Scoping Study on Debt for Climate and Nature Swaps in Sri Lanka

Thematic Area: Environment & Climate Change

Sri Lanka’s debt crisis compelled the government to unilaterally default on its external debt in April 2022 and seek a bailout from the International Monetary Fund (IMF). The root cause of the debt crisis is financing the persistent and large fiscal deficits using unsustainable public debt. To achieve debt sustainability, a rigorous debt restructuring is mandatory. Yet, debt restructuring is extremely challenging as it is inherently a costlier process, complicated further by Sri Lanka’s intricate creditor landscape.

In response to the intersecting challenges of unsustainable debt, climate change, and biodiversity loss, many developing countries are turning to debt swaps focused on climate and nature conservation. This scoping study aims to explore the potential of utilising debt-for-climate-and-nature swaps as an alternative fiscal instrument to provide debt relief for Sri Lanka.