Public Debt and Private Sector Investment in Iran: A Nonlinear Autoregressive Distributed Lag Method

Document Type : Original Article

Authors

1 Faculty Member, Shahid Bahonar University of Kerman, Baft Higher Education Complex, Faculty of Economics

2 economics faculty, Allameh Tabatabai university

Abstract

Achieving the ambitious 8% economic growth target outlined in Iran’s Seventh Five-Year Development Plan necessitates a substantial and targeted increase in investment, particularly in the private sector. Given the declining trend of foreign direct investment (FDI) since 2011—due to political and institutional challenges—it is expected that the bulk of investment necessary for growth must come from domestic private investors. The private sector’s role is vital, as investment in this domain simultaneously affects both the supply and demand sides of the macroeconomy. Consequently, targeted private sector investment can stimulate economic activity, employment, and productivity.

However, empirical and theoretical literature highlights that one of the critical impediments to private sector investment, particularly in developing economies like Iran, is the suboptimal expansion of government activities, often manifested in the form of rising public debt. In recent years, the persistent increase in public debt in Iran has raised concerns regarding its crowding-out effects on private investment. This study investigates whether the recent surge in public borrowing has adversely affected private sector investment in Iran.

Theoretically, rising government debt leads to increased demand for financial resources, which in turn can place upward pressure on interest rates. Since private investment is sensitive to interest, higher interest rates discourage private sector borrowing and investment. Additionally, the availability of safe government bonds in financial markets diverts savings away from productive investments in the private sector, further exacerbating the crowding-out effect. Consequently, a sustained rise in public debt can erode the private sector’s capacity to invest, which in turn weakens both aggregate demand and supply, diminishing the government’s future tax base and potentially leading to a vicious cycle of fiscal pressure. Budget reform and banking system reform are also two priorities to prevent imbalances in the long term.

Keywords

Main Subjects

References

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Public Sector Economics Studies
Volume 4, Issue 4 - Serial Number 14
January 2026
Pages 595-624

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  • Receive Date: 11 July 2025
  • Revise Date: 05 October 2025
  • Accept Date: 08 October 2025

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