The intersection of crippling debt and urgent environmental crises demands innovative financial solutions. This policy essay explores green debt swaps, a powerful mechanism where nations exchange foreign debt for climate and conservation commitments. We focus specifically on Sri Lanka, whose massive economic crisis and unmanageable debt burden severely limit its capacity for vital climate mitigation, adaptation, and environmental protection efforts. We then analyse the compelling reasons—from geopolitical stability to environmental security—why a green debt swap between India and Sri Lanka offers mutual, sustainable benefits. The essay concludes by detailing the current structural complications of these swaps and proposing a framework for India and Sri Lanka to navigate them effectively.
The concept of debt swaps originated in the aftermath of the 1982–1983 global debt crisis, which was triggered by a series of severe economic shocks. For example, the 1979–1980 "oil shock" drastically increased the real price of oil for importing developing nations, simultaneously raising debt interest rates and eroding their capacity to generate the foreign exchange necessary for debt servicing. This escalating dilemma led to the establishment of a secondary market for developing nation debt in 1982, where these loans could be traded at a market-determined, often steep, discount.
Recent successful applications of green debt swaps demonstrate their versatility: Ecuador restructured a significant portion of its debt in exchange for conservation efforts focused on protecting the Galapagos Islands' wildlife; Seychelles and Belize converted debt to fund investments in renewable energy production; and Cape Verde committed debt relief proceeds toward vital ocean conservation initiatives.
Relevance of Green Debt Swaps
The term "debt-for-nature swaps" has recently resurfaced as a popular mechanism for financing conservation initiatives in biodiverse, indebted developing nations. This resurgence is partly due to the reluctance of Global North nations to distribute substantial amounts of new grant funding, instead preferring conditional financial instruments primarily aimed at mobilising international private investors. Despite the annual biodiversity "finance gap" being estimated at $700 billion, contributions from wealthier nations to help lower-income countries meet biodiversity and climate targets remain insufficient. This context has driven the expansion of "swaps," allowing private investors access to previously untapped markets while enabling creditor banks to exchange risky foreign debt at a discount.
The first debt-for-nature deal was signed in 1987 between Bolivia and the US-based organisation Conservation International (CI). CI purchased $650,000 in Bolivian debt from a Swiss bank for $100,000. In exchange, the Bolivian government pledged to provide maximum legal protection to approximately 4 million hectares in the Amazon Basin and committed $250,000 in local currency for the management of the Beni Reserve. Even their early proponents acknowledged that debt-for-nature exchanges were "no panacea" for environmental challenges in the least developed nations. Nevertheless, they have remained a popular, albeit complex, instrument, experiencing a notable comeback in the post-COVID period.
What are Green Debt Swaps?
Green debt swaps, encompassing "debt-for-nature" and "debt-for-climate" arrangements, represent a specialised form of debt restructuring. Under this mechanism, a debtor nation's foreign debt is reduced or cancelled in exchange for a commitment to specific environmental protection or climate action pledges. "Debt-for-climate" specifically promotes climate change mitigation efforts, such as investments in renewable energy infrastructure, while "debt-for-nature" focuses on conservation and biodiversity preservation. These swaps are designed to assist highly indebted developing countries in addressing the concurrent challenges of financing development and transitioning their economies to combat biodiversity loss and climate change.The concept of debt swaps originated in the aftermath of the 1982–1983 global debt crisis, which was triggered by a series of severe economic shocks. For example, the 1979–1980 "oil shock" drastically increased the real price of oil for importing developing nations, simultaneously raising debt interest rates and eroding their capacity to generate the foreign exchange necessary for debt servicing. This escalating dilemma led to the establishment of a secondary market for developing nation debt in 1982, where these loans could be traded at a market-determined, often steep, discount.
Recent successful applications of green debt swaps demonstrate their versatility: Ecuador restructured a significant portion of its debt in exchange for conservation efforts focused on protecting the Galapagos Islands' wildlife; Seychelles and Belize converted debt to fund investments in renewable energy production; and Cape Verde committed debt relief proceeds toward vital ocean conservation initiatives.
Relevance of Green Debt Swaps
The term "debt-for-nature swaps" has recently resurfaced as a popular mechanism for financing conservation initiatives in biodiverse, indebted developing nations. This resurgence is partly due to the reluctance of Global North nations to distribute substantial amounts of new grant funding, instead preferring conditional financial instruments primarily aimed at mobilising international private investors. Despite the annual biodiversity "finance gap" being estimated at $700 billion, contributions from wealthier nations to help lower-income countries meet biodiversity and climate targets remain insufficient. This context has driven the expansion of "swaps," allowing private investors access to previously untapped markets while enabling creditor banks to exchange risky foreign debt at a discount.
The first debt-for-nature deal was signed in 1987 between Bolivia and the US-based organisation Conservation International (CI). CI purchased $650,000 in Bolivian debt from a Swiss bank for $100,000. In exchange, the Bolivian government pledged to provide maximum legal protection to approximately 4 million hectares in the Amazon Basin and committed $250,000 in local currency for the management of the Beni Reserve. Even their early proponents acknowledged that debt-for-nature exchanges were "no panacea" for environmental challenges in the least developed nations. Nevertheless, they have remained a popular, albeit complex, instrument, experiencing a notable comeback in the post-COVID period.
