ECONOMYNEXT – Sri Lanka has potential for using debt-for-renewables within the growing climate finance space given current funding constraints but a stronger foundation including domestic targets and a coordinated inter-agency response is needed, a researcher has said.
“Debt-for-nature and debt-for-climate swaps are most effective when mobilising funds for already-established environmental targets as these commitments are more binding for debtor governments,” says a policy brief by Michael Iveson Research Fellow at Lakshman Kadirgamar Institute of International Relations and Strategic Studies.
“Therefore, Sri Lankan policymakers must work with climate finance experts to explore the compatibility of current environmental targets with debt-for-climate instruments.
“This involves analysing incentive structures, funding requirements and the opportunity costs of debt service payments, to present effective solutions to creditors.”
A clear energy sector diversification strategy also creates opportunities to attract private investment into renewable energy infrastructure.
Sri Lanka’s current energy sector development strategy is unclear though a target for renewables had been set for electricity, which appeared to be challenging in the current economic climate.
“Policymakers must explore new ways of unlocking capital to fulfil these climate targets and a ‘debt-for-renewables’ swap could be an effective instrument that would also signal to investors and creditors that Sri Lanka is committed to pursuing its environmental targets,” Iveson writes.
A coordinated response to deal with creditors on debt-for-climate swaps was needed involving the ministries of finance, environment as well as agencies like the central bank.
“Given the high transaction costs and diverging priorities of government ministries, a cross-government strategy to identify debt-for-climate priorities is vital to ensure that processes are streamlined ahead of engagement with creditors,” the policy brief says.
The full brief can be accessed at this link at the Lakshman Kadirgamar Institute