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HomeEnvironmentDebt-for-Nature Swap after IMF Extended Fund Facility?

Debt-for-Nature Swap after IMF Extended Fund Facility?

Asiri Fernando

Colombo, 27 November (Sunday morning): The Sri Lankan government will seek alternative funding avenues, such as the $1 billion Debt-for-Nature Swap (DNS) program announced in the second half of 2023. are planning Learn from The Sunday Morning, a $2.9 billion expansion fund facility.

It is understood that the government is keen to pursue a DNS program after negotiations with creditors have resulted in Sri Lanka’s debt being restructured and made sustainable.

Ruwan Wijewardene, a presidential adviser on climate change, confirmed to The Sunday Morning that he believes the government should investigate the DNS following the IMF program and debt restructuring.

Meanwhile, the environment ministry said the government, with the help of stakeholder consultations, is slowly drafting a framework for the DNS program led by the finance ministry.

The development of a possible DNS program framework follows Sri Lanka’s commitment to global climate change and related issues at the recent United Nations Climate Change Conference (COP27) in Egypt.

Sri Lanka, which declared bankruptcy earlier this year and has more than $50 billion in external debt, has struggled to raise funds, and many have been forced into debt due to the economic crisis the country is facing and its ongoing debt restructuring program. lenders have not come.

So, along with its ambitious reform and restructuring agenda, the Sri Lankan government has shown its willingness to explore alternative forms of financing and investment to stabilize the economy and move forward towards recovery. .

What is Debt for Nature Swap?

According to Professor Shanta Devarajan, former Director of Development Economics at the World Bank (WB) and Professor of International Development Practice at Georgetown University, a Debt-to-Natural Swap (DNS) is a transaction in which the debtor country owns a portion. . Reduced debt burdens in exchange for countries investing in their own environmental protection.

“In the case of commercial debt, the transaction involves a third party, typically an NGO such as the Nature Conservancy, who purchases state bonds at a discount to ensure that the state undertakes environmental investments. In cases, the governments of the creditor countries usually do the deal directly.These are used in several countries and most recently in Belize,” Professor Devarajan told Sunday Morning.

The DNS program started in the 1980s and Ecuador was the first country to test the concept. Many countries such as the Philippines, Bolivia, and Uganda have also used DNS in the past to manage their debts, improving environmental protection and resilience in the process.

According to Professor Devarajan, such a program would be of interest to international financial institutions and conservation groups, but the current economic environment in which Sri Lanka finds itself difficult to initiate such a program. may not be the best.

When asked if a DNS program would currently benefit Sri Lanka, Professor Devarajan said that although in principle such a program could benefit Sri Lanka, it may not be a priority need. said.

“In principle, such a program could help a country like Sri Lanka with high unsustainable debt and many environmental resources that the world is interested in protecting. This program may not be the best thing for Sri Lanka at the moment, because Sri Lanka needs debt relief to buy imported goods (fuel, food, medicines) and the money saved With DNS, Sri Lanka would have to spend the money saved on protecting the environment, which is important, but now that people are starving and the economy is declining, It’s not our top priority,” explained Professor Devarajan.

Government thinking

Debtors, creditors and the planet can benefit from a well-designed DNS program, Environment Secretary Dr. Anil Jasinghe told Sunday Morning.

According to him, both lenders and debtors must agree to participate in the DNS program.

“The lender must be willing to reduce the debt in exchange for a portion of the debt in lieu of conservation work. Dr. Jasinghe said, adding that the DNS program could also include carbon credits in the future.

According to Dr. Jasinghe, the DNS framework is currently being drafted by the Ministry of Finance with support from the Ministry of the Environment. With the drafting of the framework, the government will be required to conduct a natural capital assessment of Sri Lanka’s land and marine ecospaces.

“This will take time. The government’s current focus is on getting approval from the IMF program. Whatever we do with the DNS, we do it with the IMF’s consent,” said Dr. Jasinghe.

In response to questions, he said innovative financial tools such as ‘green bonds’ and ‘blue bonds’ can only come into being after the framework is in place and the national debt becomes sustainable. It is hard to imagine a country that has done so can issue bonds,” he said.

According to Dr. Jasinghe, the reported $1 billion dollar amount associated with the proposed DNS program is what the drafting framework envisions.

Ruwan Wijewalden, presidential adviser on climate change, told Sunday Morning that the government will develop a DNS framework in parallel with the IMF programme, which will be implemented in conjunction with Sri Lanka’s debt restructuring and a four-year EFF agreement. He said it would be implemented only after had started.

“Once the debt restructuring is complete, we will consider all renewable energy projects that can be covered by the DNS framework. We will then consider other alternatives, including blue and green bonds, a topic widely discussed at COP27. A lot of institutions have told us about DNS,” says Wijewardene.

He said the government will analyze projects that could be included in the DNS framework next year, including food security, agriculture, forestry, conservation and renewable energy.

“We can start listing projects. I think the debt will be restructured and hopefully sustainable by the end of next year. Even the UN is talking to us about DNS, and other parties, including international banks, are also interested,” Wijewardene explained.

When is the right time?

When asked if Sri Lanka could pursue alternative financing instruments such as the DNS before reaching an IMF accord and debt restructuring, Professor Deverajan said that Sri Lanka had no intention of doing so prior to the IMF accord. He said alternative funding should not be pursued. The money saved from IMF loans and debt relief on essential imports can revive the economy and get the imports people need.

“There is an additional risk in that Sri Lanka is currently in discussions with both official and commercial creditors about debt restructuring. It could delay reaching an agreement,” he added.

Belize DNS

The Belizean government has signed a debt swap with environmental group The Nature Conservancy (TNC), reducing the country’s external debt to a staggering 10% of GDP, according to the IMF.

“Under the agreement, a subsidiary of TNC will provide Belize with a $553 million “super bond” (the government’s entire stock of foreign commercial debt representing 30% of GDP) at a discounted price of $1.55. lent the money. It was financed by issuing a $364 million “blue bond” in a sale arranged and underwritten by the bank Credit Suisse. The International Development Finance Corporation (IDFC), the US government’s development bank, provided insurance. This allowed for loans with low interest rates, his 10-year deferment period with no principal paid, and a long maturity of 19 years. In return, Belize agreed to spend about $4 million a year on her ocean conservation until 2041. Double the marine conservation parks spanning coral reefs, mangroves and fish spawning seagrass from 15.9% to 30% of the ocean. By 2026, she will have a $23.5 million endowment fund to fund her post-2040 protection,” he said in her May 2022 IMF Country Focus.

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