The economic cost of Iran-Israel war

Bangladesh is working hard to bounce back from some tough challenges, especially the depletion of foreign exchange reserves. The good news is that the volatility in the foreign exchange market is starting to ease after more than a year and a half.

However, there is a new concern on the horizon - the Iran-Israel conflict. This conflict has the potential to pose a threat to Bangladesh's ongoing recovery efforts.

Business owners and economists are worried that if the conflict escalates and drags on, it could negatively affect Bangladesh's economy. The Middle East is facing increased tension after Iran attacked Israel, raising concerns about the potential impact on oil prices.

While Israel is not a significant oil producer, the conflict's escalation, and involvement of key oil-producing countries like Iran could affect the global oil market.

If the Iran-Israel conflict intensifies and draws in other major oil-producing nations in the region, oil prices may continue to rise.

The escalation of conflict between Iran and Israel has the potential to exert a substantial influence on global oil prices, thereby triggering broader economic ramifications such as heightened inflation.

In this event, an increase in oil prices resulting from geopolitical tensions or supply interruptions in key oil-producing areas could exacerbate inflationary forces, posing challenges to achieving central bank target levels for inflation.

Central banks typically respond when faced with high inflation by keeping interest rates high to moderate economic overheating and controlling inflation. As a result, an increase in oil prices could indirectly prompt the Fed to maintain higher interest rates for longer than expected.

This could lead to decreased economic activity, affecting consumer spending and business investment.

Additionally, this situation could bolster the strength of the US dollar. When the US raises or sustains higher interest rates, investment in dollar-denominated assets becomes more appealing due to their higher returns.

This tends to attract more foreign capital into the US money market, increasing demand for the dollar and ultimately fortifying the currency.

A stronger dollar can further affect the global economy, particularly in developing countries with dollar-denominated debt and economies heavily reliant on imports.

The escalation of geopolitical risk, particularly the potential expansion of the Israel-Gaza conflict to involve Iran and Hezbollah, is anticipated to have significant economic ramifications for Lebanon, Israel, and Iran.

Analysts posit that Lebanon, already grappling with prolonged political deadlock, would bear the brunt of the impact, experiencing a substantial contraction in its gross domestic product should a full-scale armed conflict encroach upon its borders.

Moreover, this heightened regional tension is expected to impede further economic growth in Iran, which is already strained by sanctions.

Geopolitical instabilities and fluctuations in energy prices are expected to significantly impact numerous countries. If a regional conflict escalates, it could result in substantial economic and humanitarian setbacks for the parties involved.

Should the current tensions persist, and the worst-case scenarios become reality, the economies of the wider Middle East and North Africa region will suffer immensely.

The conflict spreading into Lebanon and Iran is expected to negatively impact investor confidence in the region, potentially affecting various sectors such as tourism, shipping, retail, and real estate.

The ongoing fighting in Lebanon has significantly impacted tourism and agriculture. Several countries have warned their citizens against travelling to Lebanon, Israel, and the neighbouring Jordan and Egypt.

In such a scenario, Bangladesh and other nations will experience heightened pressure as the costs of imports and exports will rise. This will lead to increased import expenses and reduced export profit margins.

Furthermore, the long-term consequences could have significant implications for the global economy, placing countries like Bangladesh under strain from various angles.

Simon Mohsin is a political and international affairs analyst.