The Sri Lanka debt crisis that unrolled in 2022 has left little room for manoeuvre. Three years after its sovereign default, the country is still setting aside a colossal sum of government revenue just to meet interest payments.
According to Verité Research, a Colombo-based thinktank, Budget 2025 allocated 2,950bn Sri Lanka rupees (8.9% of GDP) for interest payments on public debt, swallowing nearly 60% of the estimated state revenue of LKR4,990bn for the year. That leaves precious little for rebuilding the national economy or tackling climate risks that grow more urgent by the year.
One idea gaining traction is to tap into the recent revival of debt-for-nature swaps. The concept is not new but is taking on fresh relevance as countries look for ways to manage debt and fund climate goals at the same time.
Huge deals
Debt-for-nature swaps – the reduction or remission of sovereign debt in exchange for commitments to invest in environmental conservation or climate resilience projects – have become more ambitious over the past few years. Ecuador made headlines in 2023 when it bought back US$1.6bn of its own sovereign debt at a hefty discount, freeing up nearly half a billion dollars for marine conservation in the Galápagos. Belize did something similar in 2021, using a US$364m swap to secure long-term funding for its reef systems, backed by political risk insurance from the US Development Finance Corporation.
The Institute of Policy Studies in Colombo points out that Sri Lanka’s debt burden forces hard trade-offs. With far less now available in the national budget for climate resilience or biodiversity protection, redirecting even a fraction of that money could have outsized benefits.
Solar and wind power could slash the current massive energy imports
Unlike Ecuador and Belize, which struck their deals to avoid default, Sri Lanka has already crossed that line and is deep into restructuring talks with its creditors. Adding complex climate-linked instruments to the mix now could slow down or complicate that process. Many analysts, including Michael Iveson, an ODI Fellow, argue that Sri Lanka would be better off finishing the core restructuring first, then exploring nature swaps once the dust settles.
Even so, there is a case for being prepared. What helps debt-for-nature swaps succeed is the strength of the projects they fund. Ecuador leaned on the global profile of the Galápagos while Belize used its position as a top ecotourism spot. Sri Lanka may be able to do something similar with renewable energy. The country imports vast amounts of fuel – up to US$4.3bn worth in 2024. Moving more aggressively into solar and wind power would cut its need for foreign currency to purchase energy imports and also feed into its target of 70% renewable electricity by 2030.
There is also potential in offshore wind. A World Bank study estimates Sri Lanka’s potential offshore capacity at over 50 gigawatts, though tapping that will take time, investment and technical help. Building these projects into a debt-for-nature swap could make them easier to finance while giving creditors a clear line of sight to future returns, especially if exports to southern India materialise.
Stronger fundamentals
Older swaps were often small-scale and fragmented. More recent deals are sounder, with independent fund managers, clear performance metrics and external oversight. The Seychelles’ blue bond model, which channels funds through a dedicated trust, is one example. Sri Lanka would likely need something similar, coordinated across its finance, environment and foreign affairs ministries and the central bank. That has not always been a strength in Sri Lanka, so putting the right governance in place will be the key.
Local worries also need addressing. Some fear debt-for-nature swaps may undermine sovereignty, handing control of natural resources to foreign players. Yet the evidence doesn’t really back that up. Ecuador didn’t lose ownership of the Galápagos; Belize still manages its reefs. What these countries did was to formalise conservation commitments they already had, using external monitoring to ensure that funds were spent as promised. In many cases, that has strengthened local institutions rather than weakened them.
The swaps cost can be a price worth paying for larger funding streams
Another frequent concern is the cost. Setting up these deals means paying for independent auditors, international trustees and political risk insurance. That puts a dent in the proceeds. But without those safeguards, creditors are unlikely to agree to the discounts that make the swaps possible in the first place. In the end, it can be a price worth paying for larger, more durable funding streams.
The real attraction
The bigger question is whether it’s worth it now that Sri Lanka’s debt restructuring is underway. Some argue that debt swaps principally benefit countries on the edge of default, offering them a last-minute lifeline. But that view overlooks the real draw: these instruments are as much about securing long-term conservation financing as they are about reducing debt. Even Ecuador’s massive deal shaved only a modest amount off its debt ratio. The big gain came from locking in decades of stable funding for the country’s marine ecosystems.
Done right, a swap could also signal to international markets that Sri Lanka can handle complex, performance-based financing. That would matter for future climate or biodiversity bonds. Without it, the country risks staying stuck with underfunded parks, vulnerable coastlines and missed economic opportunities tied to tourism and renewable exports.
Debt-for-nature swaps alone will not fix Sri Lanka’s balance sheet. But with the right groundwork, credible climate targets, solid oversight and a clear revenue path for investors, they could turn some of today’s fiscal burdens into long-term assets. For a country balancing debt repayments against its environmental future, that is a trade well worth considering.
