deficit financing theory and practice in bangladesh

7/22/2019 Deficit Financing Theory and Practice in Bangladesh

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Deficit Financing Theory and Practice in Bangladesh

Assignment

DEFICIT FINANCING: TEORY AND PRACTICE IN BANGLADESH

Submitted By

Zahirul Islam

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DEFICIT FINANCING: TEORY AND PRACTICE IN BANGLADESH

INTRODUCTION

In the past as today, the deficit budget policy is famous instrument of fiscal policy used toincrease the rate of economic growth of the country. That way of financing was establish afterthe two world wars, oil crises and current financial and economic crises. The objective in seekingdeficit financing is to finance the shortfall between government expenditures and tax receipts.Tax increases are not politically palatable. Governments often resort to deficit financing whenother components of GDP such as private consumption decline during recessionary periods.Such deficits, if undertaken for a short period with an action plan to create equivalent surplus innear future, could reverse decline in real GDP and stimulate growth in real GDP for the benefitof citizens of the nation. Structural deficits are indicative of inability to reduce entrenchedgovernment expenses.

The sustainable level of accumulated deficits can also be determined with reference to both thedeficit servicing requirements and deficit servicing sources. This analysis will entailidentification of cause and effect relationships that determine the factors influencing each ofthese two areas. As shown by other researchers, the explanatory variables leading to deficitsinclude domestic budgetary receipts; tax structure; budgetary endowments; budgetarydiscretionary expenses; trade deficit; growth in real GDP; private consumption; domestic capitalformation; and foreign direct investment flows. Deficit servicing requirements analysis takes intoaccount accumulated deficit; expected additions to deficit; deficit held by Government Accounts,by Federal Reserve System, by publicdomestic entities, by overseas public & governments,maturity term; and cost of debt.

CAUSES OF DEFICIT

From a theoretical point of view the causes of sovereign deficits are equally diverse. Primarycause of deficit is that some components of government spending have a built-in growthmultiplier that is much higher than the rate of growth of tax receipts. Government expenses canbe broken down into discretionary and non-discretionary. Over time, non-discretionarycomponent grows as a percentage of total budgetary expenses, thereby reducing governmentsability to reduce expenses without disenfranchising the electorate. Deficits incurred to meet


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national emergencies present a special case where the expenditure is incurred without anyconsiderations for fiscal sacrifices. Secondary causes of deficits include shifts in governmentspending, changes in the competitive environment, globalization, presence of shadow economies,fraud in government programs, role of multinationals, and income distribution that affects privateconsumption expenditures.

During periods of economic downturn, governments often tend to stimulate demand througheither direct expenditure on specific projects or through reduction in direct taxes. Stimulationthrough direct expense is intended to increase employment or save jobs, while stimulationthrough reduction in direct taxes is aimed at increasing disposable income and, therefore,consumption as well as investments. Reduction in taxes does not necessarily lead to increasedconsumption and its impact on increasing employment has a longer lag than that of directexpenses. Reduction in taxes on higher income groups and corporations has not always increasedinvestment since higher savings could be hoarded in bank accounts or in retained earnings bycorporations. It should be noted that once taxes are reduced, it is difficult to raise them forreducing the budget gap at a later date.

The role of competitive forces in allocation of resources and setting prices, especially in freemarket economies, has been diminishing. Competition has been replaced in reality by oligopolywhere a few firms dominate a business sector. Although the number of buyers is large, product isnot necessarily homogeneous; information is asymmetric; and the seller has considerable controlin setting prices and output level. Oligopolistic firms influence elections and issues to their ownbenefit by funding elections and lobbying on issues. This often leads to either unintended directgovernment expenses or increased tax expenditures contributing to deficits. Similarly, increasedglobalization tends to reduce the effect of domestic multipliers for income and employment dueto leakages beyond the borders of a country. Thus growth of a business in a country does notnecessarily mean increase in employment in the country as anticipated by historical income and

employment multipliers. Presence of shadow economy also accounts for some problems as thisunaccounted portion of GDP outside the reach of fiscal measures increases deficit by reducingpotential tax revenue.

