Deficit financing with the national saving certificate and its macroeconomic consequences on Bangladesh's economy

The National Saving Certificate (NSC), a nonmarketable savings instrument originally designed to promote household savings and provide a safety net for small savers, has been overused by the government to finance the budget deficit in Bangladesh in recent years. This paper examines the macroeconomic impacts of NSC-based financing of the budget deficit and evaluates whether the scheme effectively promotes domestic savings and fulfills its stated social protection goals. Using a seven-variable Structural Vector Autoregression (SVAR) model with short-run restrictions, the paper draws on annual data from 1983 to 2021 and quarterly data from 2008Q3 to 2022Q2. The paper finds no evidence that a higher NSC interest rate increases gross domestic savings, suggesting that the intended small savers may not be the primary beneficiaries. The macro responses are consistent with disproportionate uptake by higher-income households, which is unlikely to serve the social safety net's intended objectives. Furthermore, higher NSC interest rates raise market lending rates, thereby crowding out private investment and depressing long-run GDP growth, despite a short-term boost in government investment. These outcomes underscore the need to reassess the role of NSCs in Bangladesh's fiscal policy and public finance management.