Components of Green Debt Swaps
Modern green debt agreements vary but are broadly classified as either Private Debt Swaps (involving commercial debt) or Public Debt Swaps (bilateral debt between governments).In Private Debt Swaps, a conservation non-governmental organisation (NGO) often purchases a portion of the government's commercial debt from private creditors, typically at a significant discount to its face value. The debtor nation then commits to repaying the debt, fully or partially, usually in local currency. The difference between the local currency repayment and the discounted purchase price constitutes the proceeds, which are channelled into an environmental preservation fund managed by the conservation NGO. While this mechanism was dominant until 2008, arrangements have grown significantly more complex.
Public Debt Swaps, or "bilateral debt-for-nature swaps," involve a lender government agreeing to restructure or forgive debt owed by a biodiverse debtor country. In exchange, the interest payments or a portion of the buy-back price are redirected toward environmental protection initiatives within the debtor country. The first known public swap took place in 1988 between Costa Rica and the Netherlands to finance a 4,000-hectare forestry project. These bilateral exchanges have recently regained momentum; for instance, Portugal agreed in January 2023 to swap up to $140 million of Cape Verde's debt for investments in a dedicated environmental and climate fund.
Growing Popularity in Conservation Policy and Finance
The strategic importance of green debt swaps in international environmental finance is growing. A 2022 report by the African Development Bank (AfDB) indicated that 145 debt-for-nature swaps globally have written off $3.7 billion in debt face value since the 1980s, with Latin America and the Caribbean accounting for the largest share ($2.4 billion). The concept officially entered the UN Framework Convention on Climate Change during COP15 in Copenhagen (2009) after Indonesia proposed "external debt swap/relief" as a legitimate source of climate funding. The geographical distribution and scale of these transactions are visualised in the figure below.At COP27 in Sharm el-Sheikh (2022), the Sustainable Debt Coalition Initiative was launched with the support of sixteen nations, advocating for debt swaps and related measures to address financial stability alongside climate change. This momentum continued at COP28 in Dubai, where eight multilateral development banks, including the Global Environment Facility and the Green Climate Fund, established a working group. Their mandate is to enhance the efficacy, accessibility, and scalability of sustainability-linked sovereign finance, explicitly including debt-for-nature swaps. These institutions formally acknowledged that the debt burden on developing countries "greatly hinders their ability to meet their global climate and nature commitments."
The Case for Green Investment Opportunities in India and Sri Lanka
Sri Lanka's ongoing debt-restructuring negotiations with creditors and the IMF underscore its immense debt load, which has profoundly disrupted the nation's political, social, and economic stability. This debt burden critically constrains the country’s ability to devote resources to effective climate change mitigation, adaptation, or environmental conservation efforts. The expected austerity measures resulting from debt renegotiations risk triggering social unrest, worsening inequality, and impeding short-term economic growth.Green debt swaps offer a vital mechanism to alleviate this pressure by reducing debt and simultaneously stimulating job creation and investment in green energy, climate-resilient infrastructure, eco-tourism, and nature conservation. These sectors, often marginalised during economic recessions, possess the potential for sustainable recovery and long-term resilience. The urgency for such innovative solutions is highlighted by the global trend: low- and middle-income nations spent a record $443.5 billion in 2022 on external public debt servicing, diverting funds from crucial sectors like environmental preservation, healthcare, and education. Forecasts predict a 10% increase in debt payment costs for all emerging nations in 2023–2024.
As a key stakeholder and regional ally, India is motivated to promote regional stability and sustainable development in neighbouring states like Sri Lanka. By engaging in a green debt swap with its heavily indebted neighbour, India can leverage economic, geopolitical, and environmental benefits while reinforcing its commitment to sustainability. This action would position India alongside industrialised countries willing to make such agreements and establish a precedent for beneficial cooperation within the Global South.
Specifically, a debt-for-climate swap with India could utilise the "forgiven debt" to finance long-overlooked solar and wind projects in Sri Lanka. Although renewables—primarily hydropower and biofuels—make up a significant portion of the country's generation mix, 49.5%, solar and wind contribute less than 0.5%. This stark lack of diversification increases Sri Lanka's energy vulnerability. The country's over-reliance on imported fossil fuels is a major contributor to its default and drains foreign exchange reserves, further obstructing finance for the renewable energy transition. World Bank assessments highlight the immense, untapped potential of sustainable ocean energy, suggesting offshore wind turbines alone in Sri Lanka's coastal waters could provide up to 56GW, alongside significant wave and tidal energy resources.
