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Deficit Financing with the National Saving Certificate and Its Macroeconomic Consequences on Bangladesh's Economy

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  • Mohammad Mahabub Alam

Abstract

The National Saving Certificate (NSC), a nonmarketable saving instrument to promote savings and provide safety nets to some small savers, has been used extensively in financing the budget deficit in Bangladesh. This paper analyzes the macroeconomic impacts of NSC financing on the lending rate, gross domestic savings, government consumption, government investment, private investment, and GDP with a seven-variable SVAR framework (with short-run restrictions) using annual data from 1983 to 2021 and quarterly data from 2008Q3 to 2022Q2. The study finds that a rise in the NSC interest rate does not bring enough informal savings to the formal economy as the targeted small savers may not be the real beneficiaries of this scheme. Therefore, deficit financing with NSCs does neither promote savings nor satisfy the safety net objective as intended. Further, a higher NSC interest rate increases the lending rate that depresses private investment and GDP in the long run although it boosts government investment in the short run.

Suggested Citation

  • Mohammad Mahabub Alam, 2023. "Deficit Financing with the National Saving Certificate and Its Macroeconomic Consequences on Bangladesh's Economy," CAMA Working Papers 2023-45, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-45
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2023-09/45_2023_alam.pdf
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    More about this item

    Keywords

    NSC financing; budget deficit; fiscal policy; savings; investment; SVAR; Bangladesh;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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