Context:

Green debt swaps between India and Sri Lanka offer a unique opportunity for both nations. For India, these swaps provide a pathway to ease Sri Lanka's debt crisis while boosting environmental conservation, enhancing regional energy security, and supporting its own Sustainable Development Goals (SDGs).

Exploring Green Debt Swaps for Mutual Benefit

The Debt Crisis in the Global South

In 2022, low- and middle-income countries faced unprecedented pressure, spending a record US$443.5 billion on external public debt servicing. This diverted critical resources away from vital sectors such as health, education, and environmental conservation. Forecasts for 2023–24 predict a further 10 percent rise in debt servicing costs for all developing countries, with low-income nations likely to experience a nearly 40 percent increase. The ongoing debt crisis in the Global South underscores the urgent need for innovative financial solutions.

India's Potential Role in Green Debt Swaps with Sri Lanka

India and Sri Lanka stand to gain significantly from green debt swaps. These mechanisms could provide debt relief for Sri Lanka while promoting environmental, economic, and geopolitical benefits for India. Sri Lanka’s persistent financial challenges—characterised by high debt, insufficient foreign reserves, and trade imbalances—were exacerbated by political instability, culminating in a severe economic crisis.

Despite attempts at debt-restructuring with the International Monetary Fund (IMF) and other creditors, Sri Lanka’s overwhelming debt hinders its capacity to invest in climate mitigation, adaptation, or environmental protection. By engaging in green debt swaps, India can not only ease Sri Lanka's external debt burden but also gain environmental and strategic advantages, aligning with its sustainability commitments.

What Are Green Debt Swaps?

Understanding Green Debt Swaps
Green debt swaps, encompassing 'debt-for-nature' and 'debt-for-climate' exchanges, are debt-restructuring mechanisms. In these swaps, a debtor country reduces its foreign debt in exchange for commitments to environmental protection. Debt-for-nature swaps emphasise conservation efforts, while debt-for-climate swaps focus on supporting climate mitigation initiatives, such as renewable energy development.

Global Precedents
Recent successful green debt swaps include Seychelles and Belize converting parts of their debts into ocean protection projects, Cape Verde using debt conversion for renewable energy investments, and Ecuador channelling its converted debt into conservation efforts on the Galapagos Islands.

Sri Lanka’s Overlooked Investment Opportunities

Austerity and Economic Pressures

Despite its heavy debt burden, Sri Lanka has engaged in debt-restructuring talks with creditors and the IMF. However, its economic obligations continue to restrict the country's ability to allocate resources toward climate mitigation and environmental conservation. The outcome of these debt negotiations will likely include austerity measures that could lead to social unrest, exacerbate inequality, and slow overall economic growth. Green debt swaps offer a potential remedy by not only reducing debt but also promoting job creation in sectors such as green energy, climate-resilient infrastructure, eco-tourism, and nature conservation—areas that hold great potential for sustainable recovery and resilience.

Renewable Energy Sector Opportunities
Green debt swaps could also channel funds toward Sri Lanka’s renewable energy sector, which heavily relies on biofuels and hydropower but underutilised solar and wind energy. Although renewables account for nearly half (49.5 percent) of Sri Lanka’s power generation, solar and wind energy contribute less than 0.5 percent to the total energy mix, highlighting a significant need for diversification to reduce the country's energy vulnerability.

Long-Term Energy Security
Sri Lanka's dependence on imported fossil fuels strains its foreign exchange reserves, contributing to its financial instability. Without investment capital, the country struggles to finance renewable energy projects. According to the World Bank, Sri Lanka's coastal waters have the potential to generate up to 56GW of ocean energy through offshore wind projects, and the country is also recognized for its potential to develop tidal and wave energy. Despite initial high costs, these resources could bolster long-term energy security.

Why Should India Engage in Green Debt Swaps?

Geopolitical Gains

• Strengthening Regional Influence: By providing debt relief through green swaps, India can solidify its role as a leader in South Asian diplomacy and environmental initiatives.
• Countering Chinese Influence: As China remains Sri Lanka's largest bilateral creditor, India's involvement in debt relief efforts can help balance the region’s power dynamics. Given Sri Lanka's strategic location, supporting its recovery aligns with India’s broader geopolitical strategy to maintain regional stability.

Geoeconomic Benefits

• Expanding Economic Footprint: Green debt swaps would open opportunities for Indian businesses in Sri Lanka’s renewable energy and conservation sectors.
• Enhancing Energy Security: Investment in Sri Lanka’s renewable energy infrastructure could lead to energy-sharing agreements, benefitting both nations. The proposed US$1.2 billion bi-directional undersea electricity cable, envisioned as an "energy corridor" between Sri Lanka and India, presents an ideal opportunity for inclusion in a Debt-for-Climate swap.

Environmental Leadership and Shared Ecosystems

• Commitment to Global Climate Goals: Engaging in green debt swaps aligns with India’s international climate commitments and reinforces its role as a responsible global actor.
• Protecting Regional Ecosystems: Investing in Sri Lanka’s conservation efforts benefits India directly, as both nations share ecosystems and maritime boundaries. Conservation in the India-Sri Lanka transboundary area of Palk Bay is crucial to preserving marine biodiversity and promoting sustainable fisheries.

Diplomatic Soft Power

• Promoting an Alternative Development Model: India can position itself as a partner in sustainable development, offering an approach that differs from traditional creditors, thus enhancing its diplomatic influence.
• Strengthening Bilateral Ties: By assisting Sri Lanka with its debt crisis while supporting environmental initiatives, India could significantly enhance its relationship with its neighbor.

Economic Spillover Effects

• Job Creation and Capacity Building: India’s support for Sri Lanka’s green initiatives could create jobs and foster capacity-building in energy sustainability, benefiting Indian firms and experts involved in these projects.
• Technology Transfer: Green debt swaps facilitate the transfer of renewable energy technologies from India to Sri Lanka, opening new markets for Indian green tech firms.

Innovative Financial Mechanisms

• Pioneering New Financial Approaches: By engaging in green debt swaps, India can establish itself as a leader in sustainable finance, paving the way for similar arrangements with other nations in the region.
• Forex Conservation: These swaps allow Sri Lanka to fund environmental initiatives using local currency, indirectly promoting economic stability in the region—a benefit to India as well.

Enhancing the Appeal of Green Debt Swaps for India

To make green debt swaps more attractive, the following product-level innovations could be explored:

• Transboundary Carbon Credits: India could receive a portion of the carbon credits generated from Sri Lanka’s green projects funded by the debt swap.
• Green Technology Transfer Programme: Agreements could include provisions for Indian companies to transfer green technologies to Sri Lanka, opening new markets for Indian green tech firms.
• Green Tourism Corridor: Establishing a special eco-tourism programme between the two countries could boost tourism while promoting conservation.
• Sustainable Fisheries Partnership: A joint programme for sustainable fishing practices in shared waters would help ensure food security and protect marine ecosystems.

Conclusion

Relieving some of Sri Lanka’s crippling sovereign debt through green debt swaps is clearly in India’s interest. These swaps offer India a chance to simultaneously alleviate Sri Lanka’s debt burden, promote environmental conservation, enhance regional energy security, and strengthen its geopolitical position. Moreover, India can demonstrate leadership in sustainable development, not just for immediate benefits but for long-term regional stability and ecological balance. Through this forward-thinking approach, India can cement its role as a leader in South Asia.

Source: ORF India