Bangladesh seeks IMF help: How has the war with Iran affected its economy? | | Articles of Controversy

The International Monetary Fund (IMF) says Bangladesh has requested a new aid program as it battles the United States-Israel economic crisis. war in Iran.

We look at the aid that Bangladesh sought, the South Asian country’s history with the IMF and how the war has affected its economy.

What has Bangladesh asked for?

The head of the IMF mission in Bangladesh, Ivo Krznar, announced on Tuesday that Bangladesh has applied for a new IMF-supported program.

“IMF staff are in discussions with government officials about their reforms and proposed actions,” Krznar said in a statement.

“The IMF remains a committed partner to Bangladesh in its efforts to achieve economic and financial stability, build resilience, and support strong and inclusive growth.”

Neither side disclosed the size or specifics of the requested financial aid package.

However, in March, the Bangladesh government said it wanted $2bn in loans from various donors as it grappled with the power crisis caused by the Iran war.

How has Bangladesh been affected by Iran’s war?

Power problems

The Iran war, which began on February 28 when the US and Israel began fighting in Iran, has caused a global power outage and caused oil prices to rise. On April 8, a long-term ceasefire was reached, but a permanent peace agreement remains elusive. In addition, the Strait of Hormuz – through which, before the war, a fifth of the world’s oil and gas was exported, mainly to Asian countries – remains under the control of Iran, while the US has naval blockade of Iranian ports instead. All of this has severely disrupted the world’s energy supply and caused the price of oil to rise to around $100 a barrel, compared to its pre-war price of around $66.

Bangladesh, home to 170 million people, imports 95 percent of the oil and natural gas (LNG) it needs to meet its energy needs. Demand is highest in summer when cooling is needed. Most of these products come from the Middle East.

Dhaka has already taken steps to reduce oil consumption, including halting the production of fertilizers in many factories. On April 19, Bangladesh raised fuel prices by 10 percent to 15 percent, based on the increase in international prices. It raised the price of gasoline from $0.95 per liter to $1.10 per liter. Diesel and kerosene also rose.

However, the economic collapse of Bangladesh from the Iran war does not only increase its power.

Clothing industry

The ready-made garment industry, which accounts for more than 80 percent of Bangladesh’s revenue, has also been affected. Bangladeshi factories import most of their products from China. The shipments are routed through the Red Sea and the Middle East, so recent shipping disruptions have raised shipping costs. Sayeed Ahmed Chowdhury, director of textile manufacturer Square Denim, told Bangladesh newspaper The Financial Express that he expects jobs to drop by about 20 to 25 percent in the next season.

After the war, several airlines stopped flying in March. As a result, clothes sent to Zara’s owner Inditex and other major retailers were stuck at airports in Bangladesh and India.

The cost of materials

Supply chain disruptions have also affected other industries in Bangladesh. The prices of plastic products have also increased.

Rising crude oil prices have driven up the cost of resin, which is derived from crude oil and a key plastic ingredient. Bangladesh’s Daily Star newspaper reported that the resin, which used to cost about $900 to $950 per ton, is being sold for about $1,500 to $1,600.

Higher cost of foreign loans

Bangladesh’s external debt has soared in recent years as the government borrowed heavily to fund construction projects and repay its debt, leaving the country with a small but growing debt burden and foreign exchange pressure, according to an IMF analysis.

In December, Bangladesh’s external debt rose to $113.5bn, compared to $112.2bn in the previous quarter, according to data from London-based market intelligence firm ISI.

In 2024, the World Bank and the IMF ranked Bangladesh as having a low risk of external debt because its debt represents about 22 percent of its gross domestic product. This could change if the fallout from the Iran war takes place.

What is Bangladesh’s history with the IMF?

Bangladesh is already in the middle of a $5.7bn IMF program that started in 2023 and was supposed to last for four years.

In a virtual meeting last week between the Ministry of Finance and Planning of Bangladesh Amir Khasru Mahmud Chowdhury and the Deputy Director of the IMF Nigel Clarke, both sides agreed to establish a new program, the Ministry of Finance said on Monday.

Last week, the World Bank said it had approved a $350m loan to help Bangladesh deal with rising oil prices and boost energy security after a major shortage caused by the Iran war.

Is the war exacerbating the debt crisis?

Before the Iran war, countries in Africa, Asia, Latin America, the Caribbean, the Pacific and Central Europe were already struggling with heavy external debt following the COVID-19 pandemic, climate-related disasters, rising food and energy prices, and rising global interest rates.

Sri Lanka, for example, suffered from recession in 2022 after years of unsustainable debt and poor financial management. In 2023, it secured $3bn in IMF aid under a four-year program and reached a debt restructuring agreement with a group of creditors that includes China, India and Japan. By 2024, Sri Lanka’s external debt will reach about 59 percent of the country’s gross domestic product, according to World Bank data.

In April, the IMF warned that war with Iran risks triggering a global debt crisis. Its report said global public debt rose to nearly 94 percent of global gross domestic product last year and warned it was on track to reach 100 percent by 2029, a level not seen since the end of World War II.