Despite ceasefire, India-Pakistan tensions expose Bangladesh’s trade vulnerabilities

Importers now must shell out higher risk premiums and may even have to hedge against possible future geopolitical tensions, which can still end up reaching consumers in higher prices. Photo: Minhaj Uddin

The guns may have fallen silent along the India-Pakistan border following a US-brokered ceasefire, but the shockwaves of the conflict continue to ripple through South Asia. For Bangladesh—geographically far removed but economically interconnected—the brief flare-up was a sobering reminder of how tenuous regional interdependence can be in times of crisis.

Even though the hostilities were not Bangladesh's own, they triggered economic uncertainty. The timing could not have been worse for a country which was only recovering from internal political disturbances and had barely stabilised under a new Interim Government. The threat today is not that of direct disruption but the lingering vulnerabilities of trade, investment, and perceptions.

Throughout the war, anxieties mounted over principal import channels, specifically for basic food items like onions, lentils, spices, and rice. Even though Bangladesh has diversified its sources beyond India in recent months, with imports coming in from Pakistan, the hostilities momentarily threatened to sever these newer trade links. Had the war continued, India's control of key land and sea routes could have severely disrupted supply chains and initiated a fresh round of food price inflation.

The ceasefire, fortunately, has halted such interruptions from happening. But the terror has exposed how precariously placed Bangladesh's import strategies are, particularly for food security.

A sector that remains exposed is energy. Bangladesh also relies heavily on oil importation from the Middle East via the Indian Ocean and Arabian Sea route, which was temporarily militarised during the crisis. Though sea routes are open once again and secure, the crisis has generated grave doubts with respect to energy security in the future, too. Energy imports shall be held back or rerouted in any subsequent escalation, leading to transport and production expenses through the roof.

For now, global oil markets have remained relatively stable. Still, the spectre of cut-off access has induced policymakers to debate how to diversify energy transit routes and, possibly, construct domestic fuel storage capacity. The ceasefire provides room for breath, but no solution.

The ready-made garment (RMG) industry, the lifeblood of the Bangladeshi economy, was one of the first to feel the tremors. The industry sources much of its raw material from neighbouring India and nearby countries, and the spectre of derailed land transport and shipping breakdowns created shudders in procurement networks. Although there were no clogs of this kind, doubt proved enough to keep international buyers jumpy.

European and North American buyers, already nervous about US tariff policy and shifting patterns of consumer preferences, have begun to question South Asia's reliability as a source base. A few weeks' tension can make its mark on contract levels down the line. The RMG sector, however, is not short-term disrupted; it has to repair international partners' confidence, which is based on perceptions of regional security.

While the Taka has remained relatively strong in the early wake, currency markets have historically been highly sensitive to geopolitics. The potential for elevated import bills, either inflation or diversion-induced, could strain Bangladesh's foreign exchange reserves even further. A weakening Taka will raise all import commodities' prices, amplifying inflation and further squeezing consumers' wallets.

Bangladesh Bank policymakers may not necessarily need to respond quickly, but the episode highlights the importance of having reserve buffers and cautiously managing capital flows. Market sentiment, not fundamentals, will increasingly drive financial stability.

The most lasting legacy of the war is perhaps the investor psyche. Bangladesh is stable and peaceful today, but because it shares a border with a troubled area, it can raise eyebrows among foreign direct investors. Risk models do not generally distinguish between actors in play and contiguous countries nearby. The image of Bangladesh as "too close to the fire" can result in the delay of infrastructure projects, reduced venture capital inflows, and slow commitments to high-tech and green sectors.

For a government desperate to attract new investment and create a digital and green revolution, this is a hurdle it can ill afford to ignore. While the ceasefire has dissipated the immediate tension, the underlying message is clear: geopolitical events elsewhere can exact real economic costs at home. 

The India-Pakistan ceasefire is welcome news to Bangladesh and to the region. But it is also a wake-up call. The brief flare-up exposed how tenuous economic stability is to external shocks, and how shallow the cushion can be when trade corridors, fuel lines, and investor confidence are involved.

Bangladesh now has the chance to turn this near miss into a strategic recalibration. Diversification of supply chains, enhancing energy resilience, building trade relationships outside the immediate vicinity, and enhancing diplomatic outreach must be prioritised. The interim government has indicated that it plans to lead through reform and vision. It is a chance to demonstrate leadership at the regional level.

The war next door has fallen silent, at least for now. But the call for vigilance, readiness, and long-term strength has never been more urgent.

Sketch: TBS

Md Deen Islam is an Associate Professor of Economics at the University of Dhaka and Research Director at RAPID.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.