Building a Greener Future: Why an Effective Sustainable Finance Landscape Matters

Building a Greener Future: Why an Effective Sustainable Finance Landscape Matters

 

The article named as, The Importance of the implementation of an Effective Sustainable Finance Landscape, on 11 June 2024 published by the DailyFT and signed by a DailyFT Contributor (PhD - MSU Malaysia; MBA; AIB, MCIM, PGDp, SLIM, Certify Lending IFS UK), informs and allows comprehension of an issue that can be called essential and it is associated with the implementation of the effective sustainable finance landscape. It focuses on incorporating Environmental, Social, and Governance (ESG) factors, Corporate Social Responsibility (CSR), and Sustainable and Responsible Investment (SRI) in the financial decisions regarding climate issues, higher transparency, and raising long-term capital funds to develop green economy and resilience.

The article picks up the fact that a powerful sustainable finance system is a pressing need to curb climate change, depletion of resources, and stability of economies posed by industrialization and globalization. Based on the World Meteorological Organization, it mentions that the deaths of almost 2 million people and losses to the economy of $4.3 trillion are attributed to climate and weather-based catastrophes between 1970 and 2021. ESG (Environmental, Social, and Governance), CSR, and Sustainable and Responsible Investment (SRI) bring environment and ethical frameworks to financial judgment, an approach called Sustainable finance. The article singles out the emergence of green bonds, sustainability-linked bonds, green banking, and circular economy financing as some of the emerging financial products to mobilize capital to promote sustainable economic growth.

It is important that Sri Lanka develops a sustainable finance environment that would secure its long-term economic resilience and systemic integration with the global capital markets. In the current volatile, uncertain, complex, and ambiguous (VUCA) world, the financial systems could not remain restricted within the use of conventional metrics such as revenue or profit. By integrating ESG factors into investment decision-making, financial intermediaries are likely to mitigate systematic risk, such as the risk of disruption due to the change in climate, reputational risk, and exposure to stranded assets and become aligned with the international expectations of investors.

To the financial markets in Sri Lanka, sustainable finance provides an avenue to streams of diversified capital inflow. The example of green bonds and sustainability-linked bonds sell renewable energy and sustainable transportation projects, as well as waste management, to institutional investors at home and abroad; they also open new sources of finance. Such capital flows will be able to reduce the interest rate on green projects, reinforce the green bond market in the country, and boost Sri Lanka as a respectable investment entity. Besides, the disclosure should be promoted, especially within such frameworks as Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), since it helps to increase investor trust by mitigating the threat of information asymmetry and greenwashing.

But there are obstacles to the shift towards a strong sustainable finance system. Failure in progress is usually encountered by weak sustainable financial literacy among the stakeholders, limited appetite to risk, and uncertainty over risk-return trade-offs. Low operational costs, common to clean energy and circular economy projects, often work against them, as they end up paying over-priced credit risk because of insufficient data and the obsolescent credit rating practices. These distortions have the potential to limit the ability of capital to move toward sectors that are important in the climate transition and the economy of diversification in Sri Lanka. Also, there are risks of greenwashing by companies that overstate their environmental qualifications to acquire funding. To review these, there ought to be sustainability measurements that are quantifiable, measurable and separately audited that can help in the sustenance of the ESG markets.

Sustainable finance achieves greater goals of fiscal and monetary perspectives on a macroeconomic level. By investing the money into green infrastructure and energy-efficient projects, Sri Lanka will be able to skip its reliance on fossil fuel complaints thereby helping free up foreign exchange through its balance of payment. Besides, sustainable investments employ workers in new areas, ensuring inclusive growth and stable domestic consumption.

ESG investing momentum can be witnessed globally. The analysis conducted by BlackRock revealed that more than 80 percent of sustainable funds beat the conventional portfolios in the year 2020 due to the COVID-19 pandemic and thereby indicating that sustainable investments are capable of generating competitive returns despite disruption to the market. In the case of Sri Lanka, ESG factors are not a luxury to integrate into the financial systems of the country anymore but a condition of gaining access to global liquidity, achieving SDG-related financing goals, as well as being resilient to climate and economic shocks.

It needs a broad strategy which includes policies innovation, investor education and working together with multilateral forums such the UN Environment Programme Finance Initiative (UNEP FI) and the International Platform on Sustainable Finance (IPSF). In this way, Sri Lanka will be able to successfully mobilize capital, to preserve its environment, and achieve long-term sustainable growth.

