The fall of Pohottuwa govt. – The Island

By Prof. Nimal Gunatilleke

This is a sequel to my earlier article, titled ‘The Sri Lankan Debt Crisis: A Layman’s Review’, which appeared in two parts on the 01st and 02nd June in The Island Midweek Review and also in the Daily Financial Times on the 06th and 07th June 2022. In the second part of that article, I highlighted some of the emerging global investment opportunities, such as Green Bonds that are being made available for restructuring sovereign debts in this green economic era.

In this article, I would like to draw attention to the additional green financing options that are currently available for prospective investors, based on recent successful examples from other countries. These green financing opportunities will only be available once the debts have been brought to a sustainable level, as dictated by the IMF. However, Sri Lanka is currently wrestling desperately with the task of securing bridging finance, either as donations or loans to meet her day-to-day needs spilled over to the streets, day in, day out.

Among the loans received in the form of fuel, food, and medical supplies, the USD 500 million loan through the Indian Credit line (more credit under negotiation) and more recently pledged loan of USD 120 million (and perhaps, additional grants) from the US stand out prominently. It is a relief to learn that several other countries and international agencies too have come forward to help Sri Lanka in her critical stage of the balance of payment crisis. All these loans being given in the name of bridge financing during this interim period will also be added on to the existing debt burden during the restructuring process. In the meantime, Sri Lanka needs to restructure its foreign debt or make substantial progress towards that goal before the IMF agrees to lend money.

Still being categorized as a Middle-Income Country, Sri Lanka is not entitled to interventions focused on providing debt relief to the Low-Income Countries, usually given on greater concessionary terms. The IMF intervention in this instance, as it happened 16 occasions earlier, since our independence, may once again recommend, among other solutions, outright sale, lease, or pawn of our family silver – the valuable real estate assets – as a stopgap fix to the debt problem. Consequently, IMF intervention alone is least likely to be a sustainable solution for our chronic trade deficit problem because Sri Lanka has been consistently spending more forex than it earns over the past decades. In all probability, this trend may continue further since the economically sound options for bridging the trade deficit are socially more painful and therefore politically inauspicious. The current mayhem that the country is going through and led by deceitful political forces would only lead to worsening the situation, further.

As we all are now well aware, we had been borrowing forex from the international capital markets to meet the deficit to balance the national budget each year over the past several decades, which obviously cannot keep going forever. If we continue to have this ‘business as usual’ attitude, the country will simply pile up bigger and bigger debts to pay back in the future despite IMF interventions. This is where the selling of family silver stealthily sneaks in.

Fortunately, however, there are new green financing opportunities emerging as a unified global response to the climate change mitigation and adaptation in transforming International Sovereign Bonds into more climate-friendly investments such as green bonds, climate bonds, sustainability bonds, payment for ecosystem services, debt for climate swaps, etc., under Paris agreement on climate change.

Green bonds

Although Sri Lanka has been quite late to enter the globally booming green bond market, our nearest neighbour, India has been expanding its green bond market vigorously over the recent years. This includes several projects they have supported in Sri Lanka as well, under the green bond label since 2015. Amongst them, the EXIM Bank of India, the closest proxy to the Sovereign in International Debt Markets in India, had supported three projects in Sri Lanka for the purpose of laying railway tracks from i) Omanthai to Pallai, ii) Pallai to Kankasanturai, and iii) Madhu church -Talaimannar sectors under eligibility in the mass transportation sector, since 2015 ().

The recently inked Sampur Solar Energy project by the National Thermal Power Corporation of India, and even the proposed Mannar and Pooneryn wind and solar energy projects to be funded by the Indian investors may be coming under similar green or other such bond schemes. On the other hand, the only Sri Lankan green finance venture that I came across so far in literature is the one in which the Seylan Bank PLC has arranged a Green Bond for financing several renewable energy projects in Sri Lanka. The global and regional appetite for green bond issuance is on the increase and it is high time that Sri Lankan investors too, evoke greater attention towards it.

