It was the year Bangladesh's fast-moving development train was met with a reality check. Suddenly 'austerity' was the new buzzword on everyone's lips. Usually, this signifies cuts in government spending - such as the austerity programme implemented by successive chancellors in the UK since 2010, under the Conservatives. In our case though, a large part of it means cutting down on profligacy. That is why in our case, most economists would rather have the government's austerity drive, which started becoming visible in the second half of the year, continue into the New Year.

Nothing drove this home quite like the situation that arose in the energy sector, thanks in part to the war in Ukraine, but to leave it at that would be to forget the shortsightedness of our policymakers through successive governments. It's not that we Bangladeshis have been used to living in luxury. What was shocking though was that this whole austerity shtick we are now embarked upon came to us less than a week after parliament passed a budget for the 2022-23 fiscal that makes no mention of it, or anything like it.

The projections in the budget wouldn't have told you what was in store just three days after it was passed. A scorching midsummer week was met with large shortfalls in electricity generation, leading to some old-fashioned rationing by the authorities to get through the day. By the end of the week, area-based 1-hr per day loadshedding was back. In the space of a fortnight, it had to be increased to 2-hrs per day. Many locations had to endure worse.

The problem was a shortage of fuel. Early on in the crisis, it was announced that Bangladesh will not buy liquefied natural gas (LNG) on the spot market in the coming months due to a steep rise in prices - pushed up by European demand to replace Russian gas supplies - something our policymakers hadn't accounted for, the volatility of international energy markets, when opting for LNG as the long term replacement for our onshore gas fields once they run out.

Petrobangla handles LNG imports in Bangladesh, which include daily imports of about 300-400 million cubic feet under two long-term deals with Oman and Qatar. Since February, it had also been consistently tapping the spot market, buying two or three cargoes in a month. It last purchased a spot LNG cargo of 138,000 cubic metres for June 22-23 delivery at $24.25 per million British thermal unit (MMBtu) from trading house Gunvor. That's when the price started rising steeply.

It all dealt a crude blow to the government's development narrative. At first, we were told that it may last till September (PM's advisor Toufiq e Elahi on July 7). Ultimately some of the worst days were experienced in October, and it took winter to truly settle in before we could truly say it was gone - but only for the winter. There is no telling what we come back to around March, when the demand starts tweaking up again,

Noting that the prices of diesel, fuel oil, LNG had all increased significantly in the international market, the prime minister called on her people to embrace austerity and increase savings - a theme that, to be fair, she had indeed struck up a few months into the war in Ukraine, once it became clear that there was no quick conclusion in store.

The perfect storm we are now faced with in the energy sector presents us with the peculiar predicament of having massive amounts of installed capacity for electricity generation, outstripping even demand. In other words, more than we could use. Even as we keep on making capacity payments to the independent power producers (IPPs). Meanwhile exploration activity - that we urged at the start of the year should be the number one priority for the energy sector in 2022 - still remains far too limited.

Forex reserve peak at $48 billion, and then

The main reason behind the government's caution spending big on fuel imports was driven by the knowledge that the country's foreign exchange reserves began falling after reaching a historic peak of $48 billion in August 2021, as exports and remittances, despite not doing badly, were totally outpaced by skyrocketing import costs. Currently it stands at below $34 billion according to Bangladesh Bank's own calculation, but that includes $8 billion in 'encumbered reserves' that according to the IMF and most economists, shouldn't be counted as part of the reserve. So the actual amount is closer to $26 billion.

Speaking of the IMF, the government sought a $4.5 billion loan as balance of payment and budget support, along with mitigating the effects of climate change. Bangladesh joined Sri Lanka and Pakistan seeking support packages from the Washington-based multilateral lender to help their economies navigate the fallout of the Ukraine war that has sparked rampant inflation at home. Seeing what happened in Sri Lanka with the economy imploding under the Rajapakses earlier in the year, and Pakistan's constant struggles, that may not sound like reassuring company. But most economists are of the view that the government has timed its application to the 'international lender of last resort' well to avert any unforeseen crisis. The scenes out of Colombo weighed heavily on the public amid their own struggles, but a cursory glance at most indicators would tell you Bangladesh is far from the situation Sri Lanka got into, thanks to inept governance and the crushing blow of COVID-19 on its tourism dependent economy.

The third feature of economic uncertainty in 2022 was the exchange rate of the local currency, that was laid low by US Federal Reserve policies that have resulted in what some people are calling 'the hideous strength of the dollar'. The inter-bank exchange rate of the US dollar against Taka crossed the Tk 100-mark in September. Bangladesh Bank flirted with letting the currency float throughout the year, but in the end it came up with a fix that no one believes in. In collaboration with the Association of Bankers Bangladesh and the association of foreign exchange dealers, BAFEDA, it devised a system that has resulted in three different rates for the dollar. Economists, Dr Ahsan Mansur of PRI particularly vocally, insist it is not sustainable. It goes hand in hand with the capped interest rate policy of the government, that also grates with economists.