Sustainable finance is critical in the stability of the Sri Lankan economy, system of sustainable environment and integration with the global economy. Greenwashing, risk mispricing, and low literacy rates are only some of the current obstacles, but with ESG, green bonds, and reporting frameworks the best-rewarded projects can have their capital mobilized. Sustainable investments are not only profitable but also resilient, meaning that Sri Lanka has to focus on the reinforcement of regulatory and market infrastructure as a means to introduce sustainability as a keyword in financial innovation and national prosperity.

Original post Link - https://www.ft.lk/financial-services/Importance-of-implementing-effective-sustainable-finance-landscape/42-762891

Author - Nehan Chamod

 

 

• Title of the article: The Desirability of Domestic Debt Restructuring

• Source: Verité Research
• Date published: 13/09/2025
• Link to the original article: https://www.veriteresearch.org/wp-content/uploads/2022/10/VR_EN_BN_Oct2022_Desirability-of-Domestic-Debt-Restructuring.pdf?

Restructuring of the domestic debt

      This is a very important process that Sri Lanka must go through to ensure that its economy is stable and healthy again. Sri Lanka is steering through one of the worst economy crises of its history with an alarming rate of debt-to-GDP ratio of approximately 121%. The foreign and domestic debt of government has led the country to the verge of financial collapses. Though there has been much emphasis on international debt restructuring, the much ignored but equally important restructuring of domestic debt is central to restoring macroeconomic stability, fiscal sustainability, and fair growth.

What is Domestic Debt Restructuring (DDR)?

The restructuring of domestic debt is a renegotiation of the terms of government debt owed to local creditors, such as the extension of maturity dates, or the repricing of interest rates or rescheduling of payments. This is in contrast with external debt restructuring which involves foreign creditors.

The domestic debt which is mainly in Sri Lankan rupees is currently approximately 59 percent of the overall public debt in Sri Lanka. The problem is in high interest rates (usually over 20 percent), the increase in debt stock through refinancing at high yield and the effect this has had on local financial institutions which are much exposed to government securities.

The Reason why Sri Lanka needs DDR?

• Improving Debt Sustainability:

 Studies indicate that restructuring of the external debt will not suffice, unless there is domestic debt restructuring, the debt to GDP ratio could increase to 139 percent within the next ten years. The extension of maturity of domestic Treasury Bonds at no reduction in the coupon can work the ratio to approximately 103, which is a much better and more manageable number.

• Macroeconomic Stability and Inflation:

The high interest rates on debt rollover stimulates the inflation and money growth. DDR would assist in lowering the cost of government borrowing, decreasing inflation rates, which are currently standing at more than 60 per cent and stabilizing the rupee.

• Strengthening Financial Institutions:

Sri Lankan banks and pension funds are heavily dependent on coupon income on domestic government bonds and therefore coupon reductions are not desirable because they provide a risk to the stability of the financial sector. The DDR strategies prefer to roll over maturities with regulatory cover to soften this shift.

• Prevention of Future Debt Crises:

It is common to see countries go through various debt restructurings unless fiscal discipline and credible policy frameworks are put in place. DDR can establish fiscal buffers to Sri Lanka to better absorb external shocks and minimize the probability of recurrence of crisis.

• Justice in the allocation of the crisis expenses:

 DDR provides a more specific and equitable solution to the reduction of the debt burden of the government than either increasing taxes or inflation which impact more on the middle and lower-income group.

Recent Developments and Government Measures

The Sri Lankan government has also been keen on negotiation with local creditors to agree on new repayment conditions and also attempting to restructure its external debts. Multilateral organizations such as the International Monetary Fund (IMF) also stress on DDR and reforms as a key to the sustainable recovery.

Based on the current research and findings:

• The government suggests the extension of the maturity of domestic Treasury Bonds to 10 years (reprofiling) without a decrease in coupons or the principal.
• The financial states of the banking sector and other financial institutions will need recapitalization assistance in the process.
• The success of the restructuring will rely on transparency and fair participation of the creditors.
• DDR will be needed in order to ensure that IMF standards are met and investor confidence is restored.

Global Context and Lessons:

Sri Lanka is not the only country that has been pursuing its domestic debt restructuring. To different extents, maturity extensions, coupon cuts, and face value haircuts have been utilized by countries like Greece, Barbados, Jamaica and Cyprus.

 Effective restructurings make it a rule not to include short-term treasury bills as this will cause market disruption.

Deep face value depreciation increases net present value (NPV) losses but could be required based on the state of the economy.

Challenges and Risks:

• DDR may request domestic creditors to suffer losses, and this will ultimately affect the country on its own.

• The DDR plan proposed by the government is expected to cut down debt servicing payments by approximately 1.5 percent of the GDP, whereas the IMF estimates higher cuts (approximately 15 percent) to make the fiscal sustainable.

