A new policy brief released this week by the Dacca Institute of Research and Analytics (DAIRA) has warned that the US-Iran conflict has delivered a severe commodity shock to Bangladesh's already-fragile economy, calling for urgent fiscal and monetary course correction ahead of the FY2026-27 budget.
The brief titled ‘Macroeconomic Impact of the US-Iran Conflict on Bangladesh: Monetary Assessment and FY2026-27 Budget Recommendations’ lays out a sobering picture: Brent crude surged 45.8 percent to $103.69 per barrel following the March 2026 conflict outbreak, urea fertilizer prices spiked 74.7 percent to $725.63 per metric tonne, and foreign exchange reserves bled $993 million in a single month.
Bangladesh entered the shock from a position of weakness. Quarterly GDP growth had already slipped to a decade-low of 3.03 percent, consumer price inflation stood at 8.71 percent, and Bangladesh Bank's repo rate was held at 10.00 percent, leaving a real interest rate of barely 1.29 percent.
Triple Constraint
The brief describes Bangladesh as trapped in a “triple constraint”, simultaneously defending reserves, containing inflation, and protecting the vulnerable with little fiscal room to manoeuvre.
Bangladesh Bank, the report argues, faces a structural dilemma. If oil prices remain above $100 per barrel, inflation could spiral to between 12 and 18 percent through fuel cost pass-through via the Bangladesh Petroleum Corporation, elevated liquefied natural gas costs raising power tariffs, and a fertilizer-to-food price feedback loop. “Yet raising interest rates further would choke private credit growth already hovering at 0.2–0.3 percent month-on-month, deepening the GDP slowdown.”
FX reserves, which had recovered from $24.8 billion in July 2024 to $35.1 billion by February 2026, are now under renewed pressure. At the March burn rate of $993 million per month, the brief warns reserves could reach $28–30 billion within six to nine months, approaching the IMF's critical three-month import cover threshold of $26 billion.
The report estimates that the conflict shock will impose additional fiscal pressure of BDT 83,000 to 130,000 crore on the FY2026-27 budget, roughly 3.7 percent of the FY2025-26 budget driven by BPC petroleum subsidy top-ups, Bangladesh Power Development Board power sector losses, swollen fertilizer subsidies and expanded food safety net requirements.
This comes as the FY2025-26 budget had already trimmed the subsidy, PPE and liabilities line by 18.4 percent to BDT 82,420 crore, a reduction the brief describes as “critically optimistic given the commodity shock.”
In the near term, Daira recommends holding the repo rate at 10 percent with a pre-announced trigger of 10.50 percent should CPI breach 12 percent, defending a $30 billion FX floor through targeted intervention, fast-tracking IMF Extended Credit Facility tranche drawdowns, and capping the Annual Development Programme at 90 percent while ring-fencing energy, agriculture and social safety net allocations.
The brief further urges that fertilizer and fuel support be delivered exclusively through the Farmer's Card Direct Benefit Transfer registry, restricting subsidised urea to smallholders farming under 2.5 acres.
Over the longer term, the report calls for allocating BDT 8,000–12,000 crore annually to grid-scale solar and wind power purchase agreements, building a 45-day strategic petroleum and LNG reserve funded by a BDT 0.50 per litre surcharge, and restructuring the energy subsidy architecture entirely toward direct transfers.
Three critical risk signals were flagged for policymakers: FX reserves falling below $30 billion, CPI exceeding 12 percent year-on-year, and the exchange rate against the dollar breaching Tk 125, each demanding immediate policy escalation.
“The FY2026-27 budget must prioritise fiscal discipline over development ambition,” the report concludes. “Monetary policy must hold its credibility even at a growth cost, and energy subsidy architecture must transition from universal to targeted before the next external shock arrives.”