The government is adamant that a problem like inflation, spurred on by record hikes in the price of fuel oils in August, cannot be controlled through interest rate management in Bangladesh. First the price of urea, the essential fertiliser, was hiked for the first time in 11 years. Couple of days later, came the hike in fuel prices by up to 51.7 percent, the highest in the country's history, creating a public outcry. Later they were reduced marginally following public demand as import costs declined. At present, diesel is sold at Tk 109 per litre, petrol Tk 125 and octane Tk 130.

Inflation, which was below 6.5 percent until April this year, crossed the 7 percent mark in May driven by increased commodity prices globally following Russia's invasion of Ukraine. The spiral continued and inflation touched a 10-year high of 9.5 percent in August - which the statistics agency, for some strange reason, held back for an extra month, only releasing it once the September figure showed a dip down to 9.1 percent.

Businesses love the upper limit cap of 9% on borrowing. They have also convinced the government to further loosen the policies on loan repayment. Even as the country's stock of default loans soared to record highs. Bangladesh posted outstanding export earnings of $52.08 billion in 2021-22 fiscal year, which was way higher from the target of $43.5 billion.

All vital sectors, including apparel, leather and leather goods, home textile and jute and jute goods, performed well this year. Even in November, which is part of the 2022-23 fiscal, the country registered its highest ever export earnings of $5.1 billion in a single month. RMG has been on fire during this period.

What the economists say

Economists are optimistic that Bangladesh's economy will regain the growth momentum while reducing inflation and stabilising the exchange rate in the New Year. Despite higher inflation and fluctuating currency exchange rate, record defaulted loans, they are optimistic about the overall growth of the domestic economy, which is predicted by the IMF and World Bank to be over 6 percent still in FY23.

Major challenges including capital flight ahead of the national election, persistent loan default culture, and lack of good governance in the banking sector will however remain.

Former adviser on finance and planning to a caretaker government Dr ABM Mirza Azizul Islam told our sister newsagency UNB that Bangladesh's economy remains in a good position compared to many other Asian countries - including Indonesia and Singapore, by his reading. The trade deficit is widening due to the sharp rise in import demand, which should be tackled by discouraging unnecessary imports and increasing domestic agriculture production. Huge import payments have eaten away at the foreign exchange reserve, he said.

Mirza Aziz said the pace of reducing the poverty rate (proportion of population under the poverty line) has slowed down. Inflation over 8 percent is pinching people's pockets, as it creates an imbalance (unfortunately a deficit) in the earnings and expenditure of marginal people. He also suggested cutting additional facilities for loan defaulters as it is not good for the economy and the loan default culture could be reduced if the defaulters face legal action.

Former governor of Bangladesh Bank Dr Atiur Rahman said the economy in the New Year will face both opportunities and challenges, depending mostly on developments in the global economy.

"If the war in Ukraine comes to an end the global supply chains will improve and the shipping and fuel costs will come down. This will have some positive impact in terms of reducing the level of imported inflation with a huge impact on our overall inflation as well," he said.

"However, we also need to do more on our domestic fronts to reduce this inflation," Dr Atiur added. Inflation is certainly the biggest problem for middle and low-income people.

On the other hand, if the Fed (US Federal Reserve, America's central bank) stops tightening its monetary policy, it would have some positive impact on the Taka-Dollar exchange rate. On the whole, the geopolitical tensions will continue to determine the pace of Bangladesh's economic growth and the level of inflation.

"Yet, we must continue to support agriculture, remittances, and export sectors to contribute positively from within towards better gains of our economic growth. The monetary policy should continue to move towards market-determined conditions to help stabilise inflation from the demand side," the former governor said.

On the whole, the challenges will remain, but the economy of Bangladesh may stabilise with a robust foundation if the global situation turns favourable and austerity measures remain in place. There has to be even greater coordination and cooperation between fiscal policy and monetary policy to respond to these challenges in the New Year.

Former IMF economist Dr Ahsan Mansur told UNB that the prices of commodities will be coming down in the New Year and the inflation rate would stabilise. But the exchange rate will remain volatile if the government is unable to control capital flight in disguise of import, he warned.

The banking sector will go through a troublesome situation in the New Year as Bangladesh Bank has shown it cannot regulate the financial sector rigorously, Dr Mansur also said. He suggests the central bank implement policy independently to bring back discipline in the sector.