What are new risks to Bangladesh's economy from Iran war?

The Middle East war, although far away, has already impacted Bangladesh’s markets, industries, and household kitchens. The United States and Israel's attack on Iran and Iran's subsequent decision to close the Strait of Hormuz has disrupted the global energy supply system. Approximately one-fifth of the world's oil supply and nearly 20 per cent of liquefied natural gas are transported through this strait. Consequently, as soon as disruptions occur on this route, the price of crude oil in the international market has exceeded $114 per barrel.

Its impact is quickly being felt on Asia's import-dependent economies—Bangladesh is no exception. Due to reliance on energy imports, the Gulf labour market, and global shipping routes, Middle East instability has swiftly pressured the country's economy. There is already uncertainty in the energy market, rising food prices, and increasing concern among businesses. For the new government, this is not a distant geopolitical event; rather, it is the first major test of economic management. In today's globalised economy, distant wars ultimately determine the prices in the nearest markets.

In the modern economy, energy is not just a commodity; it is a fundamental component in determining the price structure of the entire economic system. Bangladesh's energy sector is highly sensitive to international market volatility due to its dependence on imports. Approximately 65 per cent of the country's total electricity production comes from imported energy—oil, coal, and LNG. Consequently, when global energy prices rise, their impact is quickly reflected in the national economy.

The cost of petroleum imports in December 2025 was approximately Tk 790 billion. With the price of crude oil exceeding $114 per barrel in the international market, there is a risk of this cost increasing further. As a result, policymakers are confronted with a tough policy dilemma—whether to raise domestic energy prices or increase subsidies, thereby exerting more pressure on the revenue deficit.

Bangladesh's economy today stands at a reality where global geopolitics directly influences the cost of people’s daily lives. The increase in energy prices is quickly reflected in inflation. Transportation costs rise, food prices increase, and industrial production costs soar. In February of this year, the country's average inflation reached 9 per cent. If the war prolongs, this pressure could intensify further.

In the modern economy, energy is not just a commodity; it is a fundamental component in determining the price structure of the entire economic system.

Bangladesh's economy today stands at a reality where global geopolitics directly influences the cost of people’s daily lives.

Its impact falls most heavily on low-income families. Urban poor households spend a large portion of their income on food. Thus, even a slight increase in food prices can bring significant changes to their dietary habits—relying more on minimal food instead of nutritious meals. In economic terms, this is a cost-push inflation situation, where increased production costs create inflationary pressure across the entire economy. In reality, rising energy prices mean not just higher electricity bills; it influences the entire economic cost structure.

The increase in the use of imported energy for electricity generation in Bangladesh makes energy supply more vulnerable to international market instability. Thus, energy security is no longer just a question of supply; it is deeply linked with price stability, industrial production, and macroeconomic stability.

The most visible impact of the energy crisis falls on the industrial, trade, and agricultural sectors. The primary driving force of Bangladesh's export economy is the ready-made garment industry, which accounts for approximately 84 per cent of the country's total export income; but production is disrupted when gas supply is irregular, and production costs rapidly increase. Rising energy prices increase costs at every stage of industrial production—electricity, transportation, raw material imports, and supply chains—all come under pressure.

In the current global production system, industries are part of a complex supply chain. Thus, rising energy prices not only increase factory electricity costs but also raise international shipping, logistics, and raw material transportation costs. This could weaken Bangladesh's export competitiveness in the global market.

Energy-dependent industries such as cement, steel, and ceramics are also under similar pressure. Many small and medium-sized industries have already reduced production times or adopted cautious positions in taking new orders. Higher diesel prices in the transport sector increase transportation costs, which are reflected in product prices from the wholesale market to the retail market. Ultimately, this pressure falls on the common consumer.

This reality highlights a significant economic truth—rising energy prices do not mean just higher electricity bills; it means changing the entire production system's cost structure.

Similar types of risks are arising in the agriculture sector. About 80 per cent of Bangladesh's irrigation system relies on diesel-powered pumps. Due to the impact of the Middle East war, global oil prices have exceeded $114 per barrel, causing the average international price of diesel to reach $1.34 per liter in March. As a result, irrigation costs during the Boro season are feared to increase in the future.

Simultaneously, the cost of production and import of fertilizers is also rising. In December 2025, fertilizer import costs were nearly Tk 5.2483 billion. The global fertilizer price index increased by 6.5 per cent in February 2026. If the Middle East war prolongs, disruptions in natural gas supply could occur, which is the primary raw material for nitrogen-based fertilizers. Consequently, the risk of further price increases in fertilizers cannot be dismissed.

