The US-Israel war on Iran is casting a long shadow over Bangladesh’s economy, threatening to slow growth, stoke inflation, deepen poverty, cut jobs, and raise debt burdens, according to the World Bank’s latest Bangladesh Development Update.
“The Middle East conflict is likely to materially affect Bangladesh’s economy, compounding existing vulnerabilities,” the World Bank said in the report released yesterday at a press briefing in Dhaka.
Higher import costs, weaker exports, and falling remittances are expected to strain the current account balance, while rising energy prices and pressure on the exchange rate could intensify already elevated inflation.
Real GDP growth is now projected to fall to 3.9 percent in FY26, down from an earlier forecast of 4.6 percent, reflecting spillover effects from the war alongside pre-existing weaknesses in export growth and continued sluggish public and private investment.
The human cost, the report suggests, will be steep. Poverty has already risen for three consecutive years. Before the conflict, around 17 lakh people were expected to move out of poverty this year; that number is now projected to be just 5 lakh, meaning 12 lakh people could stay below the poverty line.
Around 6 lakh jobs are also expected to be lost.
Rising prices account for about 10 percent of the increase in poverty, widening the poverty gap. Remittances, a lifeline, offer limited cushioning for the poor in this context.
Inequality is also set to rise. The Gini coefficient, which measures income or wealth inequality, is projected to increase by 0.2 points in 2026.
The report notes that the government has inherited an economy under significant strain.
Urging the government to press ahead with reforms, the World Bank warned, “With thin foreign exchange buffers, tight fiscal and monetary conditions, and a fragile banking sector, Bangladesh has limited capacity to absorb a prolonged shock and to mitigate its impact on its people, notably the most vulnerable.”
Jean Pesme, World Bank division director for Bangladesh and Bhutan, said, “Resilience has underpinned Bangladesh’s growth story. But without decisive structural reforms, especially in revenue mobilisation, the financial sector, and the business environment, this resilience cannot last.
“Bold and immediate reforms will be essential to returning to a more resilient and inclusive growth path and creating more and better-paid jobs.”
CURRENT ACCOUNT UNDER PRESSURE
The war is expected to weigh on all major components of the current account -- imports, exports, and remittances -- placing renewed pressure on foreign exchange reserves.
Bangladesh remains heavily dependent on imported energy, sourcing 60–65 percent of its crude and 55–60 percent of its LNG from the Middle East. More than one-third of its gas demand is met through imported LNG, the World Bank said.
A surge in global energy prices would directly inflate the import bill and widen the trade deficit.
Remittance inflows, equivalent to about 3 percent of GDP and roughly half of total inflows, could weaken as Gulf economies slow, reducing labour demand and wage growth.
At the same time, disruptions to global trade routes and weaker demand in key markets may dampen exports.
Assuming crude prices remain around $94 per barrel through 2026, the current account deficit is projected to widen to 0.8 percent of GDP in FY26 and 1.0 percent in FY27.
INFLATION RISKS
The war could further fuel inflation. Higher global oil and gas prices, if passed through to consumers, would raise domestic energy costs, increasing production expenses in agriculture and industry and pushing up transport costs across the economy.
Similar second-round effects were seen during the Ukraine war, when energy shocks quickly fed into both food and non-food inflation. Partial pass-through could add around 0.5 percentage points to inflation in the coming months, the report said.
External pressures may also weaken the taka, raising the local currency cost of imports of food, fuel, fertiliser, and industrial inputs, and amplifying inflationary pressures.
FISCAL STRAIN, RISING DEBT
Higher global energy prices are also expected to intensify fiscal pressures through increased subsidy requirements in power, gas, and fertiliser sectors.
If domestic prices are not adjusted, subsidy outlays could rise by about 0.8 percentage points to 2.8 percent of GDP in FY26, with further increases likely without price adjustments. This could crowd out priority spending, undermine fiscal consolidation, and increase government borrowing needs amid tight financing conditions.
Public debt is projected to rise gradually, exceeding 45 percent of GDP by FY28, up from 39.5 percent at present.
RECOMMENDATIONS
The World Bank outlined four key short-term priorities to stabilise the economy and lay the foundation for structural reform.
Containing inflation will require a tight monetary stance and avoiding unsterilised liquidity support to banks, alongside supply-side measures such as reducing import duties on essential food items, strengthening market competition, ensuring timely agricultural inputs, and expanding targeted food distribution.
Reducing government financing needs is critical to avoid crowding out private credit. This will require improved revenue mobilisation through tax policy and administration reforms, along with gradual rationalisation of energy and fertiliser subsidies.
Concessional external financing from development partners could help anchor policy and reduce reliance on domestic borrowing.
Restoring banking sector stability will demand swift action: completing asset quality reviews, enforcing time-bound restructuring based on viability and burden sharing, and strengthening governance and transparency.
Phasing out regulatory forbearance, improving non-performing loan resolution, clarifying deposit protection mechanisms, and introducing an emergency liquidity assistance framework are also essential.
The report concluded that easing regulatory and trade constraints is key to unlocking private investment and job creation.
Measures such as digitalising business licensing, simplifying SME inspections, improving transparency in incentives, strengthening competition policy, streamlining formalisation, and ensuring reliable power supply will be crucial to support sustained, job-rich growth.
