Impact of Climate Finance on Debt Sustainability: An Analysis of Green Climate Finance and Debt-for-Climate Mechanisms in Sri Lanka

Abstract

Introduction: Unsustainable national debt and growing climate change vulnerability are Sri Lanka's two main problems. This paper explores how climate finance tools like debt-for-climate swaps and green bonds might reduce the nation's debt load while boosting climate resilience. A substantial empirical evidence vacuum about the quantitative effect of climate funding on debt sustainability is filled by the study.

Methodology: The study used secondary data from 2015–2023 that was obtained from organizations such as the Central Bank of Sri Lanka, the IMF, and the Green Climate Fund. It did this by using a positivist research philosophy and a deductive technique. The association between debt-to-GDP ratios and climate finance inflows was assessed using statistical techniques such as regression and correlation analysis.

Findings: The results showed that while climate financing systems have theoretical potential, there is currently little evidence of their actual influence on debt sustainability. Negligible regression results and weak correlations imply that present inflows are not enough to considerably lower Sri Lanka's burden of debt. The primary barriers were found to be ineffective resource allocation, institutional imperfections and a lack of conformity with national fiscal policy. The study highlights the possibility of expanding these mechanisms and incorporating them into all-encompassing debt management plans despite these barriers.

Conclusion: According to the study's findings, climate finance can help address Sri Lanka's environmental and economic problems, but its efficacy is dependent on improved policy coordination, larger funding scales, and strengthened institutional ability. Among the suggestions are improving governance structures, encouraging private sector involvement, and coordinating climate finance instruments with more comprehensive fiscal plans.