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Can Debt-for-Climate and Nature Swaps help make Sri Lanka’s debt more manageable?

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Lakmini Fernando is a Research Fellow at IPS with primary research interest in Development Economics, Public Finance and Climate Change. She has expertise in econometric data analysis, research design and causal methodologies. Lakmini holds a BSc in Agriculture from the University of Peradeniya, a Master of Development Economics (Advanced) from the University of Queensland, Australia and a PhD in Economics from the University of Adelaide, Australia.

Sunimalee Madurawala is a Research Economist at the Institute of Policy Studies of Sri Lanka (IPS). She has over 15 years of research experience in the areas of gender, health economics and population studies. Sunimalee holds a BA (Economics Special) degree with a first-class and a Masters in Economics (MEcon) degree from the University of Colombo, Sri Lanka.

By Dr Lakmini Fernando and Sunimalee Madurawala

Sri Lanka’s economic crisis, fuelled by unsustainable debt and a default in 2022, left the country struggling to stabilise its economy. Its high climate vulnerability that disrupts livelihoods exacerbated the economic challenges. In the face of dual pressures from an economic crisis and climate vulnerability, the need for alternative approaches to financial recovery has never been more urgent. Therefore, debt-for-climate-and-nature (DfCN) swaps could be a possible option to lower the financial burden while addressing climate challenges.

The Need for Alternative Financing Options in Sri Lanka

Sri Lanka was forced to default on its external debt and seek a USD 3 billion bailout from the International Monetary Fund (IMF) in March 2023. Its total debt stock stood at USD 92 billion, with 40% being external debt in 2023. Sri Lanka’s debt portfolio is complex and its outstanding debt to China and India accounted for 18% of total external debt (59% of bilateral loans) in September 2022 (Figure 1). Amidst the conclusion of debt restructuring, Sri Lanka might benefit by opening to alternative financial instruments.

DfCN Swaps as an Alternative

DfCN swaps are a sovereign debt restructuring tool that helps (partial) restructuring of external debt in exchange for domestic investment in climate action. Well-designed DfCN swaps provide debtor countries the fiscal space to invest in climate adaptation and biodiversity sustainability.

With unsustainable debt and climate change identified as pressing issues for developing countries, Sri Lanka emerges as a priority country for DfCN swaps. Earlier, DfCN swaps followed a ‘piecemeal approach’ – implementing smaller, uncoordinated projects and managing funds through extrabudgetary channels. In contrast, recent swaps follow a ‘systematic approach’ – focusing on broader programmes instead of individual projects and providing budget support by channelling funds directly into debtor countries’ national budgets. This approach makes DfCN swaps more effective by mobilising larger amounts of funds, increasing debtor governments’ accountability, linking payments to performance, and aligning Nationally Determined Contributions (NDCs) and National Biodiversity Strategies and Action Plans (NBSAPs) in target setting.

Global Context and Debt Swap Options for Sri Lanka

DfCN swaps was first introduced in 1984 in response to the deteriorating tropical rain forests and mounting debt obligations in Latin America. Since then, many countries have adopted DfCN swaps to address both financial and environmental challenges.

In 2002, the United States (US) engaged in a bilateral swap with Peru, subsidised by NGOs such as The Nature Conservancy (TNC),

to protect over 1 million hectares of wilderness areas. The US has also engaged in similar swaps with Guatemala and Indonesia to protect tropical forests.

In 2015, Seychelles, pioneered a Blue Economy debt for nature swaps, converting USD 21.6 million of sovereign debt with Paris Club creditors to fund marine conservation. This is considered the world’s first debt swap for ocean conservation and climate adaptation.

Belize engaged in a ‘tripartite blue economy swap’ with the TNC in 2021, which reduced its external debt by 10% of GDP. TNC helped Belize to buy back USD 553 million of national debt borrowed from commercial creditors (30% of GDP) by issuing USD 346 million in blue bonds (10% of GDP). In response, Belize agreed to invest in marine conservation. This deal allows buy back of entire external commercial debt by TNC and Belize to invest USD 4 million annually on marine conservation until 2041 aiming to increase marine-protection parks from 15.9% of its oceans to 30% in 2040. Hence, this deal addresses the triple objectives of restoring debt sustainability, promoting sustainable development and enhancing climate resilience.