Another factor that might influence deficits is fraud in government run programs that often leadsto unintended excess government expenditure. Government bureaucracies can also be included inthe list of factors that affect deficits. Bureaucracy often leads to redundant government agenciesthat essentially perform the same tasks resulting in an increase in government expenses withoutproviding any additional benefits or services.

WAYS OF FINANCE DEFICIT AND ITS IMPACT ON ECONOMY

There are three ways to finance the deficit taxes, borrowing and monetization (inflation tax).The most popular model of deficit finance is borrowing, which is usually done by issue ofgovernment bonds. When the government is over indebted tends through national bank to buygovernment bonds which increases the money flow and reduces the interest rate pressure.

However, it diminishes the real value of money and makes the future unpredictable for theeconomic actors. Its known that nowadays the current public debt growth is larger then the


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growth rate of the economy for most of the industrial countries. Its expected that the growingpublic debt will cause problems in perspective related to its service. The channels for public debteffect on the economy are the following:

1. Direct effect on the interest rates accompanied with the necessity to sell larger supply of

bonds. As the supply of bonds intended for sale increases, their prices tend to fall, and the marketinterest rates go up; except if credit offer is timelessly elastic and the private borrowing isreduced. The interest rate increase can be temporary limited from the capital inflows;

2. Interest rate component of the public expenditure will tend to rise, and consequently raisefuture fiscal deficits;

3. Correlated with the previous two effects, the effect on the investment and expenditure and thuson the perspective economic performance;

4. Exchange rate effect and therefore trade flows and capital movement;

Academic interest in deficit financing is not new. Researchers have studied this phenomenon formany years. It appears that data is available for loans to sovereign governments from privateforeign creditors dating back to the 1820s. A country's tolerance for debt is often the result ofmany factors including the size of the debt, history of previous defaults, balance of paymentsweaknesses, its inflation history and weak political institutions.

Research studies have focused on sovereign debt from various angles including causes ofdefaults, the effects of defaults, prescriptions to solve defaults, and early warning systems topredict pending defaults. Although this paper outlines an early warning system, the mainemphasis is on understanding the causes of unsustainable national debt that could lead to

sovereign defaults.

Political risks in the form of instability and/or more polarized experience have known to causehigher defaults. Other researchers have determined that sovereign liquidity crises are mainlydriven by economic fundamentals or by sudden shifts in private creditors default expectations.

Another area that has drawn some attention is the link between debt crisis and currencydestabilization, especially among countries that have severe debt problems at the same time. Thecurrency crisis models have looked at the effects of fixed exchange rates on sovereign debts.Because, fixed exchange rates might lead to an expansionary fiscal policy resulting in anincompatible monetary policy which in turn might give rise to a successful speculative attack

against the exchange rate peg (Krugman, 1979; Flood and Garber, 1996). The collapse of theMexican peso in December 1994; is a good example of such interventions gone wrong.

The economic crises faced by a few Latin American countries in the 1990s and the falling bondprices of these countries was influenced by global, regional and country specific factors. In astudy conducted by Diaz and Gemmill, the authors estimated that each countrys distance-to-default on a monthly basis for 19942001 could explain up to 80% of the variance of theestimated distance-to-default for each Latin American country (Diaz and Gemmill, 2006). A


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countrys banking system is another factor that might contribute to sovereign debt problems. Forexample, Kaminsky and Reinhart showed that debt crisis is often initiated by both a weakness inthe banking sector combined with currency crises (Kaminsky and Reinhart, 1999). Based onreview of the literature, it is apparent that the causes of sovereign default are varied and not onefactor alone can explain the reasons for defaults. This might be one of the reasons that

researchers have had difficulty in developing early warning systems to predict sovereigndefaults.

One way to avoid sovereign defaults is by developing a system that is able to warn the serialdefaulting countries of an impending crisis. Many systems have been proposed and they appearto focus on single variables or specific situations. For example, one possible approach is toidentify benchmarks that evaluate the level of optimal foreign debt and a maximal foreign debt(debt-max), when risk is explicitly considered. Using an application of the stochastic optimalcontrols models Stein and Paladino were able to explain how a country could anticipate defaultrisk. In their research, the authors tried to measure vulnerability to shocks, when there isuncertainty concerning the productivity of capital. Another warning system proposed by Stein

uses the dynamic programming/stochastic optimal control (DP/SOC). In his research, Stein usedvariables such as the optimal foreign debt, consumption, capital and the growth rate of GDP. Bycomparing the actual debt to the optimal debt he was able to derive a measure of thesustainability of the debt and vulnerability to default problems (Stein, 2005).

