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Bangladesh Economy. This paper will discuss about the basic theory of fiscal sustainability-
highlight the source of government income, expenditure, source of deficit financing, and public
debt equation. Also, will discuss on about the data and variables where it explained how many
variables will be used to explain fiscal performance and public debt sustainability. After that we
will derive the public debt equation and by using this equation there will be some relevant graph,
tables and estimated equations to analysis various fiscal indicators that also included in the
report. There will be at least Eight Dimensions (Fiscal indicators) to evaluate the fiscal
performance and debt dynamic sustainability. Lastly, we will highlight some problems regarding
this issue and also some policy recommendation for Bangladesh to reach developed county.
Objectives:
To derive a public debt equation based on the discussed theories and variables. Additionally, to
present the equation through relevant graphs, tables, and estimated equations that offer a deeper
understanding of the dynamics between fiscal indicators and public debt in Bangladesh.
By achieving these objectives, the paper aims to contribute valuable insights into the fiscal
dynamics of the Bangladesh economy, offering a foundation for informed policy decisions and
strategies to enhance fiscal performance and debt sustainability.
Fiscal Sustainability: Fiscal sustainability pertains to a government's ability to uphold its
current financial policies—encompassing spending, taxation, and debt—over the long term
without jeopardizing its economic stability. The focal point is to ensure that fiscal strategies
remain viable without resulting in unsustainable debt levels.
Maintaining fiscal sustainability necessitates a delicate equilibrium between government
revenues and expenditures. Persistent budget deficits, where spending consistently exceeds
income, can lead to an escalating accumulation of debt. This heightened debt relative to the
nation's economic output poses risks such as increased interest payments, reduced fiscal
maneuverability, and heightened vulnerability to economic downturns.
Countries with sustainable fiscal policies are better positioned to address economic challenges,
deliver essential public services, and instill confidence in investors and financial markets. Fiscal
sustainability is a linchpin of prudent economic governance, contributing to national stability and
prosperity.
The Bangladesh government generates income through various sources to fund its expenditures
and support economic development. The three main sources of income are taxes, foreign aid, and
non-tax income. Taxation is a significant contributor to government revenue, including
Income Tax
Value-Added Tax (VAT)
Customs Duties
Other Levies.
The National Board of Revenue (NBR) oversees tax collection. Foreign aid, in the form of grants
and loans from Mutual and multilateral sources, constitutes another crucial income source.
Donor countries, international organizations, and development partners contribute funds to
support infrastructure projects, social programs, and poverty alleviation initiatives. Non-tax
revenue is derived from diverse sources such as
Fees
Fines
Dividends from state-owned enterprises
Income from government investments.
The government also earns revenue through the Bangladesh Bank, which manages foreign
exchange reserves and implements monetary policies. Additionally, the government may engage
in revenue-generating activities through state-owned enterprises involved in sectors like
telecommunications, energy, and banking. The allocation of resources and the efficiency of
revenue collection mechanisms play a vital role in sustaining the government's fiscal health and
facilitating socioeconomic development in Bangladesh.
The expenditure sources of the Bangladesh government are diverse and comprise various sectors
to address the country's economic, social, and developmental needs. The major components of
government expenditure include:
Social Services: A significant portion of the budget is allocated to social services such as
education, healthcare, and social welfare programs. This aims to enhance human capital
and improve the overall well-being of the population.
Infrastructure Development: The government allocates funds for the development of
infrastructure, including transportation, communication, and energy projects. This is
crucial for economic growth and regional connectivity.
Public Administration: Expenditure on public administration covers the costs of running
government institutions, paying salaries, and ensuring the efficient functioning of various
government departments.
Debt Servicing: A portion of the budget is allocated for servicing the country's external
and domestic debts, including interest payments and debt repayments.
Defense: Expenditure on defense is essential for maintaining national security and
protecting the country from external threats.
Subsidies and Transfers: The government provides subsidies to various sectors, such as
agriculture and industry, to support economic activities. It also allocates funds for social
safety nets and cash transfer programs to assist vulnerable populations.
Development Projects: The government invests in development projects to promote
economic growth, poverty reduction, and job creation.
These expenditure sources collectively reflect the government's commitment to balanced and
sustainable development across different sectors of the economy.
Bangladesh Government employs various deficit financing sources to bridge the gap between its
expenditures and revenues. The major components of government deficit financing include:
Domestic Borrowing: Treasury bills and bonds are issued to the public and financial
institutions. Also National Savings Certificates and other small savings schemes.
Foreign Aid and Grants: Assistance from international organizations such as the World
Bank, and Asian Development Bank, and bilateral aid from countries.
Multilateral Loans: Loans obtained from multiple countries or financial institutions for
specific development projects.
Commercial Borrowing: Loans obtained from international capital markets and
commercial banks.
Revenue Generation: Taxation plays a significant role in government revenue, including
income tax, value-added tax (VAT), and corporate tax.
Non-Bank Financial Institutions: The government may seek loans from non-banking
financial institutions to meet its financing needs.
Privatization Revenues: Selling state-owned assets and enterprises to private entities,
generating revenue for the government.
Printed Money: In extreme cases, governments may resort to printing more money, but
this can lead to inflationary pressures.
International Monetary Fund (IMF) Assistance: Seeking financial assistance and
support from the IMF to stabilize the economy and address balance of payments issues.
Special Drawing Rights (SDRs): Allocation of special drawing rights by the
International Monetary Fund can provide additional financial resources.
These sources collectively contribute to the deficit financing efforts of the Bangladesh
Government, allowing it to fund various projects and meet budgetary requirements.
In this section, we will derive a public debt equation to explain the sources of the evolution of
public debt over a period of fiscal year 1991 to 2020 of Bangladesh economy as well as discuss
the stability condition of Bangladesh.
Here we will consider inflation explicitly in order to construct the public debt (PD) equation. We
have the basic equation of PD derived from the Consolidated government-sector Budget Identity
[Walsh,2003]
Where Wt > 0 indicates Primary Surplus and Wt < 0 indicates Primary Deficit.
Where Bt = public debt at time t , Bt-1 = public debt in previous time period (t-1)
6. It = nominal interest rate in t on B t-1 ; it generates interest in t (maturity in t), i t Bt-1 = interest
payment
7. rt = real interest rate defined as rt = it – πt
8. Vt = nominal GDP , Vt = Pt × Yt
9. αt = nominal GDP’s growth rate; Vt = (1 + αt) Vt-1.
10. Yt = real GDP level.
11. ηt = real GDP’s growth rate; Yt = (1 + ηt) Yt−1.
12. Pt = price level as described by the GDP deflator.
13. πt = GDP deflator’ growth rate; Pt = (1 + πt) Pt-1.
In ratio to GDP,
bt = - wt + {(1+it) Bt-1}/Vt - st
Here, [{(1+it)/(1 + αt)} -1] is defined as snowball effect, a combined effect of interest payment
and GDP growth.
Vt = Pt × Yt
Vt = (1 + αt) Vt-1
Vt / Vt-1 = (1 + αt)
Now,
The snowball accounts for the combined effect of the interest payment and GDP growth on the
• i = α ⇒ CR = 0, no contribution.
• i > α ⇒ CR > 0, positive contribution: if it is not compensated by wt, the Debt to GDP Ratio
worsens.
The is modified by splitting the snowball effect into two components: the real interest bill and
∆bt = - wt + [{It /(1+αt)} – {πt /(1+αt)}] bt-1 – {ηt /(1 + ηt)} bt-1 - st
The real growth contribution has a negative effect on debt creation, while the real interest bill
If 0< a <1 ; when t tends to infinity, bt leads to steady state debt ( convergence).
If a > 1 ; when t tends to infinity, bt diverge from steady state debt ( divergence).
Stability Condition: The stability condition in economic models hinges on the relationship
between the growth rate (α) and the interest rate (i). Stability is achieved when the growth rate is
less than or equal to the interest rate, expressed as α ≤ i. If the growth rate surpasses the interest
rate (α > i), a divergence occurs, potentially leading to unsustainable economic dynamics,
inflationary pressures, or financial imbalances. On the other hand, convergence happens when
the growth rate is equal to or less than the interest rate (α ≤ i), indicating a stable equilibrium. In
this scenario, economic and financial systems are better positioned for sustainability, with returns
on investments aligning with overall growth. In summary, the interplay between the growth rate
(α) and interest rate (i) determines the stability of economic and financial environments, with
divergence signaling potential instability and convergence reflecting a more balanced and stable
state.
Putting the average value of growth rate and interest rate in the equation of the slope ;
a = (1+i)/(1+α) =
Putting the value of a into debt equation to find the public debt equation of Bangladesh
economy,
bt = at bt-1 – βt =
Empirical Analysis:
Bangladesh tax system is quite low compare to other countries. When Bangladesh introduced tax
system in late 90. Higher officials believed that it could help them to reduce the deficit but it did
not happen. In Bangladesh direct tax to Gdp Ratio is quite low that’s why government pushed
the burden into indirect tax and for this reason we can see it is quite high and ultimately it gives
pressure to the middle- and lower-income people.
From 1990 to till now debt to GDP ratio is quite high for Bangladesh. There are some reasons for
this like tax revenue is low, secondly import is quite higher than export, so there is always deficit
in the budget and to fill this deficit Government has to borrow from domestic source and external
source. That’s why we can see in the graph our expenditure is bigger than revenue and over the
years it increased. Consequently, Debt to GDP ratio was also remined high.
Growth rate and Interest rate (α vs i):
References:
https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS?
end=2021&locations=BD&start=2001&view=chart
https://www.theigc.org/sites/default/files/2023 10/Razzaque%20et%20al%20Working
%20paper%20January%202023.pdf
https://www.imf.org/external/datamapper/datasets/DEBT
https://www.imf.org/external/datamapper/GGR_G01_GDP_PT@FM/ADVEC/
FM_EMG/FM_LIDC
https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/
WEOWORLD
https://www.imf.org/external/datamapper/PCPIPCH@WEO/OEMDC/ADVEC/
WEOWORLD
https://www.imf.org/external/datamapper/ie@FPP/USA/FRA/JPN/GBR/SWE/ESP/ITA/
ZAF/IND