Macroeconomic Effects of Energy Price Fluctuations: Evidence from Bangladesh
Citation: Raihan, S., Ahmed, M. T., Sakil, A. Z., & Surid, T. F. (2025). Macroeconomic Effects of Energy Price Fluctuations: Evidence from Bangladesh. SANEM Publications, Dhaka, Bangladesh.
Bangladesh has emerged as one of the world’s fastest-growing economies but remains heavily dependent on imported fossil fuels and international energy markets. The volatility of global fossil fuel prices in recent years has posed serious challenges to the country’s macroeconomic stability. Against this backdrop, this study investigates the effects of fluctuations in crude oil, coal, and LNG prices on Bangladesh’s macroeconomic variables using a Structural Vector Autoregressive (SVAR) model based on quarterly time series data from 1990 to 2022. The SVAR framework employs the Johansen cointegration test, impulse response functions, variance decomposition, and historical decomposition to explore the dynamic relationship between energy price shocks and key macroeconomic indicators.
The findings reveal that energy price fluctuations have no contemporaneous significant effect on GDP. However, shocks to coal and LNG prices significantly raise the Consumer Price Index (CPI), indicating inflationary pressure. Crude oil and coal price shocks exert a significant positive influence on the exchange rate, leading to currency depreciation. Moreover, fluctuations in the prices of crude oil, LNG, and coal worsen the net export position. The impulse response analysis suggests that one standard deviation positive shock to energy prices significantly affects macroeconomic variables, influencing short- and medium-term policy responses. Variance and historical decomposition analyses confirm that energy price shocks account for notable variations in macroeconomic indicators over time.
Based on these findings, the study recommends reducing dependence on imported fossil fuels and accelerating the transition to renewable energy. The government should, therefore, diversify its energy mix by investing in solar, wind, hydro, and domestic gas resources, while adopting flexible monetary and dynamic pricing policies to mitigate external shocks. Strengthening energy security through strategic reserves, promoting energy efficiency, enforcing environmental standards, and introducing carbon pricing are also crucial. Attracting foreign investment, advancing research and development, and fostering human capital will further support Bangladesh’s sustainable energy transition.