Sri Lanka is in consultation with all stakeholders for the introduction of a Debt-for-Nature Swap (DNS), an innovative financial solution introduced by the International Monetary Fund (IMF), according to Deputy Secretary to the Treasury R.M.P. Ratnayake.

The Deputy Secretary to the Treasury told The Sunday Morning that the Government had been working on the debt-for-nature swap concept for a long time as Sri Lanka needed to finalise all institutional and legal frameworks to go ahead with this innovative idea.

“These are new financing options that countries like ours are now looking at. But before finalising any transaction, we need to do lots of preliminary work,” Ratnayake explained.

He further said that the Government was currently engaged in the preliminary work and consultation process with all stakeholders.

“In the future, the debt-for-nature swap concept will come as a new instrument, but we are still in the consultation process with all these stakeholders. We have not finalised anything,” Ratnayake said. 

Recently, Central Bank Governor Dr. Nandalal Weerasinghe told Reuters in Washington DC that the country was open to considering the option of a debt-for-nature swap if a request was made.

When asked if the country would consider debt-for-nature swaps for all its overseas creditors, Weerasinghe said that “those are useful and relevant financial instruments,” although the country’s main goal was to complete the debt rework process “as soon as possible”.

“If creditors say that they would like to have those instruments, that it can be done within the timeline and do it fast, we are open,” the Governor stated.

In November last year, The Sunday Morning reported that the Sri Lankan Government had indicated that it was planning to explore alternative funding means such as the announced $ 1 billion DNS programme in late 2023, following the approval of the anticipated $ 2.9 billion Extended Fund Facility from the IMF.

Speaking to The Sunday Morning earlier this year, former Director of Development Economics of the World Bank (WB) and Georgetown University Practice of International Development Prof. Shanta Devarajan said a DNS was a transaction whereby a debtor country had part of its debt burden reduced in exchange for the country investing in protecting its environment.

“In the case of commercial debt, the transaction involves a third party, usually an NGO such as the Nature Conservancy, which buys the country’s bonds at a reduced price and then ensures that the country undertakes the environmental investment. In the case of official debt, the government of the creditor country typically undertakes the transaction directly. These have been used by several countries, most recently Belize,” Prof. Devarajan told The Sunday Morning.

DNS programmes began in the 1980s, with Ecuador being the first country to try out the concept. A number of countries – such as the Philippines, Bolivia, and Uganda – have also used DNS in the past to manage debt and improve their environmental protection and resilience in the process.

According to the IMF Blog, debt-for-climate swaps and debt-for-nature swaps seek to free up fiscal resources so that governments can improve resilience without triggering a fiscal crisis or sacrificing spending on other development priorities. 

Creditors provide debt relief in return for a government commitment to decarbonise the economy, invest in climate-resilient infrastructure, or protect biodiverse forests or reefs.

In cases where action would not have been taken without the swap, the arrangement aids climate action or protects nature.

Borrowers get fiscal relief through budget savings to the extent that debt reduction exceeds the new spending commitments. 

There can be other benefits, too, such as an upgrade to a country’s sovereign credit rating, as was the case in Belize, which makes government borrowing cheaper, it is stated.

Swaps could even create additional revenue for countries with valuable biodiversity by allowing them to charge others for protecting it and providing a global public good.

This is also true of carbon sinks, or natural environments which absorb carbon dioxide from the atmosphere and are an important part of the transition to a lower carbon economy.