Research has also shown that focusing on foreign currency borrowings could be a useful earlywarning system, especially for developing countries. Most developing countries borrow in worldcapital markets. Typically this borrowing is denominated in one of the major currencies thatrequire periodic servicing. The foreign exchange required to meet the service obligation is oftendependent on the export of one or a small number of commodities. This demand usuallycompetes with a number of other claims on export earnings, including both consumption and

import of capital goods. Therefore, if a developing country uses commodity-linked borrowingand the interest and/or principal payments on external debt are linked to the price of a country'sprincipal exports, the risk of default is multiplied (Chamberlin, 2006). Although there are manyearly warning systems proposed, the fact that countries continue to default on sovereign debtassumes that these systems are not employed to forestall defaults.

The current debt crisis has produced some conflicting arguments in identifying and dealing withthis global issue. Some economists feel that when aggregate demand is far shorter than requiredfor reaching full GDP potential, deficits are justified (Krugman, 2010). As economy resumesgrowth, demand for goods and services as well as tax receipts will increase to generate offsettingbudgetary surpluses. If a country does incur deficits, one way to address the issue is byintroducing radical fiscal reform to reduce budgetary expenses and deficits while increasingtaxes. This would result in increasing the confidence of both consumers and business leaders - anecessary precondition to improve the overall economy. The assumption is businesses feardeflation and uncertainty more than cyclical deficits (Ferguson, 2009). In contrast, someeconomists feel that spending cuts, specifically by reducing social transfers and governmentpayroll, is a preferred solution (Hassett, et al., 2009). These economists observe that coldshower treatments, i.e., immediate reduction, in expenditure produces better results as comparedto cumulative cuts in government spending over the consolidation years.


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In a study of the OECD countries on fiscal adjustments, Alesina and Perotti concluded thatsuccessful adjustments are mainly expenditure based, with a focus on primary currentexpenditure. On the other hand, Larch and Turrini in their research of the European Unioncountries found that fiscal consolidation did not reduce debt due to resurgence of expensesInterestingly, based on a study of forty countries, Reinhart and Rogoff suggest that as long as the

gross debt to GDP ratio is between 30% and 90%, the negative impact of higher public debt islikely to be modest. Ratio above 90% reduces GDP growth. (Reinhart and Rogoff, 2010).

|National Government Budgets for 2010 (in billions of US$) |

|Nation |GDP |Revenue |Expenditure |Budget Balance[ |Exp/GDP |Balance/Revenue |Balance/GDP |

|US (federal) |14,526 |2,162 |3,456 |-1,293 |23.79% |-59.8% |-8.90% |

|US (state) |14,526 |900 |850 |+32 |7.6% |+5.6% |+0.4% |

|Japan |4,600 |1,400 |1,748 |+195 |38.00% |-24.9% |+3.56% |

|Germany |2,700 |1,200 |1,300 |+199 | 48.15% |-8.3% |+6.08% |

|United Kingdom |2,100 |835 |897 |-75 |42.71% |-7.4% |-3.31% |

|France |2,000 |1,005 |1,080 |-44 |54.00% |-7.5% |-1.74% |

|Italy |1,600 |768 |820 |-72 |51.25% |-6.8% |-3.52% |

|China |1,600 |318 |349 |+305 | 21.81% |-9.7% |+5.14% |

|Spain |1,000 |384 |386 |-64 |38.60% |-0.5% |-4.60% |

|Canada |900 |150 |144 |-49 |16.00% |+4.0% |-3.13% |

|South Korea |600 |150 |155 |+29 |25.83% |-3.3% |+2 |

On the practical side, evolution of Euro as a common currency in 17 EU countries has broughtforth a new set of issues. The financial policy of the Eurozone countries is common but the fiscalpolicy of each country is different. Thus these countries cannot employ full spectrum of remedies

(i.e., devaluation of currency) needed to resolve problems consequential to unsustainablenational debt. The bailout of countries on the brink of insolvency by EU and IMF comes withimposition of a few common fiscal policy restrictions that may not take into account countryspecific economic situation.

