Highlighting that Sri Lanka’s fiscal strength was very weak, a leading international Sovereign Rating Agency estimates that interest payments would absorb around 70 per cent of the country’s state revenue in 2022 increasing Government debt to 125 per cent of the gross domestic product in 2022.
In a proposal to the Government, the United Nations Development Programme (UNDP) has suggested debt-for-nature swaps as part of the sovereign’s broader debt restructuring plan.
According to Moody’s Investor Services, effective use of debt-for-nature swaps might help reduce the Government’s debt burden and debt servicing requirements, while providing long-term benefits through investments to mitigate environment-related risks.
This is in parallel with Sri Lanka’s negotiations with the International Monetary Fund and other multilateral development partners for financing support, they said.
“If effectively implemented, debt-for-nature swaps have the potential to provide long-term credit benefits by offering debt relief while increasing investments that could bolster Sri Lanka’s resilience to environmental risks,” the agency said.
Under the UNDP proposal, the debt-for-nature swap would allow a portion of the Government’s large debt burden to be forgiven in exchange for the implementation of environmental policies or funding of conservation programs.
The transaction would be likely to involve bilateral creditors and environment-related non-governmental organisations as potential partners.
Moody’s already assume substantial losses for private sector creditors in line with the global average for defaulting sovereigns after the Government’s recent decision to suspend the repayment of external -public debt.
Sri Lanka missed coupon payments on 18 April and are unlikely to be cured within the 30-day grace period.
Debt-for-nature swaps have been successfully deployed in emerging markets.
In 2010, the US and Brazil struck a deal to write off US$21 million of debt; money which would otherwise have gone to service the debt is being used to conserve Brazil’s rainforests and enhance the livelihoods of those who live in them.
By Mario Andree