Bangladesh is facing a major economic shock due to the disruption in oil and gas supplies through the Strait of Hormuz in the wake of the Iran war
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NEW DELHI — Bangladesh is facing a major economic shock due to the disruption in oil and gas supplies through the Strait of Hormuz in the wake of the Iran war, as the country is heavily dependent on imports for its energy needs, according to an article in the local media.
Years of relying on imported energy, along with slow progress toward renewable alternatives, have tied the economy to volatile global currents. When those currents turn turbulent, the exposure is immediate and unforgiving. This is not just a story of blocked routes but of a system built without enough resilience, now tested at its limits, stated the article, written by Sakib Bin Amin, in Dhaka's Business Standard newspaper.
The global energy market appears to be becoming more volatile. Brent crude oil prices have surged to $114.81 per barrel, with further increases expected if disruptions persist. The cost of LNG has also increased significantly in the spot market ($23–$28 per mmBtu). These have implications not only for electricity generation but also for fertiliser, transportation, etc. In the global energy market, it is increasingly geopolitical rather than traditional supply-and-demand factors that are driving price movements.
The financial implications are already evident. Bangladesh's energy import bill has risen significantly in recent years, including an increase of over 10 per cent in the latest fiscal period. It is also of concern that an increase in global oil prices by even $10 to $20 will add between $900 million and $1.8 billion to import bills.
According to Bangladesh's central bank, energy import bills have accounted for around a quarter of the country's import bills in recent years. Hence, fuel price fluctuations have already become a direct threat to the macroeconomic stability of the country, as the manufacturing and export industries are highly energy-intensive. The country's increased import bills will exert pressure on its foreign exchange reserves and the value of the domestic currency.
An increase in fuel prices will also raise the cost of electricity generation. Policymakers will face a crucial trade-off: either raise electricity prices or subsidise it. The former will lead to higher inflation in the country, and the latter will lead to financial stress. The higher energy costs will also raise transport and production costs across sectors of the economy, thereby increasing the cost of living in the country.
Apart from this immediate effect, the prolonged nature of the energy shocks could further affect the current account deficit and foreign exchange reserves, making macroeconomic management more complex. In this context, the pressures could constrain Bangladesh's efforts to stabilise the macroeconomy.
Domestically, Bangladesh's energy system offers limited flexibility. Natural gas contributes to producing an overwhelming proportion of electricity. Transport and other critical sectors are heavily dependent on imported fuels. The country's fuel reserves are limited. In some cases, they are sufficient only for a few weeks.
Given this structural constraint, there is a significant risk of a short-term interruption. Although the authorities claim that alternative sources would be sufficient for short-term stability, a prolonged disruption would lead to shortages and rationing.
This, again, highlights the lack of a strategic petroleum reserve system, a common measure of many countries with high energy import dependence. Many countries have a strategic reserve equivalent to several weeks or even months of consumption, offering an essential buffer against disruptions, a feature lacking in Bangladesh, the article added.