Green debt swaps between India and Sri Lanka can prove beneficial for both. For India, it can ease Sri Lanka's debt, boost environmental conservation, and improve regional energy security, all while supporting its SDGs.
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In 2022, low- and middle-income countries spent a record US$443.5 billion on external public debt servicing, diverting funds from crucial sectors like health, education, and environmental conservation. Projections indicate a 10 percent increase in debt servicing expenses for all developing countries in 2023–24, with low-income countries facing nearly a 40 percent rise. This ongoing debt crisis in the Global South highlights the need for innovative solutions.
This article advocates why India and Sri Lanka would gain from engaging in green debt swaps, with a focus on India's motivations and potential benefits. Sri Lanka has long grappled with financial challenges such as high debt levels, insufficient foreign reserves, and trade imbalances. Compounded by persistent political instability, the country faced an economic crisis, highlighted by an unmanageable debt burden. Despite engaging in debt-restructuring with creditors and the International Monetary Fund (IMF), Sri Lanka's heavy debt curtails its ability to allocate resources to climate mitigation, adaptation, or environmental conservation efforts.
By engaging in a green debt swap with its heavily indebted neighbour, India would not only alleviate its external debt burden while leveraging environmental, economic and geopolitical benefits but also align with its commitment to sustainability.
India, a regional ally and stakeholder, seeks to promote sustainable development and regional stability, particularly in neighbouring countries like Sri Lanka. By engaging in a green debt swap with its heavily indebted neighbour, India would not only alleviate its external debt burden while leveraging environmental, economic and geopolitical benefits but also align with its commitment to sustainability. This would position India alongside developed nations offering such agreements and set a precedent for mutually beneficial assistance between developing countries.
'Debt-for-nature' and 'debt-for-climate' swaps, collectively referred to as green debt swaps, are debt-restructuring mechanisms where a country reduces its foreign debt in exchange for environmental protection commitments. While debt-for-nature emphasises conservation, debt-for-climate supports climate mitigation initiatives like renewable energy. Green debt swaps address the dual challenges faced by developing nations of borrowing for development and adapting their approaches to combat climate change and biodiversity loss.
Recent successful swaps include; Seychelles and Belize converted parts of their debts for ocean protection efforts; Cape Verde converted part of its debt for investments in renewable energy production and Ecuador converted a large part of its debt in exchange conservation efforts and protection of wildlife on the Galapagos Islands.
Due to its staggering debt burden, Sri Lanka has been engaged in debt-restructuring talks with creditors and the IMF. Its overwhelming debt obligations have already impaired the country politically, socially and economically, thereby severely constraining its ability to commit resources to climate mitigation or adaptation or any meaningful environmental protection or conservation efforts.
The outcome of these debt renegotiations will likely be some form of austerity package that may lead to social unrest, increased inequality, and hamper overall economic growth in the short-term. Green debt swaps could help alleviate this pressure, not only through debt reduction but also through job creation in green energy, climate-resilient infrastructure, eco-tourism and nature conservation. These sectors, often sidelined during economic downturns, hold promise for sustainable recovery and long-term resilience.
Green debt swaps could help alleviate this pressure, not only through debt reduction but also through job creation in green energy, climate-resilient infrastructure, eco-tourism and nature conservation.
Debt-for-climate swaps with India would allow “forgiven debt” to fund Sri Lanka’s renewable energy sector, which currently relies heavily on biofuels and hydropower, with much overlooked solar and wind projects. Despite a significant portion of its power generation coming from renewables (49.5 percent), solar and wind contribute less than 0.5 percent to the country’s total energy mix, signalling a pressing need for diversification to mitigate Sri Lanka's energy vulnerability.
Sri Lanka’s heavy reliance on imported fossil fuels strains its foreign exchange reserves, a major factor contributing to the country’s default. Due to a lack of investment capital, this reliance impedes financing for its renewable energy sector and its broader transition to sustainable energy. A study by the World Bank indicated that Sri Lanka could harness up to 56GW of sustainable ocean energy through offshore wind projects alone in its coastal waters. Moreover, Sri Lanka’s waters are also recognised to also have great potential for ocean energy in the form of tidal and wave energy. Despite initial costs, these resources could significantly contribute to long-term energy security.
To make green debt swaps more attractive for India, the following product-level innovations could be considered:
There are a multitude of reasons why some form of relief or forgiveness of some of Sri Lanka’s crippling sovereign debt is in India’s interest. By engaging in green debt swaps with Sri Lanka, India can address multiple strategic objectives simultaneously. It can help alleviate Sri Lanka's debt burden, promote environmental conservation, enhance regional energy security, strengthen its geopolitical position, and demonstrate leadership in sustainable development. This multifaceted approach not only serves India's immediate interests but also contributes to long-term regional stability and ecological balance, positioning India as a forward-thinking leader in South Asia.
Anirudh Rastogi is the Founder and Managing Partner at Ikigai Law.
Daniel Odisho works at Ikigai Law as a Sustainability Consultant.
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Anirudh is the Founder and Managing Partner at Ikigai Law - an award-winning law and public policy firm. An author and Ted speaker, Anirudh was ...
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Daniel is a corporate runaway from the finance industry. With 17 years of international experience, his professional journey included roles as an independent Management Consultant ...
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