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Fiscal Deficit and Economic Growth in Bangladesh

Author

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  • Ebney Ayaj Rana
  • Abu N. M. Wahid

Abstract

The economy of Bangladesh is currently going through a period of continuous budget deficit. The present data suggest that the government budget deficit, on average, is nearly 5% of the country’s GDP. This has been true since the early 2000s. To finance this deficit, governments have been borrowing largely from domestic and foreign sources resulting in inflationary pressure on one hand, and crowding out of private investments on the other. During the same period, although the economy has grown steadily at a rate of more than 6%, this growth is less than the potential. This article presents an econometric study of the impact of government budget deficits on the economic growth of Bangladesh. We conduct a time-series analysis using ordinary least squares estimation, vector error correction model, and granger causality test. The findings suggest that the government budget deficit has statistically significant negative impact on economic growth in Bangladesh. Policy implications of our findings include reestablishing the rule of law, political stability in the country, restructuring tax structure, closing tax loopholes, and harmonizing fiscal policy with monetary policy to attract additional domestic and foreign investment.

Suggested Citation

  • Ebney Ayaj Rana & Abu N. M. Wahid, 2017. "Fiscal Deficit and Economic Growth in Bangladesh," The American Economist, Sage Publications, vol. 62(1), pages 31-42, March.
  • Handle: RePEc:sae:amerec:v:62:y:2017:i:1:p:31-42
    DOI: 10.1177/0569434516672778
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    References listed on IDEAS

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    Cited by:

    1. Binata Rani Sen & Shamim Alam & Md. Maznur Rahman & Mohammad Iqbal Hossain, 2019. "Investigating Impact of Expansionary Fiscal Policy on Output in Bangladesh Economy: An Econometric Study," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 9(8), pages 936-945, August.

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    More about this item

    Keywords

    budget deficit; economic growth; fiscal management; vector error correction model; Bangladesh;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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