RESEARCH MONOGRAPH 17 Deficit Financing, Crowding Out and Economic Growth: Bangladesh Perspective Dr. Prashanta Kumar Banerjee Professor & Director (RD&C), BIBM Abed Ali Consulting Editor, BIBM Md. Mohiuddin Siddique Associate Professor & Director (DSBM), BIBM Md. Ruhul Amin Assistant Professor, BIBM BANGLADESH INSTITUTE OF BANK MANAGEMENT Mirpur, Dhaka
Deficit Financing, Crowding Out and Economic Growth: Bangladesh Perspective Dr. Prashanta Kumar Banerjee Abed Ali Md. Mohiuddin Siddique Md. Ruhul Amin Editor Support Team Graphics & Design Dr. Toufic Ahmad Choudhury, Director General, BIBM Dr. Prashanta Kumar Banerjee, Professor & Director (RD&C), BIBM Md. Golam Kabir, Publications-cum-Public Relations Officer Papon Tabassum, Research Officer Md. Morshadur Rahman, Proof Reader Md. Awalad Hossain Md. Nasir Uddin Published: January, 2016 Published by Bangladesh Institute of Bank Management (BIBM) Plot No. 4, Main Road No. 1 (South), Section No. 2 Mirpur, Dhaka-1216, Bangladesh PABX : 9003031-5, 9003051-2 Fax : 88-02-9006756 E-mail : bibmresearch@bibm.org.bd Web : www.bibm.org.bd Printed by Nahida Art Press, 64/F, R.K. Mission Road, Dhaka, Bangladesh. Copyright BIBM 2016, All Rights Reserved No part of this report may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without the permission of the publisher ii Research Monograph 17
A Foreword s part of the ongoing dissemination of BIBM research outputs, the present research monograph contains the findings of the research project: Deficit Financing, Crowding Out and Economic Growth: Bangladesh Perspective. Crowding out effect of deficit financing on economic growth in the context of Bangladesh has been examined in this study. This publication empirically shows the crowding-out effect of Government borrowing from banking system on the economic growth in Bangladesh. Government borrowing from the commercial banks does not appear to exert any negative impact on private investment by creating fund crisis in long run; rather, short term crowding in effect has been noticed in the study. The study has also postulated that Government can borrow from the banking sector up to 3% of GDP without any hesitation and without hurtening the private investment. It gives me immense pleasure, on behalf of BIBM, to offer this important resource of academic inputs to the participants of financial institutions, policy makers, academicians and common readers as well. I hope this monograph will be a useful reference point for the stakeholders related to fiscal and monetary policy implementation authorities. We do encourage feedback from our esteemed readers on this issue which certainly would help us improve upon our research activities in the years to ahead. Dr. Toufic Ahmad Choudhury Director General It gives me great pleasure, on behalf of BIBM, to offer this important resource to
Acknowledgement T his research project Deficit Financing, Crowding Out and Economic Growth: Bangladesh Perspective has been completed with immense support from numerous individuals and organizations. We would like to express our gratitude to the honorable Director General, BIBM, Dr. Toufic Ahmad Choudhury for his precious guidance, observations and ideas to progress our work all the way through. We are very much thankdful to Dr. Shah Md. Ahsan Habib, Professor and Director (Training), BIBM; Mr. S. A. Chowdhury, A. K. Gangopadhaya Chair Professor, BIBM; and Mr. Helal Ahmed Cowdhury, Supernumerary Professor, BIBM for their opinion and observation about the report. Bangladesh Bureaue of Statistics, Bangladesh Bank, different banks and many organizations extended their cooperation for completing the report. We do very much recognize their input in fulfilling our objectives. We are also thankful to all of our faculty colleagues for their opinions and positive suggestions to carry out our research. Our honest appreciation goes to Ms. Papon Tabassum, Research Officer, BIBM and Mr. Md. Awalad, Computer Operator, BIBM for their support. Finally, we would like to extend our appreciation to those who, openly and sincerely, extended their support in our research effort. Dr. Prashanta Kumar Banerjee Abed Ali Md. Mohiuddin Siddique Md. Ruhul Amin
RESEARCH MONOGRAPH 17 D eficit Financing, Crowding Out and Economic Growth: Bangladesh Perspective
Contents Abbreviations viii Executive Summary ix 1. Introduction 1 2. Literature Review 3 3. Theoretical Framework of Budget Deficit and Crowding Out Hypotheses 7 4. Methodology, Data Sources and Framework for Empirical Analysis 10 5. Pattern and Trend of Deficit Finance, Crowding Out and Economic Growth 12 6. Empirical Results and Discussions 20 7. Possible Highest Level of Public Borrowing from Commercial Banks 25 8. Concluding Remarks 27 References 28 Appendix 33 Research Monograph 17 vii