How shockwaves from the Gulf are reshaping Bangladesh’s economic stability

In addition to the innumerable civilian, infrastructural, and humanitarian issues that have come to the fore as a result of the ongoing conflict in the Middle East, perhaps the biggest issue on the economic front has been soaring energy prices. The International Energy Agency (IEA) has said that, since the start of the war, at least 40 energy assets across nine countries have been "severely or very severely" damaged. The almost complete closure of the Strait of Hormuz, one of the world’s key waterways for global trade and commerce which carries around 20% of the world’s oil and LNG trade, resulted in severe reductions in the trade of oil and other key energy sources. 

A lot of the coverage on energy prices has focused on the global effects of the energy crisis and, regionally, on the Middle East. As far as East and South Asia are concerned, China and India have been severely impacted, as around 37.7% of the former's, and 14.7% of the latter's oil flows through the Strait of Hormuz.

But how does this conflict impact Bangladesh? 

Bangladesh depends on imports for around 95% of its energy needs, making it especially vulnerable to changes to global supply chains. Specifically, around 80% of its crude and refined oil imports come from the Middle East, making the country’s dependence on this single chokepoint significant. For Bangladesh, whose economy is heavily reliant on the export of ready-made garments (RMGs) with low production costs, this is more likely to translate into disproportionate cost shocks relative to competitors like Vietnam and India, who have more diversified energy sourcing patterns.

Beyond this, Bangladesh’s trade linkages with the Middle East are multidimensional. The region not only serves as the country’s main energy trading source, but also indirectly plays a salient role in areas like agriculture and transport. The region also happens to bring in the overwhelming bulk of remittances to Bangladesh, making it a crucial source of foreign exchange inflows. Any disruption to Gulf economies, therefore, also has a significant impact on these remittance inflows, directly affecting Bangladesh's macroeconomic stability. Already, there are fears of remittance declines, with Bangladeshi workers reporting job losses, displacement, and inability to send money home from the Middle East.

Two key energy concerns emerge for Bangladesh 

In terms of fuel security, Bangladesh has only a modest reserve of diesel and furnace oil, but LNG is essentially imported on a need basis, making it particularly vulnerable to the whims of the market. 

The Bangladesh Petroleum Corporation initially decided to ration petrol supplies to 10 litres per filling for cars and 2 litres per filling for motorbikes. Although this restriction has now been lifted, there were reports of fuel being sold at higher than market prices by unscrupulous sellers on the black market, causing even more harm to ordinary citizens who are already facing rising inflation. This was done against the backdrop of rising oil prices, with Brent, the international oil benchmark, crossing USD 94/barrel, the highest since 2023. With renewable energy stocks accounting for only around 5% of total capacity (Figure 1), accelerated domestic energy development is of the essence.

The heavy concentration of imports from a single region reflects long-standing procurement choices. The current crisis is exposing already-existing structural issues and the mismatch between Bangladesh’s growth model and its energy architecture. An export-oriented manufacturing economy relies on predictable, low-cost energy inputs, but the current system is highly exposed to volatile global markets, making it particularly susceptible to external shocks.

Figure 1: Bangladesh’s installed power capacity is overwhelmingly non-renewable

Macroeconomic impact across imports, exports, and other sectors

The ongoing crisis is reported to put as many as 1.2 million Bangladeshis in poverty. Broadly, it has had a three-pronged negative impact across sectors:

1. Imports: Bangladesh mainly imports crude and refined fuel oil from Saudi Arabia, Kuwait and the United Arab Emirates, spending close to USD 1 billion annually to import more than six million tonnes of petroleum products. Most of these imports are dependent on the Strait of Hormuz, resulting in fuel supply disruptions, inflation, foreign exchange crisis, and increased import and production costs. Experts have estimated that if the price of oil rises by USD 5/barrel in the global market, Bangladesh's annual import costs would go up by a whopping USD 400-500 million.  
2. Exports: A significant portion of Bangladesh’s RMG exports (which constitute more than 80% of the country’s overall exports) passes through the Strait of Hormuz. Not being able to use the strait would cause up to a 35% increase in export costs for Bangladesh, with maritime costs rising by as much as 400%. Further, this will most likely lead to a slowdown in the time taken to reach export destinations, passing on higher costs to consumers and leading to reduced demand for Bangladeshi exports in the US and EU markets.
3. Multi-sectoral and connected macroeconomic impacts: Rising energy prices are hitting Bangladesh’s key fiscal and monetary aspects, such as foreign exchange liquidity, and risk increasing LC margins and trade credit costs, among other things. At a multi-sectoral level, it is also impacting key sectors, including transport, irrigation, food distribution, power, manufacturing, and agriculture. For instance, the global rise in prices of urea and other fertilisers has hit the Bangladesh market hard through import-cost escalations. According to the Department of Agricultural Extension (DAE), Bangladesh requires around 6.2-6.5 million tonnes of fertiliser annually to support its agriculture sector. The current stock of fertiliser – around 1.8 million tonnes – is enough to meet demand until the middle of the year. However, many fertiliser plants have been shut down due to gas shortages; the energy crisis is also resulting in higher than usual load-shedding, with power generators also struggling to keep up.

What is Bangladesh doing to mitigate the risks?

First, Bangladesh and Iran have reached an agreement under which Iran will allow Bangladeshi ships safe passage through the Strait of Hormuz. Second, energy agencies such as PetroBangla are reviewing current energy supply chains and pipelines to try to find alternative ways to import fuel. The government is exploring alternative energy import sources and evaluating other contingency options. Going forward, the government may also decide to restrict non-essential imports to protect foreign exchange reserves. Third, the government is also trying to manage LNG shortages through allocation and rationing decisions, prioritising power and fertiliser sectors, while also going back to relying more on coal-based power.

Policy recommendations to strengthen energy security and economic resilience in Bangladesh

The ongoing war and energy crisis have underscored the importance for Bangladesh to prioritise certain issues related to its energy and economic needs. On the policy side, there is a need to focus on a few salient areas to ensure that Bangladesh’s interests are protected in the face of the ongoing and future crises.

• Building energy resilience will be key. It will be important for the Bangladesh government to establish a formal energy reserve, especially for LNG, instead of the current ‘buy-as-you-need’ system. Key policy instruments could include minimum energy reserve mandates and shifting from spot purchases to longer-term agreements, which could also help bring down costs.
• The government should seriously look at accelerating its renewable energy transition plans (currently targeting 20% by 2030 and 30% by 2040). Policy instruments can include fast-tracking the implementation of the Renewable Energy Policy 2025 to reduce dependency on imports.
• Bangladesh should prioritise geographic diversification of energy import routes and suppliers. This includes securing supply contracts from non-Middle Eastern sources and investing in logistics that bypass chokepoints like the Strait of Hormuz – even if at a marginally higher cost – to reduce systemic vulnerability to regional conflicts.
• There is a need for regional energy integration and cross-border infrastructure. Expanding electricity imports (for example, hydropower from Nepal and Bhutan via India) and better grid connectivity can reduce dependence on seaborne fuel imports, while also stabilising supply during global disruptions.
• Bangladesh should invest in domestic gas exploration and upstream capacity development, particularly in the Bay of Bengal. This can help to reduce regulatory uncertainty and attract credible international energy firms to unlock untapped reserves and gradually substitute imported LNG.
• The situation underscores that energy security should be treated not only as a supply issue, but as a core component of economic resilience and national security planning. The current reactive structure suggests that energy has not yet been fully integrated into Bangladesh’s broader strategic risk framework – an omission that may become increasingly costly in a more volatile global environment.
• There is a need to strengthen energy market governance and risk management frameworks. This includes developing hedging strategies against oil price volatility, improving coordination between agencies like BPC and Petrobangla, and establishing early-warning systems for global supply shocks, allowing for more proactive, rather than reactive, policy responses.

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