• Maintaining the inflation regulation plus monetary growth to finance debt repayments is a complicated issue and demands both the fiscal and monetary policies.

 Conclusion

 A Path Forward Sri Lanka has a twin deficit issue, i.e. a fiscal deficit and, a current account deficit, which have been heavily financed by domestic debt. Devoid of restructuring this domestic debt and external restructuring, there is the risk of the country sliding into years of financial turmoil, inflation, and recurring debt crises. Restructuring of domestic debt through maturity extension and favorable financial sector interventions provides an effective route through which the economy can be brought to its senses and confidence is rebuilt and recovery is enhanced in an equitable manner. This process must be transparent, involve creditors and be accompanied by structural reforms to guarantee long-term sustainability. This is a hard road to go through, and with extensive DDR and profound reforms, Sri Lanka will be able to recover a strong economy that will be able to grow and flourish.

Sri Lanka’s Forex Surge: Trends and Risks

Introduction

A recent article published by Economynext on August 31, 2025, reported a surprising development in Sri Lanka’s economy. The country recorded a $729 million foreign exchange surplus in July, driven by goods exports of $1.3 billion, remittance inflows of $690 million, and tourism income of $318 million. These figures seem to demonstrate resilience in Sri Lanka’s external sector. Exports are growing strongly, incomes from migrant workers remain strong, and tourism is becoming a more stable form of income. But there are also some risks that should be brought up with this news that should not be ignored. Rising imports, the increase in private credit, and controversial policy decisions of the Central Bank raise questions about the viability of this surplus. As seen by Sri Lanka's difficulties following its 2022 debt default, these short-term gains could become risks if not managed carefully.

Understanding the Inflows

Sri Lanka’s forex growth in July was caused by three main income categories: exports, remittances, and services (including tourism). Exports of goods reached their highest monthly level ever, stimulated by demand ahead of the Trump administration’s new tariff system in the U.S., which was set to take place in August. Remittances increased to $690 million, led by higher contributions from the country’s overseas workforce, while tourism and other services income increased to $618 million.

These inflows give firms and individuals more purchasing power. They also contribute to improving Sri Lanka’s overall balance of payments account by supporting the current account. But the reality is that increased inflows often end up resulting in increased outflows. The demand for imported goods and services tends to increase when there is more money available. Spending on traveling abroad increased to $81 million in July from just $55 million the previous year, while spending on imports increased in several areas. This shows a continuing problem where inflows increase confidence and provide temporary restoration, only to be offset by increasing imports, causing a medium-term burden on reserves.

The Rising Credit Problem

The most worrying issue is the rapid growth of private credit. In June alone, private credit increased by Rs. 221 billion, the highest in recent history. Although easy credit is frequently regarded as a booster for investment and consumption, in Sri Lanka, it mostly results in increasing imports. Imports related to investment, which included construction materials, machinery, and automobiles, increased to $446 million in July 2025. This was the highest level since January 2022, just before the economy plunged into its worst balance of payments crisis in decades. The pattern is apparent because excessive credit growth increases demand for imports, which in turn reduces reserves and worsens the trade deficit. In the last currency crisis, Sri Lanka banned car imports to manage its external position; however, even without cars, total imports still exceeded $2 billion. These policy failures are a reminder of the consequences of disregarding classical economic principles.

Risks of Rate Cuts 

Recent policy decisions taken by the Central Bank of Sri Lanka (CBSL) have complicated the situation. The decision of lower policy rates and using a single policy rate framework has been criticized by analysts. Even small reductions in rates suggest a favorable monetary policy at a time when private lending is already expanding. Banks are less motivated to invest in government securities like Treasury bills and bonds when interest rates are lower. Rather, banks are more likely to increase their loans to the private sector, which will further increase demand for imports. This puts strain on reserves, because more money is being spent on imports rather than saved to pay off external debt.

Conclusion

Sri Lanka’s July forex surplus presents a positive image, but it conceals more serious concerns. High exports, remittances, and tourism earnings show resilience, but rising private credit, surging imports, and lowering interest rates risk sustainability. If reserves are not managed carefully and policy regulations are not controlled, current inflows might turn into a future crisis. For Sri Lanka, the real challenge will be how CBSL and policymakers manage growth without compromising stability. Avoiding the current progress from turning into a future crisis is crucial to ensure a sustained recovery and restore investor confidence.

References

https://economynext.com/sri-lanka-foreign-exchange-earnings-2-6bn-in-july-exceeds-imports-by-729mn-238818/

https://www.cbsl.gov.lk/en/news/external-sector-performance-july-2025

https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20250829_external_sector_performance_july_2025_e.pdf

 

Written by,

Devni Weeramuni (236136B)