Business
Can Debt-for-Climate and Nature Swaps help make Sri Lanka’s debt more manageable?
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.
When Vidullanka PLC announced it was launching Sri Lanka’s first listed Sukuk—a Shariah-compliant, asset-backed debt instrument—it wasn’t just another financial product hitting the market. It was a landmark moment for Islamic Finance in the country. At the helm of this groundbreaking initiative was Riyaz Sangani, Chief Executive Officer of Vidullanka PLC, who, along with a visionary team of arrangers and advisors, ushered in a new chapter in Sri Lanka’s capital market history.
“We believe renewable energy and Islamic finance are natural partners,” Sangani remarked in the press briefing in Colombo recently underscoring how Vidullanka’s asset-rich, sustainability-driven operations make it an ideal candidate for structuring Shariah-compliant financing. This alignment not only enhanced Vidullanka’s funding options but opened the door for a new class of investors seeking ethical and interest-free investment vehicles.
With Sri Lanka’s financial sector still emerging from a turbulent period marked by instability and credit tightness, Vidullanka’s Rs. 500 million Sukuk issue signals a calculated pivot toward financial innovation. For Sangani, the move is more than strategic—it’s symbolic. “This issuance is a stepping stone, he said, expressing hope it would inspire further diversification in Sri Lanka’s Islamic finance ecosystem.
The two-tranche Sukuk—offered in both fixed and floating rate structures—has been rated A+ (lka) by Fitch Ratings and secured by tangible assets and designated cash reserves. It also adheres strictly to Shariah principles, certified by a panel of reputed scholars, including Prof. Aishath Muneeza and Moulavi Mohammed Siraj Najubudeen.
Behind the scenes, the Sukuk’s success was driven by the unwavering dedication of partners like Eshani Thenuwara, Senior Vice President at NDB Investment Bank. Her team had begun work on the product long before formal regulatory frameworks were in place.
“It has been a fulfilling journey of learning and overcoming many obstacles,” Thenuwara noted. “Vidullanka was the perfect partner—dedicated to Shariah-compliant finance as a matter of policy, not just convenience.” NDB Investment Bank served both as Manager and Joint Arranger for the issue, alongside Adl Capital.
Ishrat Rauff, Managing Director of Adl Capital, offered a broader view of the accomplishment. “This is a product that has been on the industry’s wishlist for decades, he said, pointing to the perseverance it took to get regulatory buy-in from the Colombo Stock Exchange (CSE) and the Securities and Exchange Commission (SEC). He described the structuring exercise as “the most complex” in his nearly 30-year career.
Adl Capital’s involvement went beyond technical advisory—it helped bridge gaps between regulatory expectations, investor confidence, and religious compliance. “We sincerely hope this sets a precedent for more ethically aligned financial products in the market, Rauff added
By Ifham Nizam ✍️
In a bold move to revolutionise the construction industry, International Construction Consortium (Pvt) Limited (ICC), one of Sri Lanka’s leading engineering and construction companies, has introduced an innovative, eco-friendly housing solution aimed at shaping a more sustainable future.
Celebrating 40 years of construction excellence, ICC remains true to its vision of being the most innovative and responsible developer, contractor, and engineering solutions provider on a global stage. Its latest venture—Durra Kit Houses—embodies this vision, offering a modern alternative to conventional building methods through cutting-edge design and environmental responsibility.
Durra panels, a remarkable construction material made from compressed straw bound with a zero-emission adhesive, form the foundation of the prefabricated Durra Kit Houses. They deliver superior thermal insulation that maintains stable indoor temperatures while dramatically reducing energy consumption. Homeowners can expect significantly lower heating and cooling costs, alongside a reduced carbon footprint.
Beyond energy efficiency, Durra panels offer excellent soundproofing, creating a peaceful and comfortable indoor environment. Their fire resistance, pest-proofing, and mould resistance ensure safety and durability, making these homes as practical as they are sustainable.
A standout feature of the Durra Kit Houses is their cost-effectiveness. The prefabrication process enables rapid assembly, reducing construction times and labour expenses. Additionally, the energy-efficient design offers long-term savings on utility bills.
The design is highly customisable, allowing for a variety of aesthetic and functional preferences—from sleek modern styles to more traditional layouts. Its flexible structure also simplifies future expansions or modifications.
DFCC Bank PLC has officially relaunched its flagship digital corporate banking platform, DFCC iConnect 2.0, reinforcing its commitment to delivering digitally advanced, client-centric solutions. Engineered for speed, security, and precision, iConnect 2.0 now includes TradeConnect, a robust trade finance module that fully integrates both cash management and trade services into a single, integrated platform.
Created in direct response to the evolving needs of Sri Lanka’s corporate and SME sectors, DFCC iConnect 2.0 goes beyond standard digital banking. It is a strategic enabler that helps clients simplify financial operations, gain greater control, and scale with confidence. By consolidating daily banking and complex trade workflows into a single, secure, and real-time interface, the platform empowers businesses to focus on growth while managing their finances with transparency and efficiency.
Sohantha Wijesingha, Senior Vice President – Head of Corporate Banking at DFCC Bank PLC, stated,
“At DFCC Bank, our approach to digital banking is built on the principles of service, simplicity, and trust. iConnect 2.0 has been reimagined to support our clients not only with advanced functionality but also with the flexibility and responsiveness they need to succeed. Whether through enterprise-level user controls, real-time mobile authorisations, or dedicated relationship support, every element of the platform is designed to reduce complexity and enhance the client experience.”
DFCC iConnect 2.0 delivers a comprehensive suite of enhancements that elevate the corporate banking experience. Features include multi-tiered approvals, group-level access, customisable alerts, real-time dashboards, and mobile transaction authorisations. Clients also benefit from a dedicated client service team, providing end-to-end support throughout the onboarding and operational journey.
The introduction of TradeConnect marks a significant leap forward for DFCC iConnect 2.0, transforming it into a truly end-to-end digital trade platform for businesses. It brings together a comprehensive suite of trade finance facilities—including Letters of Credit (LC), Import and Export Loans, and both Local and International Bank Guarantees—while supporting multiple payment terms such as Advance Payments, Open Accounts, Documents Against Payment (DP), and Documents Against Acceptance (DA).
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