In 2023, Ecuador entered into the world’s largest DfCN swap, facilitated by Credit Suisse, buying back USD 1.6 billion of sovereign debt for USD 656 million in new sovereign debt. In return, Ecuador agreed to allocate USD 450 million in long-term marine conservation in the Galápagos Islands. The success of this deal was driven by several key factors: participation of academia, collaboration and consensus among multiple stakeholders including civil society and local governments, an innovative financing model, and government leadership.

The effectiveness of swaps depends on the ability to address several key challenges: political and macroeconomic stability to ensure long-term accomplishment; stable institutional structures to denote stability in planning and implementation; strong regulatory frameworks to cover both financial and environmental obligations; and knowledge/skills on swaps at every level of the public service. Accordingly, the success of DfCN swaps is dependent on the leadership role of debtor governments and a systematic approach in the designing and implementation of swaps.

Debt swaps are determined collectively by the respective parties involved, hence, it is difficult to predict the magnitudes of these swaps. However, following the three criteria proposed by Boland (2023) on the magnitude of debt, type of lending (whether it is a commercial or concessional loans) and interest of the creditors (considering the country’s track record), Sri Lanka may consider the following four creditors for a possible DfCN swap in the future (Table 1).

Way Forward

In addressing the triple challenges of high indebtedness, climate change and loss of nature, DfCN swaps can serve as an effective alternative fiscal instrument for debt-ridden Sri Lanka. Systematic planning and stringent government commitment and all relevant key stakeholders are crucial for its success. Also, addressing knowledge and skill gaps on debt swaps is crucial. With sufficient political and macro-stability, Sri Lanka could be ready to implement DfCN swaps potentially accelerating its economic recovery.



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Cyber heist at External Resources Dept: Funds diverted in email hack, CID probe underway

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Deputy Finance Minister Dr. Anil Jayantha Fernando

A suspected cyber fraud targeting Sri Lanka’s Department of External Resources has triggered a high-level investigation after hackers allegedly manipulated official email communications to divert funds to unauthorised overseas accounts, Deputy Finance Minister Dr. Anil Jayantha Fernando said.

The sophisticated breach is believed to have involved the interception and alteration of email exchanges between the Department and Export Finance Australia, raising serious concerns over vulnerabilities in the Government’s digital financial communication systems.

According to the Deputy Minister, the fraud came to light following suspicious changes detected in bank account details linked to a payment transaction involving India. This anomaly prompted officials to scrutinise prior correspondence, eventually uncovering what appears to be a coordinated cyber intrusion designed to reroute funds.

“This was not a routine technical glitch. There is clear indication of external interference where communication trails have been tampered with,” Jayantha said, noting that complaints had already been lodged with law enforcement authorities.

“Investigations are now being handled by the Criminal Investigation Department (CID), which is probing the extent of the breach, the financial losses incurred, and the possible involvement of international cybercrime networks”.

Financial analysts warn that the incident underscores growing risks faced by state institutions engaged in cross-border financing arrangements, particularly when relying heavily on unsecured or inadequately protected communication channels.

The Department of External Resources plays a pivotal role in managing Sri Lanka’s foreign-funded projects and liaising with international lenders and export credit agencies. Any compromise in its communication systems could have far-reaching implications for investor confidence and the country’s financial credibility.

Authorities are expected to review existing cybersecurity protocols across key financial institutions in the wake of the breach, with calls mounting for tighter safeguards, encrypted communications, and multi-layer verification systems for fund transfers.

Meanwhile, officials remained tight-lipped on the exact quantum of funds involved, citing the ongoing nature of the investigation. However, sources indicated that the attempted diversion was significant enough to raise alarm at the highest levels of the Finance Ministry.

The incident adds to a growing list of cyber-related financial threats confronting governments worldwide, highlighting the urgent need for robust digital governance frameworks as Sri Lanka continues to engage with international financial partners.

By Ifham Nizam

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Sun Siyam Pasikudah marks the New Year at the shore of Sri Lanka’s rising coast

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There is something about Avurudu that naturally fills every corner of Sri Lanka with energy and connection, and this year, that spirit extended to the shores of Pasikudah. At Sun Siyam Pasikudah, part of the Prive Collection within The House of Siyam, the Sinhala and Tamil New Year was celebrated on 14 April with a vibrant, full day programme that brought together guests and team members in true festive spirit, warm, lively, and centred around shared traditions and generous feasts.

