The Study of Government Debt Sustainability in Iran's Economy

This research examines the sustainability of debt in the Iranian economy during 1978-2011. Based on the literature of fiscal sustainability، the debt is sustainable if the growth of debt is not greater than growth of GDP. In this study in order to test the debt sustainability، fiscal reaction function is estimated where a positive relationship is found between the surplus-to-GDP ratio and the lagged debt-to-GDP ratio. The results show that the coefficient of lagged surplus-to-GDP ratio is positive which confirms the role of past surpluses in the current surplus or alternatively the role of past deficits in the current deficit. Furthermore، the debt sustainability is tested through the extended fiscal reaction function، and debt dynamics function and co integration analysis. The results indicate that the debt is sustainable in weak form in short run while it is not sustainable in long run. Thus، the government in order to reduce the risk of future debt crises should try to diversify the economy and income sources and reduce the dependence on oil revenue funds.