Energy-price shock may hurt GDP growth, disrupt inflation control

A further energy-price shock stemming from the conflicts in the Middle East could undermine Bangladesh's economic outlook in FY27, finance officials fear.

They warn that higher energy costs may slow GDP growth, disrupt the downward trend in inflation, dampen industrial and agricultural expansion, and erode gross international reserves as the government places the budget for the next fiscal year in Parliament today (Thursday).

Officials say there is no sign of an early end to the conflict, raising the possibility that energy prices could rise further as production and transportation remain seriously disrupted.

They predict that in the immediate aftermath of the shock, in FY27, GDP growth could fall to around 4.5 per cent, a sharp decline from the baseline projection of 6.5 per cent.

"While the economy is projected to regain some momentum in the following years, it will fail to close the gap with the original growth path," finance officials apprehend.

The energy price shock could create a lasting "growth deficit", preventing the economy from achieving its full productive capacity over the medium term, they warn.

Officials say that if oil prices rise by a further 30 per cent from current levels in FY27, it would significantly disrupt the downward trajectory of inflation in Bangladesh, pushing the rate from a baseline projection of 7.5 per cent to 9.1 per cent.

"The projected oil price shock in FY27 is expected to significantly dampen growth rates across both the industrial and agricultural sectors in Bangladesh compared with their baseline trajectories," finance division officials fear.

Industrial growth could drop sharply from a baseline of 7.0 per cent to 4.5 per cent in FY27, while agricultural growth could slow from 4.5 per cent to 3.0 per cent.

The oil price shock in FY27 is also expected to trigger a significant and sustained deterioration in Bangladesh's external sector indicators.

The balance of trade (BoT) deficit is projected to widen, putting additional pressure on the current account balance, which could slip to a deficit of 1.2 per cent of GDP in FY27.

Consequently, higher import costs would significantly erode gross international reserves.

Officials say the increase in global oil prices in FY26 has already raised foreign exchange requirements and resulted in substantially higher-than-budgeted subsidies, creating additional and unforeseen fiscal pressures.

The oil price shock in FY27 could cause a profound and lasting disruption to Bangladesh's medium-term macroeconomic stability, characterised by a shift towards a high-inflation, low-growth environment, officials fear.

The shock is expected to trigger an immediate rise in inflation to 9.1 per cent and a sharp slowdown in GDP growth to 4.5 per cent, driven largely by reduced industrial and agricultural productivity.

Officials say the shock would not merely cause a temporary fluctuation but alter the country's entire macroeconomic trajectory, leaving the economy with persistent inflationary pressures, lower productive capacity and weaker external buffers throughout the forecast period.

They also warn that a sustained revenue shortfall would require significant fiscal adjustments, with both current and capital expenditure coming under pressure.

Current expenditure is expected to remain below the baseline throughout the medium term, although the gap is projected to narrow gradually as the revenue base expands.

The revenue shock is expected to worsen the fiscal balance and accelerate the accumulation of public debt.

The debt-to-GDP ratio could rise to 40.08 per cent by FY27. If the trend persists, public debt sustainability may deteriorate, potentially constraining the government's borrowing capacity and fiscal space.

Private-sector investment could also decline significantly as a result of the shock, officials fear.

syful-islam@outlook.com