Debt for climate and nature swaps in Sri Lanka
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Date
2025-07
Journal Title
Journal ISSN
Volume Title
Publisher
Institute of Policy Studies of Sri Lanka
Abstract
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 where debt repayments are restructured to reduce the debt
burden, with the funds allocated to climate-positive investments that support
environmental commitments. Debt swaps, therefore, can be used to reduce foreign
debt obligations and unlock fiscal space for environment-related investments.
With the conclusion of debt restructuring, Sri Lanka is in a more favourable position
to implement a DfCN swap. An early start to the preparatory work would enhance
the government’s readiness for successful implementation.
Externally, implementing DfCN swaps requires a transformed global financial
architecture where developing countries are better supported to maintain
sustainable debt levels and higher climate investments. Multilateral financial
institutions have a bigger role to play in this regard. Internally, long-term planning,
stringent commitments across all sectors and capacity building are critical in
implementing DfCN swaps.
DfCN swaps have the potential to re-establish financial and governance credibility
and accomplish the financing needs of debtor countries. However, whether the
benefits of DfCN swaps can be fully capitalised depends significantly on the
government’s willingness to implement broader policy reforms and its ability to
negotiate more favourable debt agreements.