The Finance Division has warned that a possible fresh surge in global oil prices driven by the Middle East war could derail Bangladesh’s inflation-control efforts, pushing average inflation above 9 percent in the current fiscal year and further squeezing household purchasing power.
According to its fiscal risk assessment in the midterm macroeconomic policy statement presented in parliament on June 11, a 30 percent rise in oil prices in FY27 could lift average inflation by 1.6 percentage points from the baseline projection of 7.5 percent to 9.1 percent.
The possible rise in global oil prices in FY27 is projected to “significantly disrupt the downward trend of inflation”, the report said, citing cost-push pressures on transport and manufacturing.
To assess volatility, the division simulated a 20 percent decline in oil prices in FY28 and stability thereafter after the possible rise this fiscal year.
Bangladesh is already grappling with stubbornly high inflation. The government’s target last fiscal year was 7 percent, but the Finance Division projected 8.9 percent, while BBS data showed 8.68 percent in FY2025-26.
Even a single drone strike in the war zone could send prices soaring again.
Zahid Hussain, former lead economist, WB Dhaka office
Inflation has remained above 9 percent since FY2022-23 and crossed 10 percent in FY2024-25. Meanwhile, wages have grown more slowly than inflation for over four years, eroding real incomes and leaving households struggling to keep pace with rising expenses.
The report warned that the inflation shock would widen the gap between nominal and real consumption.
While nominal household spending rises mechanically under higher prices, real consumption, which reflects actual purchasing power, declines.
From FY27 onward, real consumption would fall below baseline, reaching Tk 30,512 billion by FY29 compared with Tk 31,341 billion in the baseline projection.
“This wedge between nominal and real consumption sharply illuminates the welfare cost of inflation,” the report said, noting the burden would fall most heavily on lower-income groups.
The US and Israel’s war on Iran beginning in late February 2026 led to a temporary closure of the Strait of Hormuz, severely disrupting global oil supplies.
Brent crude surged 55 percent to a four-year high of $126 per barrel. The World Bank forecast global energy prices could rise 24 percent in 2026, with Brent averaging $86 per barrel versus $69 in 2025. Diesel prices jumped to $231.39 per barrel from $75.79.
Earlier, the finance ministry estimated Bangladesh might need an extra $3 billion between March and June to import fuel, LNG, and fertiliser. The IMF projected the war could raise the import bill by up to $5 billion this year.
‘RISK HAS NOT DISAPPEARED’
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, said some of the anxiety reflected in the report has eased as oil prices retreated from wartime highs. Prices were about 1.5 percent below pre-war levels yesterday and have hovered close to pre-conflict rates over the past week.
Still, uncertainty remains.
“Even a single drone strike in the war zone could send prices soaring again,” he cautioned, adding that stability may hold for the next 60 days but the outlook beyond that is highly uncertain. “My assumption is that the war situation will remain relatively peaceful until the US mid-term elections this coming November.”
Despite easing prices, Bangladesh continues to pay more for energy.
Spot-market LNG cost $16-$17 per metric million British thermal unit (MMBtu) last week, compared with under $11 before the war. Qatar’s LNG production capacity has also suffered major disruption, which could take over a year to repair, keeping prices elevated.
‘KEEP DEFICIT IN CHECK’
Zahid warned that inflation threats are not only external.
Revenue underperformance, combined with rigid expenditures such as salaries, safety nets, and development projects, could widen the budget deficit and fuel excess demand.
He noted that recent policies, including the Tk 60,000 crore support scheme and extended banking sector forbearance, effectively expand the money supply, akin to quantitative easing.
Rising imports without matching exports or remittances could pressure the balance of payments, weaken the exchange rate, and feed imported inflation.
“Ultimately, I see three major risks ahead: a budget deficit overshoot, expansion of the money supply, and mounting pressure on the exchange rate,” Zahid said.
He urged aligning spending with revenue, avoiding excessive money creation, and channeling support funds into productive sectors. Productive investment may cause short-term inflation but builds long-term capacity, whereas inefficient bailouts worsen inflation.
The economist also flagged supply-side bottlenecks and market manipulation of essentials like onions, rice, sugar, and edible oil. “The government must take either preventive or punitive action to ensure that no one can manipulate the market,” he said, stressing proactive oversight to maintain competition and prevent abnormal price spikes.
STICKY INFLATION RISK
The Finance Division noted that global oil price hikes do not immediately translate into domestic inflation because fuel price adjustments are regulated and often delayed.
Still, higher oil prices weaken the exchange rate, raising import costs. Inflation is further amplified by supply chain disruptions and rent-seeking by oligopolistic actors.
“This reflects the broader phenomenon of sticky inflation, whereby prices respond sharply to adverse economic shocks but exhibit considerable resistance to downward adjustment even after underlying conditions have stabilised,” the report said.
“Consequently, Bangladesh is expected to continue experiencing protracted inflation well beyond the dissipation of the initial shock, posing a sustained risk to fiscal stability,” it added.
