Amid the ongoing Israel-Iran conflict, the global economy is once again heading toward a major crisis. Earlier, the Russia-Ukraine war had shaken the world economy, and analysts fear that the impact this time could be even greater.
Oil prices in the global market have already crossed $90 per barrel. After Iran closed the Strait of Hormuz, oil prices began rising rapidly. Many other essentials, including fertilizers, were transported through this route. With the strait now closed, the prices of those goods are also expected to rise. As a result, the effects of the war will be felt by all countries. Experts say it is urgent to formulate strategies on how to deal with this situation.
The World Food Programme has reported that global food prices increased in February. If the war situation continues for long, it is obvious that food prices will rise further. Overall, analysts believe difficult times lie ahead for the global economy. Bangladesh, naturally, will bear the brunt too.
According to a BBC report, fuel prices have been rising since the start of the war. Until Thursday night, however, it did not appear to signal a major crisis. Many analysts believed it was only a temporary shock.
Even after the closure of the Strait of Hormuz-an important shipping route in the Persian Gulf-the market’s initial reaction was relatively restrained. Oil prices increased by about 10 per cent. But since oil prices had been trending downward for a long time, and considering how much they were expected to rise during a crisis, this increase did not initially seem very significant.
However, the situation began to change rapidly on Friday. Fresh concerns started growing in the market. Qatar’s Energy Minister Saad Al-Kaabi warned that energy exporters in the Gulf region might be forced to halt exports within a few days. According to him, if the situation worsens further, oil prices could rise to as high as $150 per barrel. Following his remarks, market volatility increased. Since the conflict began, crude oil prices have already risen by nearly 27 per cent.
The prices of various petrochemical products essential for people’s daily lives and industrial production are also rising rapidly. From jet fuel to urea, supplies of these products depend on the free movement of vessels through the Strait of Hormuz. With fears of disruption along that route, prices of these goods have begun to increase in the market.
According to the BBC report, although a full-scale energy crisis has not yet begun, the market is becoming more cautious and is assessing how bad the situation could become. Analysts believe that if conditions remain the same, oil prices could exceed the $100 mark as early as next week.
The BBC report also says that Iran has not yet officially declared the closure of the Strait of Hormuz. However, in reality the situation is such that this shipping route has become almost inactive. Due to war risks, the cost of insuring ships traveling through the route is rising rapidly. Concerns over the safety of sailors are also increasing. As a result, many ship owners have voluntarily stopped using this route to avoid risk.
In this situation, the BBC says another wave of inflation may be approaching. This will not be limited to the United Kingdom alone; its impact will be felt across the world.
The effects are not limited only to the oil market. Inflationary pressure from the center of the conflict is spreading throughout the global economy. From fuel to food products and chemical raw materials used in industries, instability is appearing in many markets. The international credit market is also being affected, creating new uncertainty in the global marketplace.
Food prices increased even before the war
Meanwhile, global food prices have risen again after five months. The United Nations’ Food and Agriculture Organization (FAO) reported this on Friday amid the backdrop of the Israel–Iran conflict.
According to the FAO report, overall global food prices increased in February mainly due to higher prices of wheat and other grains, edible oils, and meat. Although the prices of various dairy products, including cheese, and sugar declined somewhat last month, this did not reduce overall inflation. The FAO Food Price Index stood at 125.3 points in February, compared to 124.2 in January, an increase of 1.1 points in one month.
However, global food prices are still about 1 per cent lower than they were a year ago. Compared with the level reached after Russia launched its military operation in Ukraine on 24 February 2022, current food prices are about 22 per cent lower.
In February, edible oil prices reached their highest level since 2022. Prices of edible oils rose by 3.3 per cent during the month, the highest since June 2022. Wheat prices increased by 1.1 per cent. In comparison, rice prices rose much less, increasing by only 0.4 per cent. Meat prices saw the biggest rise, about 8 per cent. On the other hand, dairy product prices fell by 1.2 per cent in February compared with January, while sugar prices dropped by 4.1 per cent.
Possible impact on Bangladesh
During the crisis of 2022, oil prices rose to as high as $139 per barrel, although not for a very long period. Bangladesh faced a reserve crisis while importing oil at those high prices. In many cases, imports had to be reduced, and the inflation index rose sharply.
Inflation increased worldwide at that time. Although other countries were able to recover from that shock, Bangladesh has still not fully overcome it even after four years. If Bangladesh now has to buy oil again at an average price of more than $100 per barrel, it is easy to imagine what the situation could become.
Another major risk area is remittances. If economic activities in the Middle East slow down, Bangladeshi workers there will naturally be affected. Iran has already attacked a data center in Qatar, which has had a major impact on financial activities in the Middle East. In such a situation, there is concern that remittance inflows to Bangladesh may decline, and that the number of workers going to the Middle East could also decrease.
There is also concern that Bangladesh’s export costs could increase. Although Bangladeshi exporters do not heavily rely on the Strait of Hormuz, the reality is that the panic spreading across the Middle East has raised the cost of ship insurance. Some are also choosing to use the Cape of Good Hope route to avoid risks.
The government should properly present accurate information about oil to the public so that no one can exploit misinformation. The government should be transparent about how much stock is available, what initiatives it is taking, and what is happening regarding possible fuel rationing
The new government’s hopes of increasing investment, especially efforts to boost foreign direct investment (FDI), may also be disrupted. Investment is closely linked with imports. If shipping routes are disrupted, it will affect investment as well. There is also the broader issue of uncertainty.
Most importantly, analysts believe that the scope of this war is larger than the Russia-Ukraine war, especially geographically. Several countries in the Middle East have already been affected by the conflict. If the war continues for a long time, analysts fear the situation could become even worse than the Russia-Ukraine war.
Selim Raihan, a professor in the Department of Economics at the University of Dhaka, expressed concern about where inflation could go if the war continues. Speaking to Prothom Alo, he said that the cycle of high inflation that began during the Russia-Ukraine war has still not ended. In other words, once inflation rises, it becomes very difficult to bring it down. If the Israel-Iran war drags on, this would simply exacerbate matters.
Selim Raihan believes the government should properly present accurate information about oil to the public so that no one can exploit misinformation. The government should be transparent about how much stock is available, what initiatives it is taking, and what is happening regarding possible fuel rationing.
Secondly, austerity measures should be practiced, from the national level down to the individual level.
Thirdly, he suggests that the government could hold discussions with experts to determine economic strategies regarding the war situation up to the time of the national budget. In this situation, he believes the coverage of social safety net programs may also need to be expanded.