What new risks does the Iran war pose to Bangladesh’s economy?

 

Analysis: What new risks does the Iran war pose to Bangladesh’s economy?

Although the war in the Middle East is geographically distant, its economic shock has already reached Bangladesh within days. The conflict—triggered by attacks involving the United States and Israel and Iran’s response, including disruption of the Strait of Hormuz—has unsettled global energy markets. Since nearly one-fifth of the world’s oil and a significant share of liquefied natural gas pass through this route, any disruption quickly drives up prices. Crude oil has already surged beyond $114 per barrel.

For an import-dependent economy like Bangladesh, the impact is immediate and widespread. From energy markets to household food costs, the ripple effects are being felt across sectors. This is not just a distant geopolitical event—it is a direct test of economic management for the government.

Energy shock and rising inflation

Energy is the backbone of modern economic systems, influencing the cost structure of nearly all goods and services. Bangladesh, which depends heavily on imported fuel for electricity generation, is particularly vulnerable to global price fluctuations. Around 65% of its power production relies on imported oil, coal, and LNG.

As global fuel prices rise, the country faces a difficult policy dilemma: increase domestic energy prices or expand subsidies—both of which carry economic costs. Higher energy prices quickly translate into higher transportation costs, rising food prices, and increased industrial expenses. Inflation, already hovering around 9%, could climb further if the conflict persists.

The burden falls most heavily on low-income households, especially in urban areas, where a large share of income is spent on food. Even small price increases can force families to compromise on nutrition. Economically, this reflects a classic case of cost-push inflation, where rising production costs push up overall price levels.

Pressure on industry, trade, and agriculture

The industrial sector is among the hardest hit. Bangladesh’s export economy—dominated by the ready-made garment industry—depends on stable energy supply and competitive production costs. Rising fuel prices increase costs across the entire value chain, from electricity and transportation to raw material imports and global shipping.

Energy-intensive industries such as cement, steel, and ceramics are also under strain. Many small and medium enterprises are already scaling back production or delaying new orders. As transportation costs rise, the impact spreads from wholesale markets to retail prices, ultimately affecting consumers.

Agriculture faces similar risks. Around 80% of irrigation relies on diesel-powered pumps, making farming highly sensitive to fuel price increases. With global diesel prices rising, irrigation costs during key crop seasons—such as Boro—are expected to increase.

At the same time, fertilizer prices are also climbing due to higher production and import costs. Since natural gas is a key input for nitrogen-based fertilizers, disruptions in supply could push prices even higher. This raises the risk of reduced agricultural output in the long term, threatening food security.

Energy and food security are deeply interconnected. Past global crises have shown that rising energy prices can reduce food supply and increase global food prices. Without careful planning, Bangladesh could face similar risks.

External pressures and policy challenges

Bangladesh’s external sector is also under growing pressure. Remittances—one of the country’s economic pillars—remain vulnerable due to heavy dependence on Middle Eastern labor markets. Any slowdown in those economies could disrupt income flows for millions of families and weaken foreign currency reserves.

Although foreign exchange reserves stand at around $30 billion, rising fuel import costs could erode this buffer. A weakening currency would further increase import costs and inflation. At the same time, external debt—already around $70 billion—adds another layer of vulnerability amid global financial uncertainty.

On the fiscal side, Bangladesh faces structural limitations. Its tax-to-GDP ratio, at about 8%, is among the lowest in emerging economies, limiting the government’s ability to respond to crises. Expanding subsidies for energy and fertilizers could widen the fiscal deficit even further.

This creates a difficult balancing act: controlling inflation while maintaining fiscal stability.

The need for long-term strategy

To navigate these challenges, policymakers must focus on structural reforms rather than short-term fixes. Expanding the tax base, targeting subsidies more efficiently, and investing in renewable energy are essential steps.

Diversifying labor markets beyond the Middle East could stabilize remittance inflows. At the same time, regional energy cooperation offers new opportunities. Bangladesh has already begun importing hydropower from neighboring countries via cross-border arrangements, which could strengthen long-term energy security.

Conclusion

The economic impact of the Iran war has reached Bangladesh faster than expected. Rising oil prices, increasing food costs, and uncertainty in remittance flows highlight the scale of the challenge.

How the government responds now will be crucial. This crisis could either deepen existing economic vulnerabilities or serve as an opportunity for reform. Strengthening revenue systems, diversifying energy sources, and building resilience in external sectors will determine the country’s economic stability in the years ahead.