Bangladesh Bank has warned that inflation could surge further in Bangladesh due to the ongoing Middle East conflict. A central bank’s study suggests that if the war continues, inflation may exceed 10 percent this year. Foreign exchange reserves, in contrast, could decline by as much as $6.5 billion. A prolonged conflict would expose the economy to even greater loss.
The projections were outlined in an article on the Middle East Conflict 2026 and its impact on inflation and foreign exchange reserves in Bangladesh. The study was prepared by a research team led by Md Salim Al Mamun, director of the Chief Economist’s Unit at Bangladesh Bank. The central bank’s quarterly report published the article.
Bangladesh’s economy is highly sensitive to global fuel prices and exchange rate movements, the report notes. A sudden rise in international oil prices, combined with currency depreciation, can significantly increase inflationary pressure. It also raises the risk of a decline in foreign exchange reserves.
To manage potential inflationary risks, the study recommends three measures. These include allowing greater flexibility in the exchange rate rather than fixing the dollar price, adjusting domestic fuel prices somewhat, and continuing the current contractionary monetary policy.
Meanwhile, a separate study by the South Asian Network on Economic Modelling (SANEM) highlights the potential impact on the Bangladesh economy due to the Middle East conflict. It estimates that if global crude oil prices rise by 40 percent and LNG prices by 50 percent, Bangladesh’s real GDP could decline by around 1.2 percent. Exports may fall by about 2 percent, while imports could decrease by 1.5 percent.
SANEM warns that inflationary pressure will intensify under such a scenario. Consumer prices, it estimates, could rise by around 4 percent in the consumer level. In contrast, real wages may fall by about 1 percent. This scenario signals a decline in household purchasing power.
The uneven impact of the shock is also evident across sectors. Output in the ready-made garments sector may drop by around 1.5 percent, the transport sector nearly 3 percent, and agricultural production about 1 percent. Energy-intensive industries may also see a potential decline of around 2.5 percent. To mitigate these losses, the research organisation has put forward seven policy recommendations for the government.
The effects of the Middle East conflict are already visible in different economic sectors, banking executives say. Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told Bonik Barta that most fuel product prices, except jet fuel and LPG, have not yet been increased in the domestic market. “Despite that, transport costs have already gone up across the board,” he said. “In this case, Fuel shortages are being used as an excuse. It’s difficult to predict how severe the situation could become if fuel prices are officially raised.”
The exchange rate has risen by about BDT 1 over the past month, Rahman noted. He said the dollar market remains stable due to strong remittance inflows. “But the exchange rate may not remain stable for long as export earnings are declining. At the same time, import costs, especially for fuel, are increasing,” he stated.
“The banking sector has been facing multiple challenges for several years,” he added. “If the Middle East conflict doesn’t end soon, these pressures will intensify further.”
In its assessment of the macroeconomic impact, Bangladesh Bank used a Structural Vector Autoregression (SVAR) model. The analysis incorporated quarterly data on global oil prices, exchange rates, inflation, and foreign exchange reserves.
Three scenarios were considered: a fuel price shock, an exchange rate depreciation shock, and a combined shock from both factors. The findings suggest that if domestic fuel prices are adjusted in line with global trends and the exchange rate also depreciates at the same time, inflation could rise by 0.5 to 2 percentage points by December this year. In that case, inflation may reach as high as 11.67 percent.
During the same time, higher import costs could reduce foreign exchange reserves by up to $6.5 billion. Gross reserves may fall to around $26 billion. Current gross reserves stand at $34.64 billion, while inflation is already hovering around 9 percent, according to Bangladesh Bank.
The study highlights important policy implications. It finds that Bangladesh’s economy is highly sensitive to global oil price shocks and exchange rate depreciation. A sudden rise in global oil prices, especially when combined with currency depreciation, can create significant inflationary pressure. It also increases the risk of a decline in foreign exchange reserves.
In such a situation, strong policy preparedness is essential to maintain macroeconomic stability. The study further suggests that allowing flexibility in the exchange rate could help ease pressure on reserves. At the same time, to balance fiscal costs and inflationary pressure, partial adjustments in domestic fuel prices may be necessary. It also recommends continuing the current contractionary monetary policy.
A researcher involved in the Bangladesh Bank study told Bonik Barta, “We tried to analyse the potential economic impacts of the Middle East conflict, including shocks to fuel prices and exchange rates. Based on our findings, we’ve recommended appropriate policy measures. We hope policymakers will take these recommendations into consideration and adopt effective steps to protect the economy and the public.”