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

Mohammad Mahabub Alam

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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.

Keywords: NSC financing; budget deficit; fiscal policy; savings; investment; SVAR; Bangladesh (search for similar items in EconPapers)
JEL-codes: C51 E21 E22 E62 H62 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2023-09
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2023-45

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