The increased public borrowing from the country's banking sector does not cause crowding-out effect on the economy, according to a finding of research by the Bangladesh Institute of Development Studies (BIDS).
It is widely believed that public borrowing from the banking sector affects private investment significantly and thus creates a 'crowding-out effect' on the economy.
The latest BIDS study that was released Thursday said public investment by borrowing from the domestic sources encourages private investment.
It argued that infrastructure development by the public departments has helped attract investors to invest more in the country.
The BIDS team, led by Dr Abul Basher, used data from 1987 to 2011 for econometric analysis on the issue.
The study said public borrowing was recorded at its highest level at 2.5 per cent of gross domestic product (GDP) in 2011 and during that time, the economy did not witness any crowing-out effect.
Abul Basher told the FE: "Actually, we did not find any negative correlation between public borrowing and private investment."
He said the study shows that instead of driving out, public borrowings in fact lure more private investment.
Mr. Basher said nearly 40 per cent fund of private investment comes from banks. Their funds also come from profits of their organisations and other sources.
The study suggests that the government can safely borrow up to 2.5 per cent of GDP from domestic sources.
"Without worrying about crowding-out effect on the economy, the government might borrow 2.5 per cent of GDP or more," the study noted.
The BIDS recently conducted the study with the support of its research endowment fund to assess whether public borrowing promotes or hinders private investment.
According to the study, public borrowing in Bangladesh continues to promote private investment in more than one subsequent year.
It noted that due to inadequate revenue collection and inability to curtail non-discretionary public expenditure, public investment becomes highly dependent on public borrowing.
It said the economic capacity building of the country with the help of public borrowing promotes private investment, which is financed by different sources of funding including borrowing from banks.
It has been highlighted in many economic analyses that infrastructural deficits are one of the main roadblocks to private investment in Bangladesh, it noted.
It suggests the government should not shy away from financing infrastructure through borrowing.
"With current trend of public borrowing, no trade-off between provision of infrastructure and private investment is implied," it said.
The government sometimes contemplates to borrow at commercial rates from the international financial market by issuing sovereign bond.
It observed that the real cost of borrowing of any dollar-denominated borrowing can be higher than cost of domestic borrowing,
"More importantly, such borrowing can erode the macroeconomic stability of the country," it further observed.
However, the finding of the BIDS study implies that there is no ground for such a policy shift as long as cost of borrowing from domestic sources is less than that of commercial borrowing from international financial market.
It, however, noted that some level of inefficiency of public spending causes some problems to implement the government projects.
"To ensure the highest possible benefit of public borrowing, the government needs to act to increase the efficiency by promoting timely implementation of public projects," it said.