This situation can raise the production costs of staple crops like rice, wheat, and maize. If farmers are forced to cut back on using irrigation and fertilizers, production may decline. The long-term impact may affect the country's food security. In other words, even though production is not being disrupted immediately, the continuous increase in irrigation and fertilizer costs poses a serious risk to agricultural production stability in the future.

In reality, energy security and food security are deeply interconnected. During the global food crisis in 2008, it was observed that as energy prices rose, crops like maize and sugarcane were increasingly used for biofuel production, reducing food supply and rapidly raising food prices in the international market. If future biofuel production demand increases, competition for food crops may become more intense, creating long-term risks for food security.

This reality raises an important policy question—an energy crisis is not just a problem for power production or industry; it can also impact the foundation of food production. Although Bangladesh's ongoing canal re-excavation and irrigation infrastructure improvement initiatives are positive, it is essential to plan energy and food policies in an integrated manner in the long term.

Thus, the energy crisis is already putting pressure on the industrial, trade, and agricultural sectors. However, the biggest concern is its potential long-term impact. Increasing production costs, supply chain disruptions, and rising agricultural production costs—all together, these could become a significant risk for Bangladesh's economic stability in the future. Therefore, policymakers must prepare now to address this potential crisis before it materialises.

Remittances have long been an important pillar of Bangladesh's economy. In the first seven months of the 2025–26 fiscal year, expatriates sent home nearly $18 billion, playing a vital role in funding the food, education, and healthcare expenses of millions of families. However, a large portion of this income depends on a few economies in the Middle East.

Consequently, regional instability or economic downturns could quickly make remittance flows uncertain. In reality, remittances are not just a source of family income; it is one of the main pillars for the stability of foreign currency in the country; but excessive reliance on a specific region's labour market could put the economy at risk in the long term.

Pressure is also gradually becoming evident in the external sector. Although Bangladesh's foreign exchange reserves are currently around $30 billion, rapidly rising fuel import costs could exert pressure on these reserves.

Additionally, the devaluation of the Taka increases the price of imported goods and exacerbates inflation. The country's external debt has already reached approximately $70 billion, so global interest rates and currency market volatility could create additional pressure on the economy. Here lies an important economic reality—when external sector stability is weak, its impact quickly falls on inflation, investment, and growth.

There are similar structural limitations in the revenue sector as well. Bangladesh's tax-to-GDP ratio is about 8 per cent, one of the lowest among emerging economies. As a result, the government's fiscal policy space to address economic crises is relatively limited. Subsidies for energy and fertilizer have already reached a huge amount; if the Middle East war continues, these costs may increase further, deepening the revenue deficit.

Therefore, policymakers face a challenging question of maintaining balance—controlling inflation on one hand, and maintaining fiscal stability on the other. To address this dual challenge, expanding the tax base, targeting subsidies, and increasing investment in renewable energy are essential in the long term.

Economic stability ultimately does not only depend on temporary policies; it rests on a strong revenue framework and long-term planning. At the same time, labour market diversity is also extremely important. If new employment opportunities can be created in emerging labour markets in Southeast Asia and Europe, remittance inflows could become more stable, reducing excessive reliance on a specific region.

While investing in renewable energy is important to address the energy crisis, regional electricity cooperation could be an effective strategy as well. In South Asia, a regional market for cross-border electricity trade is already emerging. India has expanded hydropower trade with Nepal and Bhutan, strengthening energy security in the region.

Bangladesh is gradually becoming a part of this initiative. From June 2025, it has started importing 40 MW of hydropower from Nepal through India's transmission lines and has decided to import an additional 20 MW in November of the same year. This initiative is a positive step for Bangladesh's energy source diversification and long-term energy security. In the future, there are opportunities to import electricity from Bhutan's hydropower projects as well, which could further strengthen regional cooperation.

Therefore, ensuring external sector stability and energy security is not only a question of economic policy now; it has become a strategic priority for long-term growth and stability in Bangladesh.

Though the Iran war is thousands of miles away, its economic shock reached Bangladesh within days. Oil prices, food costs, and remittances—these three indicators most clearly reflect the crisis. How the government responds now will determine whether this crisis increases economic weaknesses or creates opportunities for reform.

Increasing the tax base, targeting subsidies, investing in renewable energy, and diversifying labour markets—these steps are now necessary. Economic stability is never coincidental; it is the result of conscious policy and institutional capacity. History shows that economic crises sometimes create opportunities for reform. Today, Bangladesh has that opportunity.

#Dr. Golam Rasul is a professor at the Department of Economics, International University of Business Agriculture and Technology, Dhaka. Email: [email protected]

*The opinions expressed are the author’s own.

#This article, originally published in Prothom Alo print and online editions, has been rewritten in English by Rabiul Islam