How the Iran-Israel conflict threatens Bangladesh’s economic stability

Bangladesh, though geographically distant from the Middle East's turmoil, is caught in the economic crossfire of the growing Iran-Israel conflict.

What appears to be a regional flare-up is evolving into a global economic threat, disrupting supply chains, destabilising financial markets, and threatening the fragile macroeconomic foundations of economies like Bangladesh. As oil prices surge, remittances falter, foreign reserves shrink, and inflation ratchets higher, the looming consequences demand coordinated action from Dhaka's policymakers.

The Iran–Israel military escalation has rippled through global oil markets. Following a string of airstrikes – most notably Israel's June 13 attack on nuclear and energy installations in Tehran – Brent crude prices surged nearly 7%, jumping to about USD 74 per barrel and climbing further to 11 % later the same day. The risk lies in further disruption of supply through strategic chokepoints like the Strait of Hormuz or the Suez Canal, where already heightened insecurity threatens supply stability. Approximately 20% of global oil and a significant share of South Asia's oil transit through the Strait of Hormuz, which also channels LNG from Qatar and the UAE.  Closure of this route would severely disrupt the global energy supply chain.

As a net crude importer, Bangladesh is particularly vulnerable to these dynamics. The country relies heavily on Gulf oil, and steep fuel prices directly translate into increased production and distribution costs across agriculture, manufacturing, and transport. The nation is already facing inflation of around 10%. According to the interim government of Bangladesh, general inflation hovered at approximately 11%, with food inflation reaching a notable high of 14% at one point. According to the latest CPI data based on the 2021-22 base year, inflation stood at 9.25% in May 2025, which is only a marginal improvement from the 9.94% rate of May 2024. Higher global fuel and fertiliser prices may feed this further. Any further oil cost spike would push inflation into stratospheric territory, squeezing household budgets and eroding fiscal space. If oil prices rise by 10%, inflation in emerging economies like Bangladesh could increase by more than the 0.4% rise seen in advanced economies.

Although Bangladesh secured its June oil purchases in advance and signed a long-term oil deal for July to December, the pricing index remains volatile. While the country currently enjoys a BDT 18-20 per litre pricing cushion compared to India, prolonged price shocks will eventually lead to higher local costs. Bangladesh has also secured 34 LNG cargoes out of 40 contracted for FY 2024-25 from Qatar, offering some breathing space, though future price movements remain a risk.

Bangladesh's remittance inflows, primarily from Gulf-based expatriates, underpin both foreign exchange reserves and domestic consumption. In 2024, remittances totalled around USD 27 billion, approximately 6% of the GDP, with the majority of funds coming from Saudi Arabia, the UAE, Qatar, Kuwait, and Oman. However, as the conflict escalates, roughly 6 million Bangladeshi workers who are employed in the Middle East and contribute over 70% of total remittances face severe vulnerability. Instability in the region could lead to job losses, wage cuts, or a return migration, thereby significantly impacting remittance income. Foreign reserves have already declined from approximately USD 45 billion in 2021 (gross) to about USD 25 billion, roughly covering four months of imports. As of June 4, 2025, reserves have recovered slightly to USD 26.06 billion, up from USD 24.28 billion in June 2024, driven by remittances and exports. However, the outlook will be jeopardised if the conflict continues.

Bangladesh's economic powerhouse, the ready-made garment industry, exports over 80% of the country's goods and supports millions of workers. But the Iran-Israel conflict puts this sector in the crosshairs—a drop in remittance inflows, combined with weaker export receipts, risks further depleting reserves. A depreciating taka could buffer export competitiveness but also raise the local currency cost of imports, stoke inflation, and increase debt servicing burdens on foreign currency-denominated obligations. The IMF has repeatedly highlighted the country's susceptibility to global oil price fluctuations and remittance volatility. It warns that further external shocks could ignite a depreciating inflation spiral unless Bangladesh maintains exchange rate flexibility and tight monetary control.

Even a 5-10% delay or decline in global apparel orders due to reduced consumer demand or supply chain delays could cost Bangladesh's RMG sector USD 2.25-4.5 billion annually. A 5% market share loss to competitors like Turkey, Vietnam, or Cambodia could alone mean a USD 2.25 billion hit to the economy. Bangladesh exported garments worth USD 194.45 million to the UAE and USD 136 million to Saudi Arabia from July 2024 to April 2025. A 10% drop in Middle East orders could result in an additional USD 50 million in annual losses.

Shipping disruptions triggered by conflict-related rerouting, such as avoiding the Red Sea, come with the setback of much-increased freight times and costs. Already, post-Red Sea crisis conditions are leading to 15-day delays and forcing the rerouting of ships around the Cape of Good Hope, adding 3,500 km and raising freight expenses. The notable addition to the nautical miles increases costs per container by 30-40%. Beyond logistics, global demand is also becoming unbalanced. Inflation in major export markets, including the US and EU, is dampening consumer spending. Combined with potential delays and reputational risks, buyer reluctance could lead to reduced orders, a decline in foreign exchange inflows, and a halt in industrial growth and job creation. Air freight has also become costlier, with rates from Dhaka to Europe now ranging from USD 4.00 to USD 6.50 per kg, higher than last year, partly due to India halting transhipment access. Further escalation may lead to the closure of Middle Eastern airspace, worsening the cost outlook.

Rising fuel costs also directly impact mechanised farming, irrigation, and transportation. As input costs rise, producers either absorb the losses or pass them on, exacerbating food price inflation that disproportionately affects low-income households. Domestic industries, already operating on tight margins, will face further pressure from rising energy and material costs, which may lead to reduced output and investment.

Bangladesh's banking system is already suffering due to high non-performing loans and thin capital buffers. Under the rising pressures, borrowers may default more, tightening credit and weakening banks' position. Investors are monitoring our inflation scenario, currency risks, external debt, and governance. If the country is perceived as teetering on the brink of macroeconomic imbalance, foreign direct investment (FDI) may falter, potentially harming long-term growth prospects. Many SMEs, still recovering from the pandemic, are particularly vulnerable to a surge in fuel and import costs, which could destabilise their cash flow and employment.

Our timely policy responses include fuel hedging and long-term oil agreements to shield against price volatility. We may also subsidise shipping costs in critical export sectors, such as garment and food while maintaining fiscal discipline and avoiding ad-hoc spending increases that could worsen macroeconomic instability. These measures, matched by tighter monetary policy and managed currency depreciation, could help Bangladesh withstand the global unrest.

The interim government's policy shifts, involving market-driven interest rates, exchange rate flexibility, and fiscal reforms, have appreciable stabilisation prospects. The Iran–Israel conflict serves as a harsh stress test to this. The confrontation risks evolving into a broader economic storm, with oil volatility, trade disruptions, remittance threats, and an inflationary spiral at stake. To avoid a full-blown financial crisis, Bangladesh must act swiftly and cushion its vulnerable sectors, manage external exposure, and shore up resilience. The conflict may be distant, but its economic shockwaves are already knocking at Bangladesh's door and ignoring them would be imprudent.