Sri Lanka’s Foreign Debt Restructuring: Assessing the Omission of Debt-for-Nature Swaps and Odious Debt Claims

Abstract

Sri Lanka’s recently completed debt restructuring marks a key step toward post-crisis economic stabilization. While the primary objective of the debt restructuring has been to restore macroeconomic stability and regain access to international financial markets, this paper critically examines the exclusion of debt-for-nature swaps (DFNS) and the notion of odious debt, assessing their feasibility and the factors behind their omission. Drawing on secondary data sources and using a mixed methods approach, primarily focusing on qualitative methods, the analysis is situated within the framework of debt overhang theory to demonstrate how Sri Lanka’s high debt service obligations severely constrained fiscal space, underscoring the need to consider alternative debt management mechanisms such as DFNS. Compared to the legally and politically contentious invocation of odious debt, DFNS is more practical and widely accepted, as demonstrated by implementation in other countries. Although the exact reasons for Sri Lanka’s decision to forgo DFNS remain unclear, several contributing factors can be identified: procedural complexity, time constraints, prioritization of immediate fiscal stabilization over environmental objectives, absence of a binding legal framework and limited engagement with bilateral creditors experienced in such mechanisms. This study argues that DFNS could be implemented even in the post-debt restructuring context, given its focus on environmental conservation rather than solely on debt relief. This argument is further reinforced by debate on whether Sri Lanka has received adequate debt relief. This study addresses a critical research gap by systematically analyzing the exclusion of DFNS and infeasibility of odious debt.