A new paper from the International Monetary Fund (IMF) focuses on a growing problem for many developing and emerging countries (Emerging Market and Developing Economies, or EMDEs): when the government owes too much money to its own citizens, banks, and institutions (called domestic debt).
The main message is:
Don’t Wait: If a country has too much debt, waiting to deal with it is the worst possible choice and highlights the importance of assessing the intertemporal tradeoff—the balancing of short-term pain against long-term gain.
Restructuring is Necessary: The government has to restructure this domestic debt (Domestic Debt Restructuring, or DDR)-meaning they change the terms, like lowering interest rates or extending repayment deadlines-to survive.
The Goal: The aim is to clean up the debt without causing the local financial system to break down (dysfunction of domestic debt markets).
How to Succeed at Restructuring:
The paper provides practical advice, stressing that just changing the debt terms is not enough. For a debt cleanup to work, it must be part of a bigger plan:
Fix the Core Problem: The government must first stop the bad habits (like overspending) that caused the debt in the first place.
Fair Burden: The losses from the restructuring must be shared fairly among all lenders (creditors).
Big Changes: The country needs a comprehensive plan, often supported by the IMF, that includes strict budgeting and fiscal adjustments.
Follow the full report here:
IMF Working Paper WP/25/202
