A test for Bangladesh's new government

The Middle East is already engulfed in a widening war-but its economic shockwaves are already travelling far beyond the battlefield. On February 28 2026, coordinated US-Israeli airstrikes struck Iranian military facilities and targeted Supreme Leader Ayatollah Ali Khamenei. Tehran retaliated with counter attacks on Israel and US bases in Gulf States, while declaring the Strait of Hormuz closed to commercial shipping and launching strikes on Gulf energy infrastructure.

The stakes are global. Nearly 21 million barrels of oil-one fifth of world supply-and 20 per cent of LNG shipments pass through Hormuz each day. Even the threat of disruption is enough to send energy markets into turmoil. Brent crude has already surged past $82 per barrel, LNG cargoes bound for Asia have been suspended, and insurance premiums for Gulf shipping have spiked.

For countries like Bangladesh-heavily dependent on imported energy and Gulf labour markets-the crisis is not a distant geopolitical drama but an immediate economic risk. Bangladesh's economy depends simultaneously on Gulf energy, Gulf labour markets, and global shipping routes, making it unusually exposed to instability in the Middle East. For a government barely two weeks in office, it could prove to be its first major test of resilience.

ENERGY - THE IMMEDIATE SHOCK: Bangladesh's energy dependence is enormous. Petroleum imports alone exceeded Tk 790 billion (US$7.2 billion) in December 2025, and during previous global energy shocks they surged far higher. 

Oil provides a quarter of primary energy and is almost entirely imported from Saudi Arabia and the UAE. LNG from Qatar and Oman has become essential for power generation, while LPG imports rose 10.5 per cent in FY25 as households and industries shifted away from unreliable gas.

During the global energy spike following the Russian invasion of Ukraine, monthly petroleum imports peaked at over Tk 1.43 trillion.

With the Strait of Hormuz now disrupted, Bangladesh faces an immediate threat: rapidly rising energy prices combined with possible supply interruptions. The policy choices are politically difficult-either allow domestic fuel prices to rise sharply or absorb the shock through costly subsidies.

INFLATION AND THE COST-OF-LIVING SQUEEZE: Energy shocks rarely remain confined to fuel markets; they ripple through the entire price system.

Bangladesh experienced this dynamic during 2022-23, when inflation remained above nine percent for prolonged periods. Rising fuel prices increased transportation costs, pushed up agricultural production expenses, and raised food distribution costs. Fertiliser subsidies alone expanded to nearly TK 280 billion, placing additional strain on the national budget.

A renewed energy shock would intensify these pressures. Higher natural gas prices would raise fertiliser costs; increased freight rates would push up import prices; and elevated transport costs would feed directly into food inflation.

For urban households, this translates into a sharper cost-of-living crisis. For rural families, where food constitutes a large share of household expenditure, the welfare impact can be severe. Inflation is therefore not merely an economic variable-it is one of the most politically sensitive consequences of external shocks.

For a new government already facing public pressure over rising prices, managing inflation while maintaining fiscal stability will be a formidable challenge.

REMITTANCES AT RISK: While energy imports expose Bangladesh to global price shocks, labour migration ties its economy directly to the Middle East.

In 2025 Bangladesh received a record $32.8 billion in remittances, a 22 percent increase from the previous year. These inflows-equivalent to more than six per cent of gross domestic product (GDP) -sustain millions of households and support consumption across rural Bangladesh.

A large share of these remittances originates from Gulf economies such as Saudi Arabia, United Arab Emirates (UAE), Qatar, and Kuwait, where more than seven million Bangladeshi workers are employed.

A prolonged regional conflict could strain this lifeline. Economic slowdown in host countries may reduce labour demand, construction projects could be delayed or cancelled, and wage payments may become uncertain. In extreme circumstances, large-scale repatriation of migrant workers could occur-echoing disruptions seen during the pandemic.

Unlike energy shocks, which are immediate, remittance shocks unfold gradually. Yet their macroeconomic impact can be deeper over time, weakening rural consumption, reducing foreign-exchange inflows, and increasing pressure on the Bangladeshi taka.

TRADE AND SHIPPING DISRUPTIONS: Bangladesh's export economy is equally dependent on global maritime stability.

The country's ready-made garment sector generated more than $39 billion in export earnings in FY25 and accounts for roughly 80 per cent of total exports. Much of this trade flows to European markets through routes passing the Red Sea and the Suez Canal.

Recent disruptions have already demonstrated the fragility of these shipping routes. Attacks on commercial vessels in the Red Sea during 2023-24 forced shipping companies to reroute around Africa's Cape of Good Hope, adding nearly two weeks to transit times and significantly increasing freight costs.

