Government borrowing as a ponzi scheme: The case of Bangladesh

Abstract

This study investigates whether government borrowing can be likened to a Ponzi scheme which will allow the government to roll-over its debt perpetually. The results show that, on the basis of the condition of maintaining real economic growth rate above and beyond the real interest rate on government debt, it will not be possible to sustain a perpetual Ponzi scheme of all four types of National Savings Certificates in Bangladesh. The government’s debt may be rolled over perpetually for two types of National Savings Certificates, following the condition outlined in Ball, et al. (1998), or for three types of National Savings Certificates following the condition outlined in Mehrotra (2017). Additionally, following the condition outlined in Trehan and Walsh (1991) and Ahmed and Rogers (1995) Bangladesh’s budget deficit cannot be perpetually Ponzi-financed. However, using the conditions put forward by Quintos (1995) and Bergman (2001), it may be possible to perpetually Ponzi-finance Bangladesh’s budget deficit. Overall, the findings cast a shadow of doubt on the fiscal sustainability of National Savings Certificates in Bangladesh, but should be interpreted with discretion due to the possible presence of confounding factors and uncertainty.