Middle East war may dent Bangladesh’s growth, RMG output and exports: Sanem

The war in the Middle East could weigh on Bangladesh’s economy, disrupting output in key sectors, particularly the readymade garment (RMG) industry, according to a study by the South Asian Network on Economic Modelling (Sanem).

Releasing the findings of a simulation study today, Sanem said supply disruptions of oil and gas from the Middle East and a surge in energy prices amid the US-Israel conflict with Iran could affect transport, energy-intensive manufacturing, and food production.

The research organisation warned that the closure of the Strait of Hormuz has triggered a severe energy crunch, exposing Bangladesh’s vulnerability to supply chain disruptions originating in the region.

At least one-fifth of global oil and liquefied natural gas (LNG) passes through the strait, which has effectively been shut following the escalation of hostilities. The disruption has sharply reduced vessel movement through the route.

The situation has been further aggravated by production disruptions in Qatar due to recent attacks, Sanem said.

For Bangladesh, the impact is particularly acute, as around 72 percent of its LNG imports come from Qatar and the United Arab Emirates — supply routes now severely constrained.

“This supply shock comes at a very delicate juncture, when the country is already facing a structural gas deficit due to falling domestic production,” the report said.

According to Sanem’s estimates, a 40 percent increase in global crude oil prices and a 50 percent rise in LNG prices could have significant adverse effects on the economy.

Real GDP may contract by about 1.2 percent, while exports could fall by around 2 percent and imports by 1.5 percent.

Inflationary pressures are also expected to intensify, with consumer prices likely to rise by nearly 4 percent. Real wages may decline by around 1 percent, indicating a drop in household purchasing power.

Sector-wise, RMG output may decline by approximately 1.5 percent, while the transport sector could contract by nearly 3 percent. Agricultural production may fall by about 1 percent, alongside a 2.5 percent drop in energy-intensive manufacturing.

To mitigate the risks, Sanem recommended diversifying the country’s energy sources through expanded multi-country contracts and bilateral arrangements for crude oil, refined fuel, and LNG in the short term.

It also urged faster adoption of renewable energy, particularly rooftop solar, by expediting net-metering approvals and supporting private sector initiatives.

“With targeted budget allocations and effective implementation, Bangladesh can gradually reduce its dependence on imported fuels vulnerable to global disruptions,” the report said.

Sanem further suggested tax exemptions for renewable energy equipment, easier access to low-cost financing, and a shift of fossil fuel subsidies towards renewables to accelerate solar and wind energy adoption.

The think tank also emphasised the need to build strategic reserves of crude oil, refined fuel, and LNG to better withstand future global supply shocks and geopolitical uncertainties.

“Prolonged and frequent crises in the global energy sector demand the development of a strategic national reserve for crude oil, refined fuel, and LNG, which will keep the country prepared for future global supply chain disruptions and geopolitical shocks.”