Economic Impact of Middle East Conflict on Bangladesh

Executive Summary

Bangladesh's Triple Exposure

Bangladesh carries three Middle East exposures at once, and none of them can be hedged after a conflict starts: the standing exposure has to be cut before the shock, or it is paid in full. First, the country imports virtually all of its petroleum and a rising share of its gas as LNG, making it acutely sensitive to energy price spikes. Second, the bulk of Bangladesh's trade with the EU and North America transits the Suez Canal and Indian Ocean chokepoints, routes whose reliability depends directly on regional stability. Third, the country's remittance outlook is tied to the growth of its source countries, which outside the United States are concentrated in the Gulf (Bangladesh Bank, Financial Stability Report 2023).

This paper traces each transmission channel using a Caliendo-Parro (2015) multi-sector Ricardian CGE model and the Borin-Mancini (2019) trade in value-added decomposition, both calibrated on the OECD ICIO 2025 edition (2022 data year). It is designed to inform Bangladesh's policy response to geopolitical risk before the next disruption, not after it.

Section 1

Energy Vulnerability

Natural gas supplies roughly 40% of Bangladesh's primary energy (Petrobangla, Energy Scenario of Bangladesh 2023-24), and the marginal unit is increasingly imported LNG priced off global benchmarks. The country imports nearly all of its crude oil. A disruption in Middle East energy supply, whether from conflict-related production cuts, tanker route interdiction, or speculative price spikes, transmits directly to Bangladesh's energy costs, and the shifting energy mix already carries a growing fiscal burden (Planning Commission).

The CGE model isolates the energy channel by imposing a 40% oil price increase and 50% LNG price spike, modeled as a productivity decline in energy-intensive sectors (EXTR, UTIL, CHEM, HMFG, TRNS) across all regions. The pass-through rate is calibrated at approximately 20%, reflecting the share of energy in total production costs for these sectors. In this stylized run, Bangladesh's estimated real income falls by about 5.05% (model estimate, not an observed magnitude).

Section 2

Trade Route Disruption

Bangladesh's garment success was built on EU and US market access (Seventh Five Year Plan), and containerized trade to those markets passes through the Indian Ocean, the Strait of Hormuz, and the Suez Canal. The EU-27 and the United States together absorb the majority of Bangladesh's garment exports. Any disruption to these chokepoints, whether from military conflict, piracy, or blockade, raises freight costs and delivery times.

The CGE model captures this channel through a 5% increase in bilateral trade costs (modeled as iceberg-type costs) on Asia-to-West routes, with full freight increases on all routes involving the MNA region. Additionally, a 5% demand contraction in the MNA region reflects reduced economic activity in the conflict zone. The model estimates a Bangladesh real-income loss of about 0.13% from the trade-cost channel alone, an order of magnitude smaller than the energy channel because freight is a thinner slice of delivered cost than energy is of production cost.

The trade disruption effect is distinct from the energy channel because it primarily affects the cost of moving goods rather than the cost of producing them. For Bangladesh, whose competitive advantage in garments depends on cost margins, even a modest freight cost increase can shift orders to closer competitors like Turkey (for EU markets) or Central America (for US markets).

Section 3

Supply Chain Cost Transmission

The energy and freight channels interact through global supply chains. Bangladesh's export sectors depend on imported inputs: fabrics, chemicals, machinery, and petroleum products. When energy prices rise, the cost of these inputs increases at their origin. When freight costs rise, the cost of shipping them to Bangladesh increases further. The combined effect is larger than the sum of the individual channels because supply chain costs compound at each node.

Section 4

Remittance Channel

Bangladesh is one of the world's largest recipients of worker remittances, and its remittance prospect is tied directly to the growth of its source countries, which outside the United States are concentrated in the Gulf (Bangladesh Bank, Financial Stability Report 2023). A large share of Bangladesh's overseas workers are employed in the Gulf and the wider Middle East, predominantly in construction, retail, and domestic services. Remittance inflows from these workers finance household consumption, housing investment, and, in some cases, small enterprise formation.

A Middle East conflict would affect remittances through multiple pathways: reduced construction activity (especially in the UAE and Saudi Arabia), tighter labor regulations during emergencies, worker displacement, and currency pressures in Gulf economies. Sector risk filings name the channel explicitly: economic instability in the Middle East may impair migrant employment and remittance inflows (Dutch Bangla Bank Plc, Annual Report 2025). The remittance channel is not modeled directly in the Caliendo-Parro framework (which focuses on trade in goods), but it operates through household consumption, the largest component of aggregate demand in Bangladesh.

