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

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.