Sri Lanka Road Map for Green Financing

The Sri Lankan Road Map for sustainable/green financing has been prepared by the Central Bank of Sri Lanka with technical assistance from the International Finance Corporation through a consultative process for the purpose of promoting sustainable/green finance options in Sri Lanka. In addition, the Central Bank of Sri Lanka has already prepared a Biodiversity Finance Plan (BIOFIN 2018 – 2024) to move towards sustainable financing solutions with an aggregate resource mobilization target ranging from LKR 20 billion – 46.7 billion.

The BIOFIN Plan has prioritized 13 finance solutions and issuing Green Bonds is one amongst them. The generic description of Green Bonds in this plan states that issuing green bonds is a new source of financing that can mobilize a large amount of financial resources by the public sector as per the financial regulatory mechanism, subject to the country’s debt servicing capacity. Sri Lankan investors too, now have an enviable opportunity to join this lobby as partners during the restructuring process especially, in transforming the Sri Lankan Sovereign Bond debts.

Payment for Ecosystem Services (PES)

Payment for Ecosystem Services is yet another financial solution that the BIOFIN 2018-2022 Plan has put forward which it claims to be another new financing source for paying directly or indirectly for ecosystem services and negative externalities either with private or public involvement in Sri Lanka. The BIOFIN plan considers that an introduction of PES in the energy sector is important because the current modes of power generation have significant negative implications on the country’s biodiversity and ecosystem services whilst the condition of watersheds also influences power generation efficiencies, especially in hydropower. The BIOFIN plan details out the information needed for developing three different business models under the PES system (pages 28-37). They are (i) Payment for watershed management in lands above mini-hydro power plants, (ii) Payment for watershed management for hydropower generation at Moragahakanda, and, (iii) Payment for negative externalities of coal power generation.

PES for Watershed management in the Central Highlands

Management of watersheds has been recognized as a national priority for sustainable development in Sri Lanka in the most recent National Physical Planning Policy and the Plan for Sri Lanka 2017-2050 and its immediate predecessor – NPP – 2030. Both these plans have recognized the Central Highlands and the Coast Conservation Zone as fragile regions (see the figures) that need urgent conservation interventions for the sustainable development of practically the entire country.

The ‘Central Fragile Area’ is the geographic entity that consists of lands with sensitive natural ecosystems, highly vulnerable to landslides, and plays a crucial role in sustaining water resources. A major portion of these areas are located above 300 meters from mean sea level and cover the upper catchments of all major rivers on the island. Almost all major economic enterprises in Sri Lanka, including downstream irrigated agriculture and associated livelihood sustenance, hydro-power generation, and inland and coastal tourism are very much dependent upon the ecological health of this fragile region.

Therefore, the prioritization of watershed management in at least a few selected areas as a priority area under the Payment for Ecosystem Services by the BIOFIN project of the Central Bank of Sri Lanka as a start is praiseworthy. The National REDD+ Investment Framework and Action Plan (NRIFAP) 2017 and its subsequent updates including that of the Forestry Sector Master Plan for Sri Lanka 2021-2030 (still in draft) would be able to provide a strong foundation for developing investment models in this vital sphere of sustainable development.

Conversion of exotic monoculture plantations in critical watersheds into native and naturalized species mixes in these central highlands according to proven scientific guidelines would be yet another green financial proposition for both public and private sector engagement for which intriguing business models can be developed under PES schemes. We have developed two ecologically sustainable Pinus conversion models, one in the NW buffer zone of the Sinharaja World Heritage Site and the other in Peradeniya University Lower Hantana campus land. These can be scaled up into other Pinus plantations in critical watersheds of the island with public-private collaboration as Corporate Social Responsibility projects, especially in the plantation sector.

Similarly, the World Bank-funded Landscape Management Plan for Sinharaja Forest Range prepared recently is yet another superlative green financing option for such investors. (See maps)

PES for Coastal Zone Management

On the other hand, the ‘Coast Conservation Zone’, the second fragile region identified by the NPP includes the area for which boundaries have been delineated by the Coast Conservation Department under the provisions of the Coast Conservation Act No. 57 of 1981. Even though a large quantum of physical developments in Sri Lanka has been taking place in this zone, conservation of the lagoons, estuaries, swamps, riverine, and other sensitive environments, is important because of the eco-services that they provide, the attractions they have, and the ever-expanding economic activities associated with them.