Section 5

Supply Chain Exposure: Trade in Value Added

Using the Borin-Mancini (2019) decomposition applied to OECD ICIO 2025 edition data (1995-2022, 80 economies plus rest of world; OECD, ICIO 2025 edition), aggregated here to 13 sectors and 9 regions, this section decomposes Bangladesh's gross exports into domestic value added (DVA) and foreign value added (FVA). The decomposition reveals which sectors are most exposed to external supply chain shocks and, specifically, which sectors have the deepest linkages with the MNA region.

Bilateral Value Added Flows with MNA

Bilateral TiVA data is not yet available. Once computed, this section will show the value added linkages between Bangladesh and the MNA region by sector.

Section 6

Combined Impact: All Channels Simultaneously

The combined scenario activates all three modeled channels simultaneously: a 40% oil price increase, a 5% freight cost increase on conflict-affected routes, and a 10% demand contraction in the MNA region. This represents a sustained, severe conflict scenario rather than a brief disruption.

Under the combined scenario, the model estimates a Bangladesh real-income loss of about 5.19%, which ranks 8th most affected among the nine modeled regions (1st = worst hit). Middle East & N. Africa is the most affected (-24.32%), consistent with being the conflict zone. No region records a net welfare gain in this run, so the combined shock is globally contractionary rather than a redistribution of activity.

The convergence properties of the model are important for credibility. The combined scenario converged in 37 iterations (converged: True), indicating well-behaved equilibrium properties despite the multiple simultaneous shocks.

Conclusion

Policy Recommendations

Bangladesh's exposure to Middle East conflict is structural, not transitory. Energy import dependence, the geographic concentration of trade routes, and a Gulf-concentrated remittance base are all embedded in the economy's current structure. Reducing this vulnerability requires deliberate, medium-term action by named owners across five domains.

1. Diversify LNG supply and extend fuel cover (Power Division, Petrobangla). The energy channel is by far the largest in the model, so it carries the largest payoff. Add term LNG volumes outside the Middle East (Australia, the United States, Mozambique) and shorten the spot-market share that prices off regional benchmarks. Pair this with a defined strategic fuel reserve sized to cover a multi-week supply interruption. Measurable signal: the non-Middle-East share of contracted LNG volume, and days of import cover held, both reported quarterly by Petrobangla.
2. Deepen domestic backward linkages in export sectors (Ministry of Commerce, BIDA). Because the energy shock transmits partly through imported intermediates, raising the domestic value-added share of exports blunts it. Direct BIDA incentives and Commerce support toward domestic yarn, fabric, dyes, packaging, and basic chemicals. Measurable signal: the foreign value-added share of textiles and RMG gross exports falling over successive ICIO/TiVA vintages.
3. Conclude and use the trade agreements already in train (Ministry of Commerce). Trade diversification here means finishing the arrangements Bangladesh is actually pursuing, not joining blocs it is not party to. Bring the Japan-Bangladesh Economic Partnership Agreement (signed February 2026) into force, conclude the Bangladesh-Singapore FTA now under negotiation, and secure a successor to EU duty-free access (GSP+ or a bilateral arrangement) before the LDC graduation transition ends. These open Asia-facing and European markets that do not depend on a single chokepoint. Measurable signal: number of preferential agreements in force and the share of exports they cover, tracked annually.
4. Diversify migrant-labor destinations (Ministry of Expatriates' Welfare). With remittances concentrated in the Gulf, a regional labor contraction strikes the largest non-export current-account inflow. Sign bilateral labor agreements with non-Gulf destinations (East Asia, Southeast Asia, Eastern Europe) and push inflows through formal channels. Measurable signal: the non-Gulf share of monthly remittance receipts reported by Bangladesh Bank.
5. Institutionalize geopolitical-risk modeling (Bangladesh Bank, Ministry of Commerce). Run the CGE plus TiVA framework used here as a standing planning tool, refreshed on each new ICIO vintage and on major shock events, rather than as a one-off. Measurable signal: a published quarterly geopolitical-risk note carrying updated channel estimates.

What would change this view

The welfare magnitudes depend on the OECD ICIO calibration and the assumed shock sizes (oil +40%, freight +5%, MNA demand contraction). Faster LNG diversification, quicker backward-linkage investment, or a milder, shorter disruption would shrink the estimated losses; a wider or longer conflict, or a simultaneous Gulf labor contraction, would widen them.