In addressing the triple challenges of high indebtedness, climate change and loss of nature, debt-for-climate and nature (DfCN) swaps are recognised as an effective fiscal instrument for developing economies.
These are agreements between the debtor and creditor countries where debt repayments are restructured to reduce the debt burden and allocate funds to climate-positive investments that support environmental commitments.
The latest study Debt for Climate and Nature Swaps in Sri Lanka: Scoping Study by IPS Researchers Dr Lakmini Fernando, Sunimalee Madurawala, and Menaka Wimalarathne explores the possibility for Sri Lanka to use DfCN swaps in achieving the dual objective of debt sustainability and climate investments.
The availability of supportive financial and environmental regulations is crucial in debt swap negotiations. Yet, capacity and skill gaps can prevent effective design and implementation. Thus, technical assistance from multilateral financial institutions would help bridge these gaps. Political and macro-stability are crucial in the negotiation process.
Hence, with the conclusion of debt restructuring, the government may now consider the possibility of adopting alternative financing options. Government’s commitment to climate finance: The current investment allocations for the climate and environment sectors needs to be revisited to understand areas of improvement.
In this regard, Sri Lanka’s commitments towards Nationally Determined Contributions (NDCs) and the Sustainable Development Goals (SDGs) could serve as benchmarks. Drawing from international success stories, it is proposed that initiatives under DfCN swaps include a wider stakeholder and public consultations to ensure successful implementation.
Stable institutional setting: Implementing DfCN swaps requires the backing of a stable and quality institutional structure. As institutional fragmentation is common with shifts in political leadership, the government’s commitment to maintaining a stable institutional structure is crucial for the success of debt swaps. Bridging capacity and skill gaps: Considerable effort to improve financial and environmental skills is a key concern.
Generally, debt swaps negotiations extend for nearly a year or more. Any skill gap may further delay the process. Hence, agreeing on better deals and skill enhancement is crucial. Supportive global financial architecture: International financial institutions could help developing countries to implement DfCN swaps by creating conducive environment.
This includes increased alignment of country operations towards climate- and nature-supportive investments. For instance, as agreed at the United Nations Biodiversity Conference in Montreal in December 2024, the Global Biodiversity Framework requires these institutions to ensure that their portfolios are both nature-positive and aligned with the 2015 Paris Climate agreement.
You can download Debt for Climate and Nature Swaps in Sri Lanka: Scoping Study from ips.lk
