A Distant War: The Economic Cost of Middle East Conflict for South Asia

The US and Iran have launched renewed strikes on each other in July 2026, after the ceasefire that barely lasted six weeks. The interim understanding between Washington and Tehran is fraying again over mistrust and diplomatic failures. Each time this conflict flares, the shockwaves travel far beyond the Gulf, and very few regions illustrate this better than South Asia. Each time the Gulf shakes, the vulnerabilities are exposed not only in terms of energy security and foreign remittance earnings, but also diplomatically.

What Defines the South Asian Economy

South Asia’s economy relies heavily on agriculture and labour-intensive, export-oriented manufacturing sectors. This economic base is supported by the region’s large population of about two billion, which provides a vast labour pool and a growing consumer market. Together they sustain industrial growth and purchasing power for local and imported goods alike. For example, Bangladesh’s garment industry, Pakistan’s textiles, India’s diversified industrial and services sectors including rapidly growing IT exports, and Nepali and Sri Lankan tourism all define this structure. However, the region’s major structural weakness lies in its energy dependency, as most countries produce insufficient oil and gas domestically. For instance, India imports about 90% of its crude oil, and Bangladesh imports nearly 70% of its total energy needs, making the region vulnerable to external energy shocks.

The Volatility of the Middle Eastern Security Situation

The region supplying much of South Asia’s energy and migrant workforce is chronically unstable. Political and sectarian rivalries between regional powers coincide with deep religious and demographic divides. Prolonged conflicts in Syria, Gaza, Lebanon, and Yemen have created large displaced populations and ongoing instability. Meanwhile, state militaries often fight alongside proxy forces and militias, such as Yemen’s Houthis and Iran-aligned groups. This instability has escalated beyond land conflicts, frequently impacting critical shipping lanes. The involvement of global powers like the United States, Russia, and China further complicates the situation, increasing unpredictability. This unstable region controls vital infrastructure, including the Strait of Hormuz and the Red Sea–Suez corridor connecting Asian exporters to Western markets, highlighting its strategic importance to South Asia’s energy security.

How Shock Travels in South Asia’s Way

South Asia experiences a Middle Eastern crisis through four channels — rising energy costs, changes in remittance flows, disruptions to trade routes, and diplomatic pressure from external powers — with each factor amplifying the others.

The Energy Bill: When Import Dependence Becomes Liability

Energy import dependence becomes a significant liability for the South Asian economies during Gulf region tensions. For instance, during April 2026, Pakistan’s weekly oil import bill surged from approximately $300 million to nearly $800 million within weeks, according to Arab News. Similarly, Bangladesh faces comparable risks due to its reliance on energy imports passing through the Strait of Hormuz, as The Business Standard has detailed. Rising tanker insurance and freight costs directly increase expenses for these import-dependent economies. As governments grapple with growing deficits, they often reduce fuel and fertilizer subsidies, disproportionately affecting low-income and agricultural households. This may trigger inflation and discourage long-term investment.

The Remittance Lifeline: A Cushion That Can Snap

Migrant labour and remittances are major pillars of South Asian economies. Remittances account for about 10% of GDP in Nepal and around 3% in Bangladesh and Sri Lanka, according to World Bank data, and Bangladeshi workers abroad sent home a record $32.8 billion in 2025 alone. However, sudden Gulf airspace restrictions during recent conflicts forced Nepal’s Himalaya Airlines to suspend all Gulf routes, disrupting labour mobility and migrant confidence, according to the Asian Institute of Diplomacy and International Affairs. Remittances support millions of families by keeping them above the poverty line, though they often lack a substantial financial safety net. Thus, even short-term disruptions in remittance flows have immediate effects on rural household budgets, beyond just impacting national foreign-exchange reserves.

Broken Routes: The Squeeze on Trade and Shipping

Bangladesh’s garment export industry is heavily impacted by instability in the Red Sea–Suez shipping corridor. Approximately 70% of Bangladesh’s ready-made garment exports pass through this route. Due to repeated attacks, major shipping carriers have rerouted around the Cape of Good Hope, increasing transit times by one to two weeks. Industry groups reported freight rates rising by 40 to 50% and war-risk insurance premiums more than quadrupling, according to the Daily Star and Fibre2Fashion. As a result, some buyers have started moving orders to Vietnam and Indonesia to reduce lead times. India also faces a comparable squeeze in its seafood exports. Exporters, already hit by US tariffs in 2025, are projected to see their share of the US shrimp market fall from 24% in 2025 to 21% in 2026 as Red Sea disruptions raise costs, allowing Ecuador to gain ground, according to Kotak Securities. These increased costs and delays severely erode industries with already-thin profit margins. If this shift becomes permanent, it could cause lasting damage to the export sector of the South Asian countries beyond the current conflict.

Caught Between Powers: Geopolitical Uncertainty and Economic Costs

South Asian governments face a complex dilemma in responding to the Middle Eastern conflict, as neither silence nor alignment fully protects their economies. Bangladesh’s foreign ministry condemned Iran’s strikes but avoided naming the US or Israel, to protect its remittance reliance on the Gulf and its Western-oriented garment trade. Sri Lanka, despite neutrality, suffered economic setbacks with the IMF lowering its growth forecast due to increased oil prices and reduced tourism linked to the war. Dhaka’s diplomatic statement reflects an attempt to balance political messaging without jeopardizing vital economic ties, despite domestic criticism. Both illustrate how neutrality carries political costs domestically and fails to shield the region from economic impacts abroad.

From Improvisation to Institution: Ways Forward

South Asian governments need proactive measures to mitigate the economic impact of Middle Eastern conflicts instead of reacting only after crises occur. They should bring into practice a crisis management policy that will deal with early warnings and reactions to a crisis that reaches a certain scale. It may include repatriation processes, ensuring the safety of migrant workers, and diverting funds without upsetting the budget or inflating costs. The Philippines offers a working model. Its Overseas Workers Welfare Administration maintains a standing Emergency Repatriation Fund and a tiered alert system that activates automatically once a crisis abroad reaches certain severity. The fund was not fully sufficient, but the mechanism itself did not have to be invented mid-crisis, unlike the ad hoc repatriation efforts South Asian governments organized this year.

Another effort in terms of a shared regional fund may provide an immediate budgetary cushion to the smaller economies at the onset of an emergency. ASEAN+3 countries pool foreign-exchange reserves into the Chiang Mai Initiative Multilateralization, which lets a member state borrow foreign currency during a balance-of-payments crunch instead of scrambling for emergency loans on worse terms. The South Asian countries may adapt this model to develop similar funds around a SAARC structure. None of this removes the underlying exposure to Middle Eastern instability. It simply means the region would meet the next shock with tools already in place, instead of building them from zero while the crisis is already unfolding.

Living With a Recurring Risk

The Middle East conflict’s economic impact hits South Asia quickly and repeatedly, revealing a pattern of reactive responses. While South Asia’s survival is likely, the real challenge is using the time between crises to build preparedness through contingency funds, diversified partnerships, and standing tools. The war may seem distant, but its effects are not; South Asia’s readiness for the next crisis remains within its control.