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This risk tends to rise when the total need for government borrowing caught substantial part ofthe total financial transactions. In that case the psychological element will have immense impacton the financial market and further on the financial stability.

Figure : General Government Fiscal Balances and Public Debt

(Percent of GDP unless noted otherwise)

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DEBATE OVER DEFICIT FINANCING

Government deficit spending is a central point of controversy in economics, with prominenteconomists holding differing views. The mainstream economics position is that deficit spendingis desirable and necessary as part of countercyclical fiscal policy, but that there should not be astructural deficit: in an economic slump, government should run deficits, to compensate for the

shortfall in aggregate demand, but should run corresponding surpluses in boom times so thatthere is no net deficit over an economic cycle a cyclical deficit only. This is derived fromKeynesian economics, and has been the mainstream economics view (in the Anglo-Saxon worldespecially) since Keynesian economics was developed and largely accepted in the GreatDepression in the 1930s.

The mainstream position is attacked from both sides advocates of sound finance argue thatdeficit spending is always bad policy, while some Post-Keynesian economists, particularlyChartalists, argue that deficit spending is necessary, and not only for fiscal stimulus.

Advocates of sound finance (in the US known as fiscal conservatism) reject Keynesianism and,

in the strongest form, argue that government should always run a balanced budget (and a surplusto pay down any outstanding debt), and that deficit spending is always bad policy.

Sound finance has academic support, predominantly associated with the neoclassical-inclinedChicago school of economics, and has significant political and institutional support, with all butone state of the United States (Vermont is the exception) having a balanced budget amendmentto its state constitution, and the Stability and Growth Pact of the European Monetary Unionpunishing government deficits of 3% of GDP or greater. Proponents of sound finance date backto Adam Smith, founder of modern economics. Sound finance was the dominant position untilthe Great Depression, associated with the gold standard and expressed in the Treasury View thatgovernment fiscal policy was ineffective.

The usual argument against deficit spending, dating to Adam Smith, is that households shouldnot run deficits one should have money before one spends it, from prudence and that what iscorrect for a household is correct for a nation and its government. A further argument is thatdebts must be repaid, and thus it is burdening future generations to run deficits today, for little orno gain.


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A similar argument is that deficit spending today will require increased taxation in the future,thus burdening future generations see generational accounting for discussion. Others argue thatbecause debt is both owed by and owed to private individuals, there is no net debt burden ofgovernment debt, just wealth transfer (redistribution) from those who owe debt (government,backed by tax payers) to those who hold debt (holders of government bonds).[3]

A related line of argument, associated with the Austrian school of economics, is that governmentdeficits are inflationary. Anything other than mild or moderate inflation is generally accepted ineconomics to be a bad thing. In practice this is argued to be because governments pay off debtsby printing fiat money, increasing the money supply and creating inflation, and is taken furtherby some as an argument against fiat money and in favor of hard money, especially the goldstandard.

Post-Keynesian economics

Conversely, some Post-Keynesian economists argue that deficit spending is necessary, either to

create the money supply (Chartalism) or to satisfy demand for savings in excess of what can besatisfied by private investment.

Chartalists argue that deficit spending is logically necessary because, in their view, fiat money iscreated by deficit spending: one cannot collect fiat money in taxes before one has issued it andspent it, and the amount of fiat money in circulation is exactly the government debt moneyspent but not collected in taxes. In a quip, "fiat money governments are 'spend and tax', not 'taxand spend'," deficit spending comes first. Chartalists argue that nations are fundamentallydifferent from households. Governments in a fiat money system which only have debt in theirown currency can issue other liabilities, their fiat money, to pay off their interesting bearing bonddebt. They cannot go bankrupt involuntarily because this fiat money is what is used in their

economy to settle debts, while household liabilities are not so used. This view is summarized as:

