Bangladesh’s GDP may fall 1.2%, inflation to rise 4% if fuel prices jump further: Sanem

Bangladesh's real GDP could decline by 1.2% while consumer prices may rise by nearly 4% if global crude oil and LNG prices increase further, according to a study by the South Asian Network on Economic Modeling (Sanem).

The study highlights the potentially severe economic fallout of the ongoing conflict involving the United States and Israel with Iran, warning of a major shock to Bangladesh's energy security and broader macroeconomic stability.

Using a Global Trade Analysis Project computable general equilibrium model, Sanem simulated the impact of the Middle East crisis and found that the country remains highly vulnerable to disruptions in the Strait of Hormuz, a key global energy transit route.

The closure of the strait has already triggered a significant energy crisis. Around 72% of Bangladesh's LNG imports originate from Qatar and the United Arab Emirates, making supply chains heavily dependent on maritime routes through the Gulf. 

With these routes disrupted and Qatar halting production following recent attacks, Bangladesh is facing a sharp supply shock amid declining domestic gas output.

Sanem noted that at least 20% of global LNG supplies shipped through the strait are now at risk, underlining the fragility of energy supply chains linked to the region.

According to the analysis, a 40% rise in global crude oil prices and a 50% increase in LNG prices would have widespread domestic consequences. In addition to the projected 1.2% contraction in GDP, exports could fall by 2% while imports may decline by 1.5%.

The impact on households is expected to be significant, with a sharp increase in consumer prices and a nearly 1% drop in real wages, eroding purchasing power.

The sectoral impact is equally alarming, with the transport sector expected to see a 3% decline and energy-intensive manufacturing falling by 2.5%. The ready-made garments sector, the mainstay of the economy, faces a potential 1.5% output decline, while agricultural production could drop by 1%.

Sanem identified three key transmission channels of the crisis into the domestic economy: energy prices, remittance flows, and trade logistics. Rising fuel costs are expected to widen the current account deficit and intensify inflationary pressures, while disruptions in shipping are increasing both the cost and time required for imports and exports.

Recommendations

To mitigate the crisis, the think tank has proposed a range of immediate and long-term policy measures. In the short term, Sanem recommended introducing a digital QR code-based fuel pass system to manage rationing until supply conditions stabilise.

It also suggested shifting industrial operations to off-peak hours and reducing commercial activity to prioritise fuel allocation for high-value sectors such as agriculture and export-oriented industries.

To strengthen resilience, Sanem urged the government to build a strategic national reserve of crude oil, refined fuel and LNG.

The report emphasised the need for rapid diversification of energy sources through multi-country contracts and bilateral arrangements to secure fuel supplies in the short term. Over the medium term, it called for accelerating both onshore and offshore gas exploration to reduce dependence on the volatile LNG market.

For long-term sustainability, the think tank stressed the importance of expanding renewable energy, particularly industrial rooftop solar. It recommended fast-tracking net metering approvals and offering fiscal incentives, including tax-free equipment and low-cost financing, by redirecting fossil fuel subsidies towards green energy.

Sanem also observed that the government's response to the energy crisis has drawn mixed reactions. While austerity measures and fuel rationing have been announced, there appears to be a gap between official statements on fuel availability and the situation on the ground.

The think tank called for more transparent and decisive policy action to safeguard economic stability against evolving geopolitical shocks.