South Asia at Risk as Iran Conflict Sparks Economic and Political Turmoil
The ongoing conflict in Iran has sent shockwaves across energy markets in Asia, with South Asia being particularly vulnerable. The region’s heavy dependence on Middle Eastern fuel and Gulf remittances puts several economies at risk of slipping into deeper crises, according to analysts.
For countries like Sri Lanka, Bangladesh, and Pakistan, the situation is especially dire. These nations are already under IMF bailout programs, which limit their fiscal flexibility. As a result, they struggle to shield their citizens from rising energy and food costs, which have reached multi-year highs. This economic strain could lead to broader instability, both economically and politically.
Nepal, too, faces similar challenges. Last year, massive student-led protests led to the downfall of a government, and recent unrest has shown how sensitive the region is to economic grievances. Bangladesh and Sri Lanka have also experienced youth-led uprisings in 2024 and 2022, respectively, highlighting the growing frustration among younger populations.
Pearl Pandya, a South Asia senior analyst at the Armed Conflict Location and Event Data project, warns that the longer the war continues, the more severe its impact will be. “The region relies heavily on the Gulf and Iran for oil, gas, and fertilizers, while remittances from large diaspora populations—particularly in countries like Nepal and Bangladesh—remain a critical economic lifeline,” she said.
Energy Prices Soar Amid Rising Tensions
Since the Iran conflict began on February 28, energy prices have surged dramatically. Benchmark Brent crude has jumped over 50% to more than $100 per barrel, while natural gas prices have reached their highest levels in years. This is due in part to Tehran throttling Gulf fuel flows, creating supply shortages.
When U.S. President Donald Trump threatened “extremely hard” fresh strikes against Iran, Brent futures spiked even higher, briefly reaching $105. Even if the war ends quickly, the damage to infrastructure will persist, along with long-term economic consequences for millions of South Asian workers who depend on jobs in the Gulf.
“We might see unrest driven by economic grievances take over,” Pandya said. “Historically, there have been strong reasons for people to mobilize.”
Industries Suffer as Protests Intensify
In Bangladesh, the garment industry—a key driver of the economy—is suffering from widespread mill shutdowns, falling production, and mounting financial losses. This is dangerous for a country where student-led protests recently led to a government change, as public dissatisfaction with the economy grows.
Nepal faces similar challenges, with Gulf remittances beginning to dry up. Pakistan, meanwhile, must manage not only economic pressures but also the risk of sectarian unrest, given its large Shia population.
Fiscal Constraints and Political Challenges
Like other economies under IMF bailout programs, Pakistan is constrained in its ability to respond to rising costs. Government spending is limited, making it difficult to provide subsidies or tax relief to cushion the blow.
Biswajit Dhar, an economics professor at New Delhi’s Council for Social Development, explained, “Sri Lanka, Bangladesh, and Pakistan are being forced to discipline their fiscal policies. The government’s fiscal space to control inflationary pressures will be less. How will they then douse inflationary fires? It will have a domino effect.”
Recent sectarian tensions in Pakistan were highlighted when the military chief, General Asim Munir, made comments about Shia clerics, following protests after the assassination of Supreme Leader Ayatollah Ali Khamenei. Similar protests occurred in Indian-administered Kashmir, prompting security measures.
Agricultural Concerns and Food Inflation
A prolonged war in Iran would be particularly damaging for agriculture, one of the region’s largest employers. Fertilizer prices are already rising, and with the Middle East accounting for around 30% of global fertilizer trade, supply disruptions are beginning to affect availability. China and Russia have also tightened their exports, according to ANZ Bank.
Higher fertilizer and energy prices could lead to reduced planting areas and lower application rates, resulting in fewer harvests. If these costs persist during the planting season for summer crops like rice, grain prices will rise, leading to a food inflation spiral on top of an energy crisis.
India Steps In to Help Neighbors
With the Iran war approaching its sixth week, India has begun providing emergency fuel shipments to Sri Lanka and Bangladesh, with Nepal expected next. This comes as Delhi works to secure its own supplies for a population of over 1.4 billion, while consumers express concerns about cooking gas availability.
Priyajit Debsarkar, a London-based author who writes about South Asia, believes India’s neighbors may return for more help if the energy crisis persists. He also warned of the knock-on effects of job losses in Gulf hospitality and real estate sectors, which could further exacerbate the situation.
