In view of climate vulnerabilities following cyclone Ditwah, Sri Lanka must avail of climate resilient debt clause tools, which may enable the Government to seamlessly fund recovery and deter accumulating long-term costs in the process.

This was mentioned in an article published on the United Nations Asia and Pacific blog recently (24), co-authored by United Nations Development Programme (UNDP) Assistant Secretary General Kanni Wignaraja, UNDP Sri Lanka Resident Representative Azusa Kubota and UN Sri Lanka Resident Coordinator Marc-Andre Franche.

“When floods hit, budgets bleed from both ends: spending surges for relief, recovery and reconstruction while revenues collapse. Without tailored instruments, countries borrow at punishing rates or divert funds from basic services like health and education,” the published article stated, addressing Sri Lanka’s natural disaster which took place in late 2025.

“The principle is simple: don’t make recovery hinge on new loans on old terms. Instead, embed climate triggers in the debt itself so that budgets can adapt when disaster hits.”

Based on indications made by Treasury officials during Committee on Public Finance (COPF) meetings which followed the catastrophe, Sri Lanka is to have earmarked $3.5 billion by now, or roughly Rs. 1,000 billion to Rs. 1.2 trillion towards relief, recovery and reconstruction for the next three years.

According to the United Nation’s office for Disaster Risk Reduction (UNDRR) Global Rapid Post-Disaster Damage Estimation (GRADE) report, the estimated direct physical damage Sri Lanka had borne due to cyclone Ditwah is worth $ 4.1 billion.

The article proposed that Sri Lanka should seek solutions for this dilemma by turning to the Sevilla Commitment on Financing for Development, which offers Climate Resilient Debt Clauses (CRDCs), particularly “pause clauses”. The pause clauses enable short term space to defer on repayments on external debt of a nation, in the event of an external shock, such as natural disasters and food or health emergencies.

“One answer, which was agreed in the Sevilla Commitment on Financing for Development, is to implement Climate Resilient Debt Clauses – ‘pause clauses’ – that automatically defer repayments when disasters strike,” the article said.

The article detailed the domino effect that climate driven costs have on broader macroeconomic stability. “Each layer is distinct, yet the pressures in one ripple through the others: Government borrowing affects macroeconomic stability and market confidence; business debt puts a strain on employment and Government revenues; and household debt amplifies poverty and social vulnerability. Addressing these layers in isolation will not work. We need tailored tools that recognize their connections if we want to dramatically reduce the total cost of recovery and protect human development.”

Referencing Sri Lanka’s calls for multilateral financial assistance, the article queried: “Sri Lanka’s request for emergency IMF financing underscores the dilemma: how do you rebuild thousands of kilometres of roads, schools and clinics without sinking deeper into debt?”

In December of 2025, Sri Lanka had requested immediate assistance from the International Monetary Fund (IMF) for which the multilateral approved $ 206 million, or Special Drawing Right (SDR) of 150.5 million under its Rapid Financing Instrument (RFI), which has repayment obligations of its own.

“After hurricane Beryl in 2024, Grenada and St. Vincent triggered such clauses, freeing cash for urgent recovery without messy renegotiations,” the article stated, offering a case study example of another country which had availed of CRDCs. It explained that the tools described are “net present value neutral”, which means that they deter long term costs. “Rating agencies are becoming more receptive to them. When paired with state contingent bonds and catastrophe instruments, which extend maturities or provide payouts after shocks, they create breathing space when disasters like floods strike,” it said.

Acknowledging the challenges Sri Lanka’s small businesses are faced with in the aftermath of the catastrophe, the article corroborated that even in the broader context of Micro Small and Medium Enterprises (MSMEs) across Asia, only 5% of natural catastrophe losses are insured. “Floods don’t just wash away homes; they wipe out inventories, cashflow and credit lines. Small and medium sized enterprises, which are the backbone of local economies, often face the brutal choice of taking on high interest emergency loans or shutting down.”

“In Asia, only about 5% of natural catastrophe losses are insured. A recent UNDP-Generali study found 95% of MSMEs across several Asian countries lack any financial protection against shocks.

In Sri Lanka, MSMEs continue to grapple with the interest rate shocks brought on by the tripling of interest rates in 2022, during its economic crisis – which increased lending rates from 10% to 30%. MSME sector representatives claim that in the aftermath of the disaster and subsequent recovery funding allocated to the segment, small businesses continued to remain unable to access concessionary loans. By the end of 2025, over 29,600 cyclone-affected MSMEs had registered for compensation on the Government platform for relief registration.

The UN article proposed parametric and concessional insurance coverages for small businesses. “A tested fix is parametric insurance coverage that pays out within days based on rainfall or river level triggers, not lengthy damage assessments. Pair that with concessional reinsurance to keep premiums affordable, and you have a lifeline for businesses.”

“Regional risk pools like SEADRIF [Southeast Asia Disaster Risk Insurance Facility] show how to scale these solutions and manage basis risk. Add guarantee-backed recovery credit – public guarantees that let banks offer lower rate, grace period loans – and you keep shops open, jobs intact and supply chains moving.”

The article added that if debt is continued to be treated as a sovereign debt issue alone, vulnerabilities and recovery are to continue to steepen. “Disaster finance should be reframed as a whole-of-economy challenge, because climate shocks trigger interlinked layers of debt: public debt, business and market debt, and household debt,” it said.

According to a Committee on Public Finance (COPF) report, Sri Lanka’s foreign debt repayments are estimated at $ 3.3 billion in 2026 and $ 2.8 billion in 2027, though other sources including the Central Bank and independent economists, place the figures slightly lower, ranging between $2.1 billion and $ 2.75 billion annually during this period. In 2028, repayments are roughly projected at $ 3.5 billion.

It is important to clarify that capital repayments to bilateral creditors such as China, India, and Japan will begin in 2028, while capital repayments to international sovereign bondholders will gradually restart from 2028, with the first payments on restructured bonds falling due that year.