war and instability, businesses often postpone new investments, accumulate cash, and reduce exposure to risk. Lowering interest rates in such conditions may produce unintended consequences.
Cheap credit could be exploited by dishonest groups, adding strain to the financial system. Excess liquidity might spill into the market, raising inflationary pressures. The risks of fraudulent letters of credit (LCs) and capital flight could also intensify. Therefore, abruptly cutting interest rates would be highly risky.
Instead, a cautious monetary policy is needed. Targeted support for SMEs, export incentives, facilitation of essential LCs, and control of non-essential LCs should be prioritized. Strengthening revenue collection is equally vital, though not easy.
In essence, the crises Bangladesh faces amid global conflict are deeply interconnected. Energy policy, reserves, and interest rates are not isolated domains; a misstep in one area will exert pressure on the others. Long-term preparation is therefore indispensable—national energy conservation programs, targeted price reforms, strategic reserve management, prudent monetary policy, increased domestic gas production, and expanded investment in renewable energy are all essential.
Ultimately, for an energy-import-dependent country like Bangladesh, war itself may be less damaging than flawed policy responses to wartime challenges. Popular decisions made for short-term public approval must give way to sustainable policy choices. Effective coordination among energy, monetary, and fiscal policies can help stabilise the economy despite global turbulence.
Yet, the task is far from easy. It is nearly impossible for any single individual or political party to manage alone. Addressing this national crisis requires forming a strong crisis management team comprising experienced economists, energy experts, and policymakers. Rising above partisan divisions and acting on sound, collective judgement remains the only viable path to confronting the economic challenges ahead.
The writer is an Assistant Professor, Department of Economics, Asian University of Bangladesh