The ‘Sri Lanka Coastal Zone and Coastal Resource Management Plan – 2018’ prepared by the Coast Conservation and Coastal Resource Management Department would be an ideal foundation document for developing investment and business models in this critical coastal belt that covers a circum-island coastline of 1,620 km. Due to its abundant natural resources and consequent social and economic benefits supporting millions of livelihoods, the coastal zone has experienced immense development and urbanization over the decades. This calls for the sustainable management of the coastal zone to ensure that resources are not exploited beyond their regeneration capacity and that the remaining habitats are not further degraded or destroyed.

Similar projects with appropriate business models have been developed in other regions/countries that Sri Lanka could take a cue from. They are the following:

i.) Mangrove Restoration in Senegal – The mangrove restoration project in Senegal, coordinated by the Livelihoods Carbon Fund (LCF) since 2011, aims at restoring an ecosystem that protects arable land from salinization and produces fish resources (fish, shellfish, crustaceans) and wood. With the support of the Livelihoods Carbon Fund, the mangrove restoration project in Casamance and Sine Saloum estuaries of Senegal has helped 450 local villages replant 10,415 out of the existing 185,000 hectares of mangrove, between 2009 and 2012. It stands like a rampart against climate change impacts and at the same time a nourishing ecosystem for the inhabitants. Carbon finance has enabled vulnerable communities to restore their mangroves through the commitment of private companies that have committed to investing in sustainable projects. In return for their investment in the Livelihoods-Senegal project, the companies that are supporting the Livelihoods Carbon Fund receive carbon credits with high social and environmental value to offset their CO2 emissions.

Investors in the Carbon Livelihoods Fund have provided Océanium – the local NGO with the necessary funding for replanting (population awareness, validation of scientific models, intervention logistics, etc.) and are going to continue to finance its monitoring and evaluation until 2029, for a total duration of 20 years.

The project was validated by the United Nations Framework Convention on Climate Change (UNFCCC) Board. The Project Detailed Document made by Carbon Decisions in December 2010 was audited by Ernst & Young and the Dept. of Environment in May 2011. The approval of the Senegalese authorities was obtained in March 2011 and was subject to a tripartite Memorandum of Understanding of 10 years between Livelihoods, OCEANIUM, and the Senegalese government (Ministry of Environment). The long-term impacts of the project is being measured using the ‘Sustainable Livelihoods Approach’ since 2017. ().

Lessons learned from this project would be beneficial for Sri Lanka to design her own mangrove restoration and coastal and marine conservation initiatives with a public-private partnership. These projects are already being done in an uncoordinated ad hoc manner, especially after the Tsunami event in 2004

. The Sri Lanka Coastal Zone and Coastal Resource Management Plan – 2018 prepared by the Coast Conservation and Coastal Resource Management Department would provide the necessary underpinning for the development of investment and business models for our fragile coastal zone extending over a circum-island coastline of 1,620 km.

ii.) Blue Bond Initiative of Seychelles: Seychelles is a Small Island Developing State dependent on its marine natural resources to derive its economic prosperity. In recent years there have been a decline in the fish stocks and marine resources linked to i) overexploitation of fisheries resources and subjected to environmental pollution. The benefits expected from the blue bond initiative. A blue bond was issued in 2018 for US$ 15 million over a maturity period of 10 years. Among the benefits expected were the development of a Blue Economy through sustainable use of marine resources securing private sector participation, raising awareness of the critical role of the ocean and marine resources, and the overall global need for environmental protection. (). The early indications are claimed to be very positive and there are several lessons that Sri Lanka can learn from this in designing her own blue bond initiatives.

iii.) Grain for Green Programme of China: China initiated its “Grain for Green” programme in 1999 as an ambitious conservation programme designed to mitigate and prevent flooding and soil erosion. It is an example of Payment for Ecosystem Services (PES) which is helping to solve Environmental issues in China. The programme is designed to retire farmland that is susceptible to soil erosion, although some farmers may go back to farming the land after the program ends. China started the Grain for Green program in the western parts of the country for example Shanxi Province. These areas were known for their rather poorly performing economy that was affiliated with an endangered ecological environment. The environment was being further damaged by soil erosion which was a result of cultivation on sloping land as people were changing forests into farmland. By 2010, around 15 million hectares of farmland and 17 million hectares of barren mountainous wasteland were converted back to natural vegetation (From Wikipedia, the free encyclopedia).

