Fuel price spikes could weigh on forex reserves

The ongoing devastating conflicts in the Middle East could put fresh pressures on Bangladesh's foreign-exchange reserves as fallouts from spikes in global prices of liquefied natural gas (LNG) and fuel oils, leading economists warn.

They also urge the government not to pass on the higher global energy costs to domestic consumers, cautioning that any increase in fuel prices could intensify inflation and further strain household budgets.

The economists made the observations during a meeting with newly appointed Bangladesh Bank Governor Md Mostaqur Rahman at the central bank headquarters on Saturday.

The meeting was attended by eight economists, including Dr. A K Enamul Haque, director-general of Bangladesh Institute of Development Studies (BIDS), Dr. Mustafa K. Mujeri, former chief economist of Bangladesh Bank, Dr Mustafizur Rahman of the Centre for Policy Dialogue (CPD), Dr. M. Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, Dr. Fahmida Khatun, chief executive of the CPD, South Asian Network on Economic Modeling economist Dr. Selim Raihan, Mohammad Abdur Razzaque of Research and Policy Integration for Development (RAPID) and Dr. Nazmul Sadat Khan, a senior economist at the World Bank.

Deputy governors and other senior officials of the central bank were also present at the event of brainstorming over the Mideast crisis and its cascading impacts worldwide.

Participants in the meeting told the governor that global energy prices had risen sharply over the past week following US-Israel attacks on Iran and subsequent fireback by Tehran in the Middle East-a region that plays a critical role in global oil and gas supplies as well as shipping routes.

According to one economist who attended the meeting, Bangladesh may need significantly more foreign currencies to sustain energy import if the price surge persists.

"If Bangladesh wants to maintain its current development momentum, the cost of LNG imports could rise to around US$20 billion, compared to roughly $5.0 billion under normal market conditions," the economist said, requesting anonymity.

International oil markets have already reacted strongly to the geopolitical tensions. Brent crude prices jumped more than 9.0 per cent on Friday, climbing above $93 a barrel -- the highest level since late 2023.

Saad al-Kaabi, Qatar's energy minister, warned in an interview with the Financial Times (FT) that continued conflict in the Middle East could disrupt oil and gas production across the Gulf, potentially destabilising global energy markets.

Economists at the contingent meet said Bangladesh's foreign-exchange reserves could come under considerable strain if energy prices remain elevated.

"We all said that the foreign-exchange reserves will be hit hard because there is no alternative to meeting the additional dollar demand for energy imports," the economist said.

Bangladesh currently holds more than $35 billion in foreign-exchange reserves, according to central bank data.

Officials say although the government had earlier indicated that energy supplies were secured until March, the country might increasingly have to rely on the volatile spot market for LNG and other fuels, sourcing supplies from outside the Middle East and Australia.

Spot-market prices have already risen sharply, according to officials at the energy and mineral resources division.

Economists also advised the authorities to avoid raising domestic fuel prices despite the global surge, warning that such a move would quickly feed into broader inflation.

"Once fuel prices increase in the domestic market, inflationary pressure will rise significantly," the participant said.

Bangladesh has already been grappling with persistent inflation above 8.0 per cent, a burden that has fallen particularly heavily on lower- and middle-income households.

Participants in the meeting also urged the central bank governor to strengthen coordination with key ministries, including the ministries of finance and commerce, to manage potential shocks from global energy markets.

They further recommended that policymakers conduct a detailed impact assessment using robust economic modelling to guide policy decisions.

"We have requested the governor to measure the potential impact through a proper economic model and act accordingly," another economist, who also attended the meet, told the FE on Saturday afternoon.

"Decisions based purely on assumptions may not produce accurate solutions."

Economists also stressed the importance of closely monitoring the country's foreign-exchange reserves, warning that a sharp depletion could create broader macroeconomic risks for the economy.

jaimharoon@yahoo.com