Oil shocks, remittances, and growth: the data behind South Asia’s energy vulnerability

Consider a family whose income has suddenly fallen short of covering basic needs. Fuel costs have risen, reducing what the household budget can afford, and remittances from a relative working abroad have been interrupted. The family made no poor financial decisions, but a conflict thousands of miles away drove up oil prices and disrupted the economy.. For millions of families across South Asia, this is the reality they face as renewed conflict in the Middle East sends shockwaves through global energy markets and into one of the world’s most dynamic, yet vulnerable, regions.

South Asia has been an economic bright spot in recent years, growing at an estimated 7 percent in 2025. That momentum is now under threat as growth is expected to slow to 6.3 percent in 2026. This seemingly small dip masks a larger story about energy dependence, rising costs, and the fragile livelihoods that hold millions of people out of poverty.
 

A spike that could linger

Conflict in the Middle East has rattled energy markets before, but the current situation carries particular uncertainty. How high and how long oil prices stay elevated depends on three key variables: the intensity and duration of the conflict, the extent of damage to the region’s energy production capacity, and whether the Strait of Hormuz — a critical chokepoint for global oil shipments — remains disrupted. Even in optimistic scenarios, prices are expected to remain elevated in the short term. 

Prices go up, real incomes come down

For most South Asian households, rising energy prices do not arrive as an abstract economic indicator. They arrive as higher costs at the fuel pump, the grocery store, and the electricity meter. Oil price shocks feed directly into headline inflation through energy costs and indirectly through fertilizer, transport, and production costs. In South Asia, the direct share of energy in household consumer baskets exceeds 5 percent, and is particularly high in India.

For businesses, the picture is similarly difficult. Higher energy costs raise production expenses across virtually every sector, compressing margins, reducing investment, and tightening financial conditions. The squeeze comes from both sides: households spend more on basics, and businesses pull back on activities that generate jobs and incomes.

Double whammy: current accounts and fiscal balances

South Asia’s vulnerability goes beyond the direct cost of energy. The region is heavily dependent on imported oil and gas, so higher global prices mean larger import bills. This means that current account deficits will widen while fiscal deficits will be under pressure from attempts to protect consumers from price spikes, particularly for countries that subsidize fuel.

Maldives is an example of the danger of this double whammy. The country has wide deficits, elevated external debt, expensive energy subsidies, and limited reserves to buffer against high energy prices. But it is not alone. Across the region, governments face the difficult choice between protecting household incomes through subsidies and protecting fiscal stability by letting market prices pass through.

Cutting the remittance lifeline

Perhaps the most underappreciated dimension of South Asia’s exposure is its dependence on remittances from the Gulf Cooperation Council (GCC) countries (Saudi Arabia, the UAE, Kuwait, Qatar, Bahrain, and Oman). These six countries together host an estimated 9 million South Asian workers and account for around 13 percent of South Asia’s exports.

For many families, the money these workers send home is not a supplement to household incomes: it is the income. Remittances make up nearly 10 percent of GDP in Nepal, around 3 percent in Bangladesh and Sri Lanka, and approximately 2 percent in India. Turmoil in the Gulf could disrupt these flows through job losses or reduced migrant activity, with consequences that go far beyond GDP figures.

Critically, around 90 percent of South Asian migrant workers in the GCC are low-skilled and lower-paid than migrants from other regions. This means they have the least financial resilience to absorb a loss of income, and their families back home have the thinnest buffers of savings to fall back on. The poverty impact of workers returning home without savings could easily outpace the economic damage.

What comes next

The immediate economic arithmetic is sobering. South Asia’s growth, which was expected to hold steady at around 7 percent through 2026 and 2027, now looks set to slow to 6.3 percent in 2026 before recovering in 2027, assuming energy prices do not spike further. That recovery is possible, but it is not guaranteed, and it rests on conditions that are largely outside the region’s control. 

The broader lesson here is structural: South Asia’s dynamism is real, but so is its exposure to external shocks driven by global energy markets and geopolitical events. The region’s long-term resilience will depend on accelerating the transition to diversified energy sources, strengthening fiscal buffers, and developing stronger safety nets for migrant workers and families who depend on them.

The time to act on these structural vulnerabilities is not when the next crisis hits: it is now, while there is still room to maneuver. Policymakers across South Asia should use this moment to identify where their energy and fiscal exposure is greatest, and begin the harder, longer work of reducing it. The goal is not just to weather this particular storm, but to ensure that the next one — and there will be a next one — crashes upon a more resilient region.

Source : World Bank