Debt Sustainability Analysis with emphasis on Fiscal Rules: Case of Iran

Persistent budget deficit in Iran, and recent leaning to issuance of bonds for deficit compensation raised concerns about the public debt sustainability. In this article, we forecast the budget deficit for next five years (up to 2026) by using an Autoregressive Distributed Lags (ARDL) model, based on two scenarios for future macroeconomic conditions of Iran and then, the sustainability of public debt to GDP ratio is analysed. According to the results, increasing trend of the debt ratio would tend to debt unsustainability. Findings have two important implications. Firstly, in absence of budget structure reforms even high economic growth has no significant effect on debt overrun. Secondly, in continuation of high inflation the only way to prevent budget solvency is suppressed real interest rate, which subsequently could disturb saving and investment intention through the misallocation of resources. Therefore, Central Bank and Treasury should cope with a trade-off between government insolvency and inflation, warned that persistent inflation is not a reliable tool to manage fiscal sustainability. In low rate of inflation, the sustainable debt ratio is achieved due to budget structural reforms with emphasis on implementing obligatory fiscal rules