This project has a strong appeal for the restoration of the Central Fragile Area of Sri Lanka as recommended in the NPP 2017 – 2050. The unproductive tea lands, areas under unsustainable vegetable cultivation susceptible to excessive soil erosion and degradation, and monoculture exotic tree plantations in critical watersheds are prime candidates to be sustainably developed under appropriate PES-type business models. It is hoped that the Chinese experience and expertise in the above example would be taken on board in restructuring some of our outstanding Chinese debts.

iv.) Great Green Wall Initiative – An ambitious project partnered by the European Union and the UNCCD and implemented across 22 African countries in 2007 to restore 100 million ha of currently degraded land; sequester 250 million tons of carbon and create 10 million green jobs by 2030. More than USD 8 billion has been raised and pledged to support this game-changing initiative in the Sahel region in Africa to provide fertile land, food security, and economic opportunities for the millions and climate resilience in a region where temperatures are rising faster than anywhere else on earth ().

If the world renowned ‘ellanga’ irrigated agricultural systems (small tank cascade systems) spread across the dry zone of Sri Lanka, can be further enriched through a similar program, not only the sustainability of the agricultural heritage system but the chronic health issues currently afflicted with the farming communities could be successfully addressed. Prototype business models well supported by socio-ecological research are already available for these regions for rebuilding agricultural resilience in the Dry Zone of Sri Lanka.

Debt-for-Climate Swaps

Debt-for Climate Swaps are also emerging as yet another viable option that can generate the much-needed fiscal space for Middle-Income Countries like Sri Lanka to focus on climate ambitions and economic recovery while reducing their overall debt burdens.

A debt for climate swap is an agreement between a sovereign debtor and one or more of its international creditors by which the latter forgives all or a portion of the debtor’s external debt in exchange for a commitment by the debtor to invest, in domestic currency, in specific climate projects during a commonly agreed period. The rationale of debt swaps is that debt can be acquired at a discount. When creditors do not expect to recover the full nominal value of debts, they may be willing to accept less. In exchange for (partial) cancellation of the debt, the debtor government is prepared to mobilize the equivalent of the reduced amount in local currency for agreed purposes on agreed terms. The Debt for Climate swaps help countries struggling to service their debts to reduce the debt and free up fiscal space (cash flow) for climate-friendly investments.

Debt swaps provide opportunities for raising capital especially in low-income countries to address environmental and other policy challenges and support green growth. For the debt for climate swaps, the debtor government commits to invest the accrued savings from debt forgiveness in climate adaptation or mitigation. Debt-for-climate swaps have the potential to transform daunting debt into opportunities to reduce climate vulnerability and implement much-needed adaptation. These swaps would thus contribute to the Paris Agreement, which stipulates that developed countries should mobilize climate finance from a wide variety of sources through a variety of actions.

The potential for using debt-for-climate swaps as an innovative financial solution to the twin crises of climate change and debt distress is very high. Such debt swaps provide opportunities for raising capital in debt-stridden low-income countries to address environmental and other policy challenges and support green growth. However, only when the debt has been made sustainable, the swaps can transfer resources for climate purposes.

A number of developing countries are engaging in debt-for-climate swaps since Seychelles secured the world’s first debt-for-climate swap deal for protecting the world’s oceans with the Paris Club group of developed country creditors in 2016, aimed at ocean conservation and climate resiliency. Since then, several Small Island Developing States (SIDS), especially those in the Caribbean region too have joined this program. These countries are facing situations similar to those that we in Sri Lanka, are currently undergoing. They too are heavily indebted countries with tourism-dependent economies more recently worsened by COVID -19 pandemic and subjected to serious climate vulnerabilities.

