The ongoing conflict between the US, Israel, and Iran has cast a long shadow over global economic prospects, with Bangladesh being no exception. In this article, we delve into the impact of the war on private credit demand and explore the broader implications for the country's economy.
The Cloud of Uncertainty
Credit growth to the private sector in Bangladesh has been stagnant, hovering around 6% for an unprecedented eight consecutive months. This stagnation can be attributed to the economic uncertainty caused by the volatile oil and gas prices resulting from the Middle East crisis. Mati Ul Hasan, Managing Director of Mercantile Bank PLC, highlights the unconducive environment for fresh investments, a sentiment echoed by businesses across the country.
Oil Prices and Their Ripple Effect
The impact of the war is evident in the surge of oil prices, which reached nearly $120 per barrel last week as Iran blocked the Strait of Hormuz. This key maritime chokepoint is a critical route for global oil trade, and its disruption has sent shockwaves through the energy markets. The price of Brent crude, the international benchmark, has soared by over 42% since the conflict began, according to an AFP report. Bangladesh, heavily reliant on imported oil and gas, is particularly vulnerable to these price fluctuations.
A Stressed Business Environment
The spike in oil prices and the resulting increase in shipping costs have created a stressful situation for businesses in Bangladesh. With 95% of its oil and 30% of its gas imported, the country is acutely aware of the risks associated with higher import costs. As a result, businesses are hesitant to make fresh investments, opting instead to wait and see how the geopolitical situation unfolds.
Private Investment Slump
Bangladesh's private investment has been on a downward trajectory for three consecutive years, reaching its lowest level in 11 years at 22.03% of GDP in the fiscal year 2024-25. This consistent slowdown in credit demand and investment has broader implications for the country's economic growth and job creation.
Political and Policy Uncertainty
Ashikur Rahman, Principal Economist at the Policy Research Institute of Bangladesh, suggests that the proximity to national elections often leads entrepreneurs to delay major investment decisions. This, coupled with banks' cautious lending practices due to concerns about asset quality and the macroeconomic environment, further dampens private sector credit demand.
A Complex Macroeconomic Outlook
Restoring confidence and stability is crucial for reviving private sector credit demand. However, the emerging geopolitical tensions add an additional layer of complexity. Any escalation in the Middle East conflict could drive up global oil prices, disrupt energy markets, and exacerbate the challenges faced by energy-importing countries like Bangladesh. This would increase the import bill, strain the balance of payments, and complicate inflation management.
Conclusion
The war in the Middle East has cast a long shadow over Bangladesh's economic prospects, with private credit demand and investment suffering as a result. The country's heavy reliance on imported oil and gas makes it particularly vulnerable to global geopolitical tensions. As the conflict continues, the need for political stability and credible economic reforms becomes increasingly urgent to mitigate the risks and revive economic growth.
