Domestic Debt Restructuring, Central Bank, and Monetary Policy in EMDEs: Lessons from Recent Country Cases

Domestic debt restructuring (DDR) in emerging markets and developing economies is a monetary and financial event as much as a fiscal one. DDR reallocates losses across three interconnected balance sheets—the sovereign, the central bank, and domestic financial institutions—impairing monetary policy through four channels: the central bank balance sheet, government securities markets, bank credit, and policy credibility. Cross-country evidence from 17 DDR episodes shows that the money multiplier falls below its pre-restructuring level in most episodes, with the compression concentrated in multi-year restructurings, and that banks’ discretionary reserve buffers thin around the restructuring year. Three recent cases—Jamaica (2010), Barbados (2018–19), and Ghana (2022–24)—show that vulnerability to monetary impairment is shaped, among other factors, by the pre-DDR monetary framework and the degree of prior fiscal dominance, and that recovery of monetary transmission is the most uncertain post-DDR outcome. The design lesson is that DDR is constrained optimization: success requires not only reducing debt service but preserving the monetary and financial system capable of supporting economic recovery.