UN calls on Sri Lanka to negotiate ‘debt for nature’ swaps to mitigate economic collapse

The UN has called on Sri Lanka to introduce a temporary basic income and negotiate “debt for nature” swaps linked to environmental conservation as part of measures to mitigate the country’s economic collapse, while that Colombo start talks with the IMF.

The United Nations Development Program made the proposals in a document seen by the Financial Times that has been submitted to the government of President Gotabaya Rajapaksa and will be considered by the cabinet that was sworn in this week.

Sri Lanka’s lack of foreign currency has prevented the $22 million island from repaying its loans, triggering an economic and political crisis with mass protests over shortages of food, fuel and medicine. Rajapaksa has faced sustained calls to resign.

The government, which has about $8 billion in debt and interest due this year on usable foreign exchange reserves estimated at a few hundred million dollars, has suspended bond payments and started negotiations for an IMF bailout. .

A Sri Lankan government delegation traveled to Washington this week to start talks with the fund on an assistance package that is expected to include debt restructuring.

The UNDP argues that Sri Lanka, which owes around $45 billion in long-term debt to creditors including international bondholders and countries like India and China, needs immediate financial assistance. while talks with the IMF are ongoing.

The UN body has asked Sri Lanka to seek trade and short-term financing from countries such as India, China and Bangladesh to ease economic hardship ahead of IMF assistance.

“The IMF package, if it happens, it will be an austerity package,” Kanni Wignaraja, UNDP Asia director, told the FT. “The government will therefore have to, and it is giving it a lot of thought, to support the most vulnerable households with an immediate flow of social protection.”

Among UNDP’s demands, the government of Rajapaksa is to introduce a temporary basic income, which would take the form of an unconditional cash transfer to Sri Lankans of working age for a period of around six to nine months. Similar programs have been implemented in Kenya and the US state of Alaska.

“It’s something that’s been tried and tested,” Wignaraja said. “There is obviously a cost to bear, but it has proven to be more effective than some of these very heavy social protection measures.

The agency also asked Sri Lanka to seek bonds or debt swaps linked to environmental and social sustainability, such as debt-for-nature agreements in which certain loans are forgiven in return for investments in nature conservation. environment.

Similar measures have been introduced in countries like Costa Rica, and Wignaraja argued that Sri Lanka – famous for its beaches, forests and mountains – was well placed to exploit such schemes.

We’re “acting quite aggressively to see if debt-for-nature swaps can play a significant role in [a deal]. We need to reduce our debt burden, not just keep restructuring it,” she said. “Sri Lanka has incredible natural resources that they can put [up] to reduce debt. »

Sri Lanka is Asia’s largest issuer of high-yield debt, but was shut out of private markets and rendered unable to refinance after rating downgrades triggered by steep tax cuts in 2019 and the loss of tourism during the pandemic.

Dwindling foreign exchange reserves left the island dependent on imports with shortages and high inflation. Food and fuel prices have doubled while the currency has fallen 60% since floating last month.

Video: The Case for a Universal Basic Income

Rajapaksa’s government had for months resisted international calls to restructure or approach the IMF before a reversal last month sparked by widespread protests followed by the resignation of his cabinet. A protester was killed after police opened fire on crowds in the town of Rambukkana on Tuesday.

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