But it is hard to understand how the concept of "budget busting" applies to a government which,as a sovereign issuer of its own currency, can always create dollars to spend. There is, in otherwords, no budget to "bust". A national "budget" is merely an account of national spendingpriorities, and does not represent an external constraint in the manner of a household budget.[4]

Continuing in this vein, Chartalists argue that a structural deficit is necessary for monetaryexpansion in an expanding economy: if the economy grows, the money supply should as well,which should be accomplished by government deficit spending. Private sector savings are equalto government sector deficits, to the penny. In the absence of sufficient deficit spending, money

supply can increase by increasing financial leverage in the economy the amount of bank moneygrows, while the base money supply remains unchanged or grows at a slower rate, and thus theratio (leverage = credit/base) increases, which can lead to a credit bubble and a financial crisis.

Chartalism is a small minority view in economics; while it has had advocates over the years, andinfluenced Keynes, who specifically credited it,[5] it is categorically rejected or ignored byvirtually all contemporary mainstream economists. A notable proponent was UkrainianAmerican economist Abba P. Lerner, who founded the school of Neo-Chartalism, and advocated


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deficit spending in his theory of functional finance. A contemporary center of Neo-Chartalism isthe Kansas City School of economics.

Chartalists, like other Keynesians accept the paradox of thrift, which argues that identifyingbehavior of individual households and the nation as a whole commits the fallacy of composition;

while the paradox of thrift (and thus deficit spending for fiscal stimulus) is widely accepted ineconomics, the Chartalist form is not.

An alternative argument for the necessity of deficits was given by celebrated Americaneconomist William Vickrey, who argued that deficits were necessary to satisfy demand forsavings in excess of what can be satisfied by private investment. Larger deficits, sufficient torecycle savings out of a growing gross domestic product (GDP) in excess of what can berecycled by profit-seeking private investment, are not an economic sin but an economicnecessity.

Deficit Financing Bangladesh Scenario

Debt burden is increasing sharply over time due to increase in the budget deficit. The deficit ofbudget mainly occurs for the payment of interest, principal of debt burden and the subsidy whichare mainly given to non-productive sectors.

During the FY 2011-12, the total revenue collection of the government is estimated at Tk.1,18,385 crore against Tk. 95,187 crore in revised budget of FY 2010-11. The tax collectionfrom NBR is estimated for FY 2011-12 is Tk. 91,870 crore which was Tk. 75,600 crore in FY2010-11 that is about 21.52 percent higher than that of the previous fiscal year. The revenueexpenditure in FY 2011-12 is estimated at Tk. 1,63,589 crore. In FY 2011-12, the totalexpenditure for development sectors is estimated at Tk. 46,000 crore and Tk. 1,02,903 crore for

non-development sectors.

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Budget Deficit as percentage of GDP Ratio

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Accordingly, in FY 2011-12, the overall budget deficit is estimated at Tk. 45,204 crore which is5 percent of GDP and is 0.6 percent higher than that of the previous year. In FY 2007-08, it hasreached at the peak but after that deficit has turned around to five percent.

One of the prime tasks of the fiscal policy of the government is to continue endeavouring fornarrowing the gap between expenditure and income in order to offset the budget deficit or tomaintain it at a tolerable level. Over the past few years, the overall budget deficit registers anincreasing trend that puts serious pressures on the total debt of the country.

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Government Revenue and GDP Ratio

If the current trend continues, the government revenue and GDP ratio might be around 12.60 inthe upcoming years and in FY 2014-15, it might reach to 12.58.The government revenue andGDP ratio (percentage) is increasing to some extent over the time and stays between 10 to 12

percent. In FY 2000-01, the government revenue and GDP ratio was 10.7 which increased to12.08 in FY 2005-06. It indicates that the government revenue earning in terms of GDP willslightly be increasing in future vis-a-vis the increasing deficits and debts.

Government Revenue and GDP Ratio

Debt sustainability is an essential condition for macroeconomic stability and sustainableeconomic growth. However, debt condition of Bangladesh is not sustainable because this countryhas more urgent needs than to make external debt service payments.

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The debt-GDP ratio in FY 2010-11 has remained at 41 percent. Total debt-GDP ratio inBangladesh, on average, rose sharply from 33.65 percent during the 1970s to 56.95 percentduring the 1980s. Over the last ten years, the debt-GDP ratio has stayed above 40 percent thatreflects the high debt burden for Bangladesh.

