Sovereign debt frameworks that ignore natural capital systematically misprice climate-vulnerable economies. Debt-for-nature swaps offer an instrument; the Inclusive Wealth framework provides the architecture to make them more than symbolic.
Part 3 of a three-part series on India and the Architecture of Inclusive Wealth.
The Asia-Pacific is now caught in what may be the most consequential financial vice of the decade: a tightening triple bind of rising sovereign debt, escalating climate damage, and accelerating nature loss, with each crisis quietly amplifying the other two. Between 2008 and 2023, external sovereign debt in developing Asia-Pacific countries grew by 145 percent, and debt servicing now exceeds pre-pandemic levels as a share of government revenues. In countries such as Bangladesh, Indonesia, and Sri Lanka, debt service alone consumes more than 10 percent of government revenue — a fiscal load that crowds out precisely the health, education, and climate-resilience investments these economies most urgently need.
Two countries with identical debt-to-GDP profiles can have radically different inclusive-wealth profiles: one accumulating capital across all three forms, the other liquidating natural capital to keep debt service current.
The trap deepens because nine in ten Asia-Pacific countries are simultaneously highly climate-vulnerable and at high risk of external debt distress. Faced with rising debt-servicing burdens, governments in biodiversity-rich but fiscally constrained economies are routinely pushed toward short-horizon, environmentally extractive revenue streams that erode the very natural capital underpinning future fiscal capacity. The result is what research from the Boston University Global Development Policy Center and other institutions has described as a sovereign-climate-nature feedback loop, in which the way today’s debt is serviced shapes the size and probability of tomorrow’s fiscal shocks.
A core diagnostic problem underlies this trap: conventional sovereign debt sustainability analyses fail to account for natural capital. Ecological economics has long argued that there are biophysical limits to the growth of resource throughput — thresholds in water, biomass, and pollution absorption capacity beyond which substitution between produced and natural capital becomes implausible. Standard debt sustainability frameworks, however, proceed largely as if production frontiers expand smoothly with capital investment, and they typically omit the physical risks of climate and ecosystem damage, the transition risks of shifting toward sustainability, and the cascading systemic risks. Without these dimensions, debt is mispriced, capital is misallocated, and environmental costs are systematically underestimated — leaving climate-vulnerable economies exposed to the very shocks their debt structures were ostensibly designed to absorb.
This is where the Inclusive Wealth framework offers an indispensable analytical correction. Where conventional debt-to-GDP ratios measure liabilities relative to the flow of annual output, an inclusive-wealth-adjusted view measures sovereign debt relative to the stock of produced, human, and natural capital that ultimately backs it. Two countries with identical debt-to-GDP profiles can have radically different inclusive-wealth profiles: one accumulating capital across all three forms, the other liquidating natural capital to keep debt service current.
UNEP’s Inclusive Wealth Report 2023 makes this point with uncomfortable clarity for the region: per-capita natural capital has fallen substantially across most developing Asia-Pacific economies over the past three decades, even as headline GDP per capita has risen. The same pattern is visible at India’s subnational level, where the Inclusive Wealth Index for Indian states reveals that several high-growth states are accumulating produced capital while drawing down natural capital, an internal version of the same regional dynamic. Treating these patterns as fiscal information rather than environmental commentary is the analytical shift that sovereign debt markets have not yet made.
Debt-for-Nature swaps (DFNs) are the instrument best positioned to break this loop. The mechanism is straightforward: creditors accept partial debt cancellation or refinancing on more favourable terms in exchange for measurable, time-bound conservation commitments by the debtor. Since the first transaction in Bolivia in 1987, roughly 140 DFNs have been executed worldwide. The recent generation of swaps is markedly more ambitious: Ecuador’s 2023 Galapagos swap, the largest to date, retired US$1.6 billion of sovereign debt at a steep discount, generated US$1.13 billion in debt-service savings, and channelled US$323 million into the Galapagos Life Fund, with credit enhancement from the IDB and the US International Development Finance Corporation. Belize, Barbados, Seychelles, and Gabon have all closed comparable transactions, and the International Institute for Environment and Development estimates that DFNs could plausibly unlock as much as US$100 billion in restoration and adaptation finance across the most debt-distressed economies.
Faced with rising debt-servicing burdens, governments in biodiversity-rich but fiscally constrained economies are routinely pushed toward short-horizon, environmentally extractive revenue streams that erode the very natural capital underpinning future fiscal capacity.
For South Asia, the relevance is direct. Sri Lanka’s sovereign default has reopened active discussion of nature-conditioned debt restructuring, and Bangladesh, Pakistan, the Maldives, and Nepal share enough of the underlying economic-ecological profile to make DFNs a serious option rather than a niche curiosity. Seychelles’ successful marine conservation swap, which doubled its marine protected area to roughly 32 per cent of its national waters, offers an instructive template for conservation in the Indian Ocean more broadly.
Yet DFNs are not, and should not be marketed as, a universal solution. Negotiations remain cumbersome and slow, with transaction costs that often consume a significant share of the expected gains. Deal sizes remain small relative to overall debt stocks; even the Galapagos transaction retired only about 1.5 percent of Ecuador’s outstanding debt. There are also legitimate concerns that conditional swaps can prioritise external conservation preferences over domestic development priorities, occasionally displacing local communities or replacing existing conservation finance rather than supplementing it. The structuring fees absorbed by intermediary banks have, in some cases, been disproportionate to the public-good outcomes financed. When debt is genuinely unsustainable, broader restructuring with embedded environmental conditions is generally a better instrument than a standalone DFN. When debt is manageable, direct climate grants will usually outperform a swap. DFNs are best suited to the intermediate zone — acute fiscal vulnerability combined with high-return, cost-efficient conservation opportunities — and that zone needs to be defined precisely if the instrument is to be used well.
Scaling DFNs from a curiosity to a system requires four institutional shifts. First, finance ministries across the region need dedicated environmental risk units that integrate natural capital valuation into sovereign debt assessment — essentially building inclusive-wealth-adjusted debt sustainability analyses alongside the conventional IMF Debt Sustainability Framework. Second, transparency and accountability mechanisms must be strengthened through independent oversight and the meaningful inclusion of indigenous peoples and local communities in swap design, addressing the legitimate concerns raised by civil-society critiques of recent transactions.
The strategic point is that sovereign debt, development, and conservation are not competing priorities to be sequenced; they are interlocking systems that have been mismeasured as separate.
Third, multilateral platforms such as the IMF, the World Bank, and the Asian Development Bank should provide standardised technical assistance, creditor coordination, and transaction templates that reduce the per-deal negotiation burden. Fourth, bilateral and regional debt-climate-nature initiatives should be designed around national biodiversity and climate priorities