A wider Middle East war would amplify these disruptions. Higher insurance premiums, longer transit times, and volatile freight rates could undermine Bangladesh's competitiveness in global apparel markets. For an industry employing millions of workers, even modest export disruptions could carry serious economic consequences.

EXTERNAL BALANCE UNDER STRAIN: Bangladesh's external position remains fragile. Although the balance of payments recorded a $3.3 billion surplus in FY25 and reserves recovered to $27.4 billion, vulnerabilities remain significant. 

Petroleum imports alone cost $7.2 billion in December 2025, underscoring how quickly reserves can erode. Remittances worth $32.8 billion and garment exports of $39.35 billion are both exposed to Gulf instability and shipping disruptions.

Bangladesh's currency has already weakened sharply-losing nearly 40 per cent of its value against the dollar between 2022 and 2025, eroding purchasing power and driving up the cost of imports. This steep depreciation has not only inflated the energy import bill but also strained reserves, complicated debt servicing, and fuelled inflationary pressures at home.

A Gulf conflict would intensify the challenge. Rising energy imports would drain foreign exchange, while weaker exports and remittances would reduce inflows. The resulting pressure on the current account could weaken the currency, force interest rate hikes, and squeeze growth. In a severe scenario, Dhaka could again be forced to rely on external financial support-just as it did with the $4.7 billion IMF program in 2023.

FISCAL PRESSURE: Bangladesh's fiscal space is exceptionally narrow. The country's tax to GDP ratio of about 8 per cent is far below India's 17 per cent and Vietnam's 19 per cent, leaving Dhaka with far less capacity to absorb external shocks. This weak revenue base means the government relies heavily on subsidies as its primary tool to stabilise domestic prices during crises.

But subsidies consume vast resources. Fuel subsidies alone exceeded Tk 290 billion ($2.6 billion) in FY23, while fertiliser subsidies topped Tk 280 billion ($2.5 billion) in the same year. Electricity subsidies added another Tk 170 billion ($1.5 billion) in FY25. Together, these outlays amount to more than Tk 740 billion annually, a burden that absorbs nearly one?tenth of the national budget and leaves little fiscal space for investment in infrastructure, health, or education. The fiscal deficit was reduced to 3.6 per cent of GDP in FY26, but only through austerity measures, import compression, and cuts to development spending.

A Gulf war would magnify this burden. A sharp rise in global energy prices would dramatically increase subsidy costs, forcing policymakers into a painful trade off. Passing higher costs to consumers risks runaway inflation and social unrest; absorbing them through subsidies deepens deficits and crowds out investment in infrastructure, education, and health-precisely the areas needed to build resilience.

The opportunity cost is stark. Every taka spent on subsidies is a taka not invested in long-term growth. With fiscal space already constrained, Bangladesh risks being locked into a cycle of crisis management rather than building the foundations of resilience.

GEOPOLITICAL PRESSURES: Beyond economics, the crisis will also test Bangladesh's diplomacy. The country maintains deep economic and labour ties with Gulf states while simultaneously navigating relations with major global powers whose strategic interests in the region often diverge. A widening conflict could create diplomatic pressures over sanctions, security alignments, or humanitarian responses, forcing Dhaka to balance principle with pragmatism.

Most critically, the safety of millions of Bangladeshi expatriate workers would become a national concern. Evacuation planning, consular protection, and labour diplomacy would require rapid mobilisation of Bangladesh's foreign policy apparatus. At the same time, Dhaka would face growing expectations from partners to take positions on contested issues-testing its ability to preserve neutrality while safeguarding national interests.

THE ROAD AHEAD: Wars in the Middle East rarely remain confined to the battlefield. Through oil prices, remittance flows, and maritime trade routes, their economic aftershocks travel thousands of miles-reaching countries far removed from the conflict itself. Bangladesh's deep reliance on imported energy, Gulf labour markets, and global shipping lanes means that instability in the region can quickly translate into inflation at home, pressure on foreign-exchange reserves, and uncertainty for millions of migrant families.

For Bangladesh's new government, the unfolding crisis is more than a distant geopolitical conflict. It is an early test of economic leadership in a turbulent world. Managing the immediate shock-containing inflation, protecting reserves, and safeguarding migrant workers-will be essential. The crisis also highlights a longer-term imperative: accelerating energy diversification through renewables, regional power trade, and domestic gas exploration to reduce dependence on volatile Gulf supply chains.

The deeper challenge is not only to navigate the immediate shock but to build resilience in an increasingly volatile global environment-laying the foundations so that future external crises does not reverberate as an economic crisis at home.

Golam Rasul, PhD, is Professor, Department of Economics, International University of Business Agriculture and Technology (IUBAT), Dhaka. 

golam.grasul@gmail.com