Iran War and Bangladesh’s Economic Vulnerability

As conflict deepens in the Middle East, economic anxieties in Dhaka grow more acute. For Bangladesh, an import-dependent economy sustained significantly by overseas employment and remittance inflows, the war in the region is not merely a distant geopolitical event. It is a direct and potentially destabilising economic shock. Energy security, industrial production, inflation control, foreign exchange stability, and social cohesion are all intertwined with developments in a region thousands of miles away. For a new government already grappling with macroeconomic fragility, prolonged instability in the Middle East could significantly complicate recovery efforts.

Bangladesh’s vulnerability begins with energy dependence. A substantial share of its crude oil, refined petroleum products, liquefied natural gas (LNG) and liquefied petroleum gas (LPG) originates from Middle Eastern suppliers. Global energy trade routes are deeply interconnected, and one of the most critical maritime chokepoints in this system is the Strait of Hormuz. A significant portion of the world’s oil exports passes through this narrow corridor. If war disrupts shipping in this channel, whether through direct military action, heightened security threats, or soaring insurance premiums, global energy markets would react immediately.

For Bangladesh, such disruption would translate into higher import bills and supply uncertainty. Shipping costs would climb, insurance premiums for vessels operating in conflict zones would spike, and delivery times would lengthen. Even temporary interruptions could trigger price volatility in international oil markets. Since Bangladesh purchases much of its energy at global benchmark prices, a sharp rise would strain both public finances and foreign currency reserves.

The consequences of higher oil prices ripple throughout the domestic economy. Electricity generation costs would increase, especially given Bangladesh’s reliance on fuel-based power plants. If the government attempts to shield consumers from sudden price hikes by maintaining subsidies, fiscal pressure would intensify. Budget deficits could widen, compelling either increased domestic borrowing or external financing. 

If, on the other hand, energy prices are passed on to consumers, the result would be higher transportation costs and elevated prices for essential goods. Food items, edible oil, fertiliser and industrial inputs, all heavily import-dependent, would become more expensive. In an economy already struggling with inflationary pressures, this could trigger another wave of price escalation. The burden would fall disproportionately on low- and middle-income households, whose real purchasing power has already eroded.

Inflation, once entrenched, is difficult to reverse without tightening monetary policy. Yet higher interest rates could dampen investment and slow economic growth further. Bangladesh thus faces a policy dilemma: contain inflation through tighter credit conditions and risk lower growth, or maintain liquidity and risk currency depreciation and reserve depletion.

Foreign exchange reserves are another critical vulnerability. Bangladesh’s reserves have been under strain due to high import costs and relatively subdued export growth. A surge in oil prices would widen the trade deficit. Since energy imports must be paid in US dollars, increased oil bills would intensify demand for foreign currency. If remittance inflows and export receipts fail to keep pace, the central bank may need to intervene to stabilise the exchange rate, drawing down reserves.

The industrial sector stands at a precarious juncture as well. Production costs have already increased due to higher fuel prices and exchange rate depreciation. Entrepreneurs face difficulty accessing affordable credit, and dollar shortages have complicated the import of raw materials. If shipping routes through the Middle East become unstable, supply chain disruptions could intensify.

Bangladesh’s ready-made garment (RMG) industry, the backbone of its export economy, is particularly exposed. Many raw materials, chemicals and intermediate goods either originate from or transit through Middle Eastern shipping routes. Delays in shipment could undermine delivery schedules, jeopardising contracts with international buyers. In a competitive global apparel market, reliability is as important as price. Failure to deliver on time can result in order cancellations or relocation of sourcing to rival producers.

Reduced export earnings would feed back into foreign exchange shortages, further weakening the currency. A depreciating currency, while theoretically supportive of exports, also raises the cost of imported inputs. For industries heavily dependent on imported raw materials, the net benefit may be limited.

Another pillar of Bangladesh’s economy, remittance inflows, faces uncertainty amid Middle Eastern instability. Millions of Bangladeshi workers are employed in countries across the Gulf and broader Middle East. Their remittances are a lifeline for rural households and a vital source of foreign currency for the national economy.

If conflict spreads or economic activity in host countries slows, employment opportunities for migrant workers could diminish. New visa issuances might decline. In worst-case scenarios, workers could be repatriated. Any significant disruption to remittance flows would exacerbate reserve pressures and weaken domestic consumption. Since remittances support household spending on food, education, housing and small business investment, a slowdown would have widespread economic consequences.

Investment, already sluggish, could slow further amid heightened uncertainty. Businesses typically postpone expansion plans when geopolitical risks escalate. Banks, facing rising non-performing loans and liquidity constraints, may adopt more conservative lending practices. The combined effect would be slower economic growth and fewer job opportunities.

In the final analysis, the Iran war, like many geopolitical crises, serves as a reminder of interdependence in the modern world. For Bangladesh, the challenge lies not only in managing immediate risks but in transforming vulnerability into resilience. With timely and well-calibrated measures, the country can navigate turbulent waters and preserve economic stability despite the storms beyond its borders.