Deficit financing strategy and fiscal sustainability in Bangladesh

Bangladesh has effectively managed its public debt, implementing a deficit-biased fiscal policy due to robust GDP growth and favourable interest rates from concessional finance. However, this approach is unsustainable without fiscal reform. Analyzing data from 1983 to 2022 with a regime-switching model, the paper finds that the government’s fiscal response was positive to the rising debt (stabilizing) during 1989-1995 and 2002-2014, but insignificant during 1983-1989, 1996-2001, and 2015-2020.