The day followed the rhythm that Sri Lankan families know well. At the auspicious hour determined by the almanac for the New Year, the hearth at The Kitchen was ceremonially lit and the milk pot set to boil, symbolising warmth, unity, and the drawing in of abundance for the year ahead. This followed another auspicious moment at noon where a Traditional Sweet Table was laid out, where kiribath, kokis, kavum, aasmi and more were on offer, prepared by the resort’s culinary team and enjoyed by guests who had gathered, some for whom this was the most natural thing in the world, and others encountering the tradition for the very first time.

From 3:00 PM onwards, the afternoon opened into games. The resort grounds hosted the full run of Avurudu classics: Kana Muttiya (Pot Breaking), Kaba Adeema (Tug of War), Banis Kama (Bun Eating Contest), Balum Pipirawima (Balloon Blowing), Kotta Pora (Pillow Fighting), the Sack Race, Spoon Race, Blindfold Yogurt Feeding, Eyeing the Elephant, and Finding the Coin on the Plate. Guests of all ages joined in, and the kind of laughter that filled the afternoon is really the only way to describe what Avurudu at its best feels like.

“Avurudu is one of those occasions where the feeling in the air does all the work. The auspicious timings, the lighting of the hearth, the sweet table, the games in the afternoon: each of these carries its own meaning, and when you observe them properly and together, the day takes on a quality that is hard to replicate at any other time of year. We wanted our guests, wherever they had travelled from, to feel genuinely part of that, not simply watching from the outside. I think the day showed that Pasikudah is a place where that kind of celebration feels entirely at home,” said Arshed Refai, General Manager, Sun Siyam Pasikudah

The celebration is also a reflection of a broader moment for this stretch of the Sri Lankan coast. Pasikudah has long been known among those who seek it out: a bay of extraordinary calm and clarity, unhurried in a way that the island’s busier coastal destinations rarely are. What has shifted in recent years is that more people are finding it. Sri Lanka welcomed over 600,000 international visitors in the first quarter of 2025, generating tourism revenue of USD 1.025 billion, and the East Coast is increasingly part of that conversation. Sun Siyam Pasikudah has been central to placing Pasikudah on that map.

The resort’s 34 pavilions, offered in one and two bedroom configurations across garden and beach settings, are styled in a way that is quietly striking: monochrome interiors with warm golden accents, spacious and well-considered, always with the ocean close by. Dining is spread across The Kitchen, The Cellar, The Slice and Grill, The Tea House, and The Bar, with destination dinners available for guests who want a private evening under the stars. Sailing excursions along the coastline, spa and wellness, and encounters with local arts and crafts complete what Sun Siyam Pasikudah offers throughout the year.

 

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Allianz Avurudu Negam returns, easing the journey home

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During the Sinhala and Tamil New Year, a time defined by togetherness, tradition and returning home, Allianz Insurance Lanka Limited once again stood alongside Sri Lankan communities by continuing its Avurudu Negam initiative for the second consecutive year, expanding its reach to support families during the festive travel period.

Building on the positive response to last year’s programme, Allianz Avurudu Negam 2026 was shaped to make the journey home special and loved during Avurudu. In response, Allianz offered ticket refunds to eligible passengers travelling on the Galu Kumari service from Maradana, supporting passengers journeying home to celebrate the New Year with loved ones.

Passengers boarding from Maradana and Fort and travelling beyond Galle up to Belliatta were eligible for the refund, helping make the journey home more affordable at a meaningful time of year. Acknowledging that financial strain frequently continues even after the celebrations conclude, Allianz extended the refund window until 30th April, easing the cost of returning to Colombo after Avurudu.

To complement this support, Allianz added a heartfelt touch rooted in New Year tradition. Traditional oil cakes were distributed to passengers boarding from Maradana, allowing families to take a familiar symbol of Avurudu back home and share it around their festive tables.

Allianz also prioritised protection during this period. Passengers eligible for the refund were given the option to obtain free Allianz Personal Accident Insurance, reflecting the belief that protection does not end with a journey, but continues wherever people go. In addition, these passengers were included in an LKR 1 million raffle draw, as an extension of the existing campaign, offering one winner shopping vouchers redeemable at outlets of their choice and support that extends beyond the New Year season.

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