Activities that can be funded through this debt structuring, include management of marine reserves, coral and mangrove restoration, improving marine, fisheries, and coastal policies, economic diversification, and climate resiliency of coastal communities.

Debt for Climate Swaps provide excellent opportunities for promoting climate change mitigation projects such as the accelerated phasing-out of coal power projects. Quite fortuitously, 40 countries including Sri Lanka pledged at the COP 26 meeting of the UNFCCC held in Glasgow in 2021 and also agreed not to build/fund any new coal power plants. In the light of these recent developments in relation to the UN Convention on Climate Change and the internationally binding Paris Agreement, the Long-term Generation Expansion Plan (LTGEP) for Sri Lanka may need to be reworked. This plan envisages the retirement of several thermal power plants that are likely to be taken off from operation due to their age-related mal-functioning and more importantly, the construction of two more coal-fired power plants totaling 1500MW in the late 2020s. Debt for Climate Swaps are strong candidates for facilitating the early retirement of coal/thermal power plants and investing in energy-efficient clean energy projects in Sri Lanka.

Debts for Climate Swaps are also eligible for climate change adaptation which include Nature- based Solutions that include conservation and enhancing diversity by restoration of degraded lands including wetlands. The rationale for undertaking such projects, which are often not commercially viable business models, is that their benefits, such as enhanced biodiversity, higher water tables, carbon capture, improved well-being of citizens, green jobs created, etc. far outweigh the costs involved. Their socio-economic benefits being intangible are often not captured or are externalized in standard benefit/cost analyses. However, in this Decade of Forest Restoration declared by the United Nations, such ventures partnered with developed countries are being used to reduce the debt burden of developing countries.


In summary, Sri Lanka has in place most of her key development strategies and plans for the next several years in conformity with major global conventions on biodiversity, climate change, and combating land degradation. They are the following:

 National Biodiversity Action plan (NBSAP 2016-2022),

 National REDD+ Investment Framework and Action Plan (NRIFAP 2018-2022),

 National Action Program for Combating Land Degradation in Sri Lanka (NAP-CLD 2015 -2024),

 National Adaptation Plan for Climate Change Impacts in Sri Lanka (2016 – 2025).

Using the information provided by these strategic action plans, the Central Bank of Sri Lanka together with Ministry of Environment has prepared a Biodiversity Finance Plan (BFP) for Sri Lanka (2018 – 2024) with 13 prioritized finance solutions some of which I have highlighted in this article. The donor agencies are also very much interested in entering into green financing partnerships with countries in need of investment capital. Therefore, every effort should be made to make this current adversity an opportunity of a lifetime.

The Prime Minister informed the parliament on 06th July 2022 that Sri Lanka is participating in the bailout negotiations with the IMF as a bankrupt country and is going into a deep recession this year and have to face current difficulties extending into 2023, as well. As such, the country needs to submit a plan on Sri Lanka’s debt sustainability separately to the IMF for which a strong political leadership to take visionary decisions is the order of the day.

At this critical juncture of our nation, it may be well worth reminding ourselves of the historic words of John F. Kennedy at his inaugural address as the 35th president of the United States in 1961‘My fellow Americans, ask not what your country can do for you – ask what you can do for your country’ which challenged every American to contribute some way to the public good. Also, what a one-time prime minister of Sri Lanka SWRD Bandaranaika wrote in his son -Anura’s album which later became a more public proclamation ‘the main duty of man is to serve man’ are words that we need to convert to deeds at this moment of despair.

This is in stark contrast to protesting with the stereotypic slogans ‘Diyaw, diyaw, diyaw’ by the politically indoctrinated trade unions and the misguided young intelligentsia at every turn during this period of despondency with much inconvenience and annoyance, in particular, to the already suffering working class people. We are in need of a socially astute political leader with a vision who can stand tall and adapt the words of JFK as ‘My fellow Sri Lankans, ask not what your country can do for you – ask what you can do for your country’ in this hour of deep political and socio-economic crisis and turmoil to steady the ship and steer it safely to calmer waters. Finding a national figure with such qualities at this moment is the Quadrillion Rupee (inflation accounted for) problem! The fall of Pohottuwa govt. – The Island

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