Restructuring Sovereign Domestic Debt in Developing Countries

Amid rising domestic sovereign debt overhang in some emerging and developing economies (EMDEs), this paper underscores the importance of effective domestic sovereign debt restructuring (DDR) strategies where a DDR is deemed necessary. The paper suggests that delayed responses to, or inaction on, rising domestic debt vulnerabilities can be costly, highlighting the importance of assessing the intertemporal tradeoff between short-term costs from a DDR and achieving long-term economic resilience. Drawing on case studies, practical guidance is provided for designing and executing a DDR, tailored to country-specific circumstances and constraints, to minimize risks to financial stability and domestic debt market dysfunction. Restructuring alone does not ensure success. A comprehensive macroeconomic adjustment program addressing the root cause of debt accumulation—while distributing the burden among creditors, implementing fiscal adjustment, and securing support from the international financial community anchored by an IMF arrangement—will enhance the chance of a successful DDR outcome.