Why India is a suitable candidate
India's engagement in providing debt relief through green swaps is a strategic opportunity to solidify its position as a major force in South Asian diplomacy and environmental leadership. Geopolitical Advantage: Given that China is Sri Lanka's largest bilateral creditor, India's participation in debt reduction directly contributes to maintaining a regional balance of power. The island nation's critical strategic location makes its stability essential to India's security objectives. Supporting Sri Lanka's financial resolution aligns with India's broader goal of counterbalancing Chinese influence and expanding its regional clout.Geo-Economic Benefits: Green swaps create opportunities for Indian companies in Sri Lanka's renewable energy and conservation sectors. The resultant infrastructure improvements can facilitate energy-sharing agreements beneficial to both nations, such as the proposed $1.2$ billion bi-directional underwater electrical cable—a potential "energy corridor." Integrating this project into a debt-for-climate exchange would enable India to gain geo-economically by boosting regional energy security and expanding its economic footprint.
Environmental and Diplomatic Leadership: This strategy strengthens India's standing as a responsible global actor and aligns with its international climate commitments. India benefits directly from environmental investments in Sri Lanka due to their shared ecosystems and marine borders; for instance, both countries rely on conservation efforts in the transboundary Palk Bay area. By supporting Sri Lanka’s sustainable fisheries management and biodiversity preservation, India indirectly safeguards its own marine resources. Furthermore, facilitating Sri Lanka's shift to indigenous renewable energy resources creates valuable opportunities for technology transfer and knowledge sharing, reinforcing India's environmental aspirations.
By positioning itself as a partner in sustainable development rather than a conventional creditor, India can significantly improve bilateral ties. Supporting Sri Lanka's green initiatives not only advances energy sustainability capabilities but also creates a market for Indian green tech companies and specialists. This leadership in sustainable finance could subsequently lead to similar agreements with other nations in the region. The utilisation of local currency by Sri Lanka to fund key environmental projects through these exchanges further fosters economic stability in India's immediate neighbourhood, providing an indirect strategic benefit.
Present Complications with Green Debt Swaps
Despite their potential, green debt swaps face significant structural and political criticism. One major concern is the commodification of nature, effectively "reducing" environmental assets to financial commodities, which is often likened to biodiversity offsets. Geopolitically, swaps are viewed by some as a subtle form of diplomatic leverage, potentially enabling external control over highly valuable land and resource rights.
Scale and Effectiveness: A key challenge is the limited scale of these transactions. Since "biodiversity is relatively cheap," a small amount of debt exchanged can fund conservation projects but offers minimal relief against substantial sovereign debt burdens. Consequently, swaps are often not the most effective method for overall debt reduction, a fact underscored by the graphical comparison of debt swap volume versus total debt service payments by developing nations over the last three decades.
Sovereignty and Autonomy: Historically, opposition has centred on concerns over foreign interference, sovereignty violations, and the potential for a "return to the colonial system." The resolution of public debt through a swap arrangement can lead to a perceived loss of autonomy. For example, the 1987 Bolivia exchange "unilaterally titled" the Amazonian protected area before Indigenous groups could secure land tenure claims, prompting Brazil's rejection in 1989, with President Jose Sarney declaring, "The Amazon is ours... after all, it is situated in our territory." Lenders often dictate the terms of the exchange, imposing restrictions on the use of released funds and potentially favouring the lender's private companies over true debt cancellation.
Greenwashing and Additionality: A fundamental criticism is that swaps do not generate "additional" biodiversity or climate finance from the Global North. They may also risk being "double-counted" if the restructured loan was already factored into previous aid targets. Furthermore, the push for swaps by developed nations, while simultaneously failing to meet climate funding commitments, risks being perceived as "greenwashing"—a strategy that increases debt and lending activity without substantive environmental improvement. A 2011 study on the $30$ million Indonesia swap (2009) found it was "too insignificant to create indirect (positive) economic effects" and failed to provide new resources to the Indonesian government.
How to solve the complications?
To mitigate the inherent complexities of green debt swaps, a bilateral agreement between India and Sri Lanka must be meticulously structured. Sovereignty and Benefits: India should establish mechanisms within the swap agreement that allow it to receive a share of the carbon credits generated by the debt swap-funded green projects in Sri Lanka. Concurrently, the agreement must include provisions for Indian companies to transfer green technologies and innovations to Sri Lanka, effectively opening new markets for Indian green-tech firms while ensuring capacity building in the debtor nation.Collaborative Initiatives: Beyond the direct swap, India can initiate a unique, joint eco-tourism program between the two nations to boost the travel industry and reinforce conservation goals. Furthermore, a cooperative program for sustainable fishing methods in shared transboundary waters, analogous to international maritime exercises, would guarantee food security and protect shared marine ecosystems.
India's engagement is strategically advantageous, allowing it to fulfil multiple objectives simultaneously: strengthening Sri Lanka's geopolitical stability, promoting environmental preservation, enhancing regional energy security, and demonstrating leadership in sustainable development by substantially reducing Sri Lanka's debt load. This comprehensive, mutually beneficial strategy positions India as a progressive leader in South Asia, advancing not only its immediate interests but also the long-term regional stability and ecological balance, thus distinguishing itself from the "greenwashing" patterns observed among some Global North creditors.
About the Author: Ayush Srivastava
A student from Deshbandhu College, University of Delhi, Ayush was a research intern at IFPP in Summer'24.
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