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Budget deficit and its financing in Bangladesh, like in many other developing countries, is veryimportant parameters for analyzing monetary and the fiscal effects on the countrys overalleconomic development. The government is indebted for debt servicing and deficit financing and

the rate is rising swiftly. Taking debt from domestic sources is hindering private investments.Again, for external debt, foreign reserve is declining due to principal and interest payment. Thedual effect is mainly responsible for devaluation of currency which in turn increases import billsand further induces debt to meet rising deficit.

The national budget for FY 2011-12 has targeted a growth rate of 7 percent which requires about30 to 35 percent investment share in GDP while in FY 2010-11 the rate has remained at 24.7percent. The difference between savings and investment may rise in the upcoming years due toincreasing debt scenario. If the current trend continues, total national savings and investmentshare as percentage of GDP might be 30.58 and 25.45 percent respectively in FY 2014-15. Gapbetween national savings and investment might increase to 5.13 percent which has remained at

3.7 percent in FY 2010-11. In addition, the ratio of external debt and investment in the samefiscal year has been 81.86 percent which clearly depicts the demand for excessive debt thaninvestment.

Deficit financing, money supply and inflation are interlinked. The government has to ensureadequate money supply which in turn increases further inflation. On the other hand, governmentdebt from banking sector is hindering private investment. The outcome is lesser actualproduction than potential production and more inflation. Consequently, the rate of inflation (12


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month average) has increased from 7.31 percent in FY 2009-10 to 8.8 percent in FY 2010-11. Inaddition, money supply (M1 and M2) has increased to 17.18 and 21.34 percent respectively inJune 2011 than that of June 2010.

Government Expenditure and GDP ratio

In FY 2012-13, the government expenditure and GDP ratio might be 15.38 and it might reachto15.46 in FY 2014-15, if the current trend prevails. However, in FY 2000-01, the governmentexpenditure and GDP ratio was 15.5 while in FY 2007-08 it has risen to 16.5.

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Government expenditure and GDP ratio stays between 14 to 17 percent of its GDP earnings overthe years. Government expenditure and GDP ratio (in percent) is much higher than that of thegovernment revenue and GDP ratio that keeps on increasing the deficit in successive years.Combining the government revenue and GDP ratio and government expenditure and GDP ratio,

it is seen that over the time the trend of deficits might increase and it might stay around four tofive percent of GDP earnings.

SOURCES OF DEFICIT FINANCING

Economic theory tells that if debt financing is inflationary when met by borrowing from centralbank whereas there is a possibility of crowding out of private sector investment if the borrowingconducted from the commercial ones. Again, if it is met by issuing bonds, the cost of debtfinancing will be higher. Hence debt financing and the method of its management are importantissues. In general, deficit financing is met by expanding monetary base. Debt financing byissuing bond is less popular than the money creation.

There are two sources of deficit financing: internal and external debt. The government hasbecome more dependent on banking sectors other than non-banking ones for domestic financingover the time. In FY 2010-11, government has borrowed 4.43 times higher from banking sectorsin comparison to that of FY 2001-02 indicating a sharp crowding out effect which has dampenedprivate investments. The government borrowing from banking sector in FY 2010-11 was 1.43percent of GDP while it was 0.45 percent from non-banking sectors.

Each year a major portion of its budget expenditure gets expanded on interest payment. It is seenthat in FY 2006-07, 11 percent of the total development and non-development expenditure.

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1. Internal Debt

The government mainly borrows both from the Bangladesh Bank and the commercial ones. InFY 2010-11, the government has borrowed 4.43 times higher from banking sectors (BDT11,240.5 crore) in comparison to that of FY 2001-02 indicating a sharp crowding out effectwhich has dampen private investments. In FY 2001-02, government has borrowed an amount of


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Tk. 2,534.9 crore from banking sector whereas Tk. 4,711.47 crore has been borrowed from non-banking sectors. The government has become more dependent on banking sectors other thannon-banking ones for domestic financing over the time.

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The borrowing from banks as percentage of GDP has been increasing over the time. In FY 2010-11, the government borrowing from banking sector is 1.43 percent of GDP while it is 0.45percent from non-banking sectors. However, in FY 2001-02, the government borrowing frombanking sector amounts 0.93 percent of GDP while from non-banking sector it totals 1.72percent.

In FY 2001-02, total domestic debt as percentage of GDP was 2.65 percent while in FY2010-11,it became 1.88 percent. Total domestic borrowing as percentage of GDP remains 1.5 to 3.0percent of GDP over the last ten years. Continuation of current trend will result into anincreasing movement in domestic debt. In FY 2013-14, the government may have to borrow Tk.

16,254.42 crore from domestic sources while it might increase to Tk. 17,755.76 crore in FY2014-15.

External Debt

Total external debt in FY 2010-11 amounts to USD 21,347.44 million while in FY 1972-73 itwas only USD 65 million. Over the time the amount of external debt has been increasing at aBangladesh Economic Update, August 2011. In FY 2014-15, the amount of external debt mightamount USD 23,475.68 million. The principal and interest payment in FY 2010-11 are 724.9million and USD 186.42 million respectively, a total payment of USD 911.32 million. higher rateand therefore in FY 1989-90, the amount has reached to USD 1,069 million, incurring a growth

of additional USD 55 million each year.

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If the current trend continues, there might be an increasing trend of external debt in forthcomingyears. In FY 2012-13 and FY 2014-15, the amount of external debt might amount USD22,411.56 million and USD 23,475.68 million respectively.

Conclusion

Since the past, the governments used the fiscal policy in order to achieve the planned projects in

their political programs. In that process, they are keen to implement deficit fiscal policy toincrease the economic growth rate. These fiscal measures are most justifiable in terms ofeconomic crisis as the current one and wars. Although, most governments intend to use deficitpolicy for unreasonable objectives like unproductive government expenditures. What isinevitable in this kind of budget finance is the future tax burden that will fall upon the next

generations. Thats not argumentable but should be taken into consideration when thegovernment loses orientation in the budget policy. But if the fiscal policy is prudent and


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coordinated with the monetary policy, this move will produce economic growth and improve theeconomic condition of the country. In deficit finance the multiplier effect is bigger then theinitial change in government expenditure but obviously its partly declined cause the crowdingout effect which reduces the private demand for loanable funds because the private investmentsare considered as more efficient then the government. Also at the end is reviewed the potential

correlation between the budget and trade deficit in spite all other factors that can have an impactof capital movement.

The conclusion from the previous description is that the fiscal stimulations play important role inthe economic growth of the country, especially if the monetary policy of that country isrestrictive and doesnt help with creating better economic conditions for the firms in order toimprove their productivity. Thats why the intervention from the fiscal policy can be crucial forthe economy, normally if it is used in productive way.

REFERENCE

ATANASOVSKI, ZIVKO (2004). Public Finance. Economic faculty. Skopje DE LAROSIEREJ. (1986). The growth of public debt and the need for fiscal discipline. Public finance and publicdebt. Wayne State University Press.

FRIEDMAN, B. (1978). Crowding Out or Crowding In? Economic Conseqences of FinancingGovernment Debt. Brookings Papers on Economic Activity No. 3, pp. 593-641

GABER S. (2009). Fiscal Stimulations for Improving the Business Environment in Republic ofMacedonia. PIEB No.3.

KRUGMAN, P. (2009). Crowding In. New York Times.

LANGDANA, F. (2009). Macroeconomic Policy: Demystifying Monetary and Fiscal Policy.Springer.

MANKIW, G. (2009). Brief Principle of Macroeconomics, 5 ed. South-Western CengageLearning.

SANTOW, L. (1988). The Budget Deficit: The Causes, the Costs, the Outlook. New YorkInstitut of Finance.

SARGENT AND WALLACE (1985). Some Unpleasent Arithmetic. Federal Reserve Bank of

Mineapolis.

SPILIMBERGO, A., SYMANSKI S., BLANCHARD O. AND COTTARELLI C.(2008). FiscalPolicy for the Crisis. IMF Staff position Note.

deficit financing theory and practice in bangladesh

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