Restructuring Sovereign Domestic Debt in Developing Countries

IMF Working Papers, October 3, 2025

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Canonical URL: Restructuring Sovereign Domestic Debt in Developing Countries

Authors: Eriko Togo, Hui Miao, Myrvin L Anthony, Marie S Kim, Joe Kogan, Shijia Luo
Published: October 3, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229028158.001

Amid rising domestic sovereign debt overhang in some emerging and developing economies (EMDEs), the 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, the paper provides practical guidance for designing and executing a DDR, tailored to country-specific circumstances and constraints, to minimize risks to financial stability and domestic debt market dysfunction.
The paper stresses that 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.

Domestic sovereign debt overhang is rising in some EMDEs and can pose risks to financial stability and domestic debt market functioning.
Delayed DDR or inaction can be costly; policymakers should weigh short-term DDR costs against long-term resilience gains.
Successful DDR design and execution require tailoring to country-specific circumstances and constraints.
Complementary measures—burden-sharing among creditors, fiscal adjustment, and international support anchored by an IMF arrangement—are essential to improve DDR outcomes.

Use case-study evidence to inform DDR design that minimizes risks to financial stability.
Tailor restructuring instruments and sequencing to domestic market structure, creditor composition, and institutional capacity.
Address domestic debt market dysfunction risks when designing exchange terms and legal/operational implementation frameworks.
Integrate DDR planning with broader macroeconomic adjustment and reform strategies to tackle root causes of debt accumulation.

Assess intertemporal tradeoffs explicitly: quantify short-term costs of a DDR versus long-term resilience benefits.
Ensure burden-sharing mechanisms across creditor types to preserve fairness and reduce moral hazard.
Implement fiscal adjustment measures that address underlying debt drivers alongside the DDR.
Secure international financial community support, ideally anchored by an IMF arrangement, to bolster credibility and resource backing for the adjustment program.

Authors: Eriko Togo, Hui Miao, Myrvin L Anthony, Marie S Kim, Joe Kogan, Shijia Luo
Publication date: October 3, 2025
Series: IMF Working Papers
Working Paper No.: 2025/202
Pages: 60
Volume: 2025
Issue: 202
DOI: https://doi.org/10.5089/9798229028158.001
Stock No: WPIEA2025202
ISBN: 9798229028158
ISSN: 1018-5941
Subject: Asset and liability management; Debt restructuring; Domestic debt; External debt; Financial institutions; Government securities; Public debt
Keywords: Caribbean; complementary Policy; Debt Relief; Debt restructuring; Domestic debt; Domestic Debt Restructuring; Government securities; Government Securities Markets; IMF arrangement; IMF seminar; IMF working papers; literature review; Sovereign Debt

IMF Working Paper: "Restructuring Sovereign Domestic Debt in Developing Countries", October 3, 2025.