How the Israel-Iran Conflict Threatens Bangladesh’s Economy
In the increasingly intertwined global community, conflicts, no matter how distant, inevitably cause economic ripples thousands of miles away. The recent heightened tension between Israel and Iran through tit-for-tat military attacks, regional proxy wars with an overall threat of war has not only destabilised the Middle East but created ripple effects in developing countries including Bangladesh. Geographically distant it may be, but Bangladesh is not immune to the seismic shocks of this geopolitical crisis.
The Geopolitical Flashpoint
The Israel-Iran rivalry grows out of ideological enmity, regional power dynamics, and the tangled web of theological and political animosity. Israel has considered Iran’s support for groups such as Hezbollah, Hamas and Islamic Jihad as a threat to their sovereignty. Israel instead has also conducted multiple attacks against Iranian assets in Syria and beyond, including cyberattacks and targeted killings. The recent surge in direct confrontations notably the Iranian-backed drone and missile attacks on Israel and Israeli further retaliation against Iran makes for a perilous move away from proxy war toward full-on confrontation.
World pet roleum and energy inflation
Chronology The struggle between Israel and Iran is primarily fought in the world energy market. Iran is a major power in the Persian Gulf, and it controls access to the Strait of Hormuz, a vital choke point through which 20% of the world’s oil flows. The slightest hint of trouble along this route sends global oil markets into a panic and causes prices to spike.
Such spikes are catastrophic for Bangladesh, which imports upwards of 85% of its fuel needs. Rising oil prices mean higher transportation and production costs, putting pressure on the country’s industrial base, in particular the ready-made garment (RMG) sector, its economic cornerstone. Inflationary pressure from high energy prices further increases the price of essentials, worsening the cost-of-living crisis facing ordinary people.
Remittance Vulnerabilities
Bangladesh’s economy is dominated by remittances from migrant workers in the Middle East, especially Saudi Arabia, the UAE, Qatar, and Oman. An escalation of tensions between Iran and its Arab neighbors in the Gulf could have destabilizing implications across the region, which in turn may jeopardize the lives and livelihoods of Bangladeshi workers.
Worse, if the crisis leads to a wider regional conflict, Gulf nations could then shift spending from infrastructure and development to defence, stalling projects that rely on guest workers. Lower remittances would undermine Bangladesh’s foreign currency reserves and the value of the taka, increasing import costs and trade deficits.
Supply Chain Disruptions
Bangladesh’s export-oriented industries are dependent on raw materials, shipping and smooth sea transport routes. Hotspots in the Middle East could also disrupt shipping routes, drive freight rates higher and delay the flow of imports and exports.
The RMG sector, which handles more than 80% of the export earnings for the country, might experience shortages in raw materials (i.e., dyes, chemicals, or machinery) due to an overall increasing uncertainty in the global coordination. Western buyers, anxious about global instability, may also scale back or delay orders compounding the damage to export revenue.
Investor Confidence and FDI
Global investors abhor geopolitical uncertainty and Bangladesh is no different. Despite no direct connection to the confrontation, that vulnerability in emerging markets often will make investors more risk averse. The DSE hasn’t been a stranger to volatility in times of crises of a similar nature.
Foreign direct investment (FDI), vital for infrastructure and energy projects, could also dwindle as investors seek steadier global conditions. Industries such as telecom, energy and manufacturing could experience postponed capital inflows, affecting growth and job creation.
Policy Paralysis and Budgetary Strain
Given these potential developments, faced with imported inflation, currency depreciation, and reserves dwindling in short supply, fiscal discipline would be a challenge for the government. On one hand, added subsidies on fuel, and food may be needed, and on the other hand, the government might not be able to conduct development spending to ward off increased debt, freezing the projects important for both long-term growth and poverty reduction. But, irrespective of the scenario, macroeconomic lenders like the IMF and World Bank would be more vigilant to scrutinize Bangladesh’s progress on reforms and debt.
Furthermore, any relinquishing of macroeconomic ambitions due to an external shock could harm its credit record. Conclusion: Preparing for the Worldwide Ripple While the hypothetical conflict between Israel and Iran crystalizes the threat that a global event poses to individual countries, it also presents a roadmap for economic resilience limited to macroeconomic policy.
Bangladesh’s economic resilience, on the other hand, would rely on energy policy beyond the limited scope of simply switching from coal to gas tourism policy, and intensifying diplomacy to secure its workers overseas. With far-away warfare having local impacts, and shocks becoming more common than the standard, policymakers can no longer be caught unprepared. Bangladesh, too, must finally awaken to geopolitical reality: it may be preferable to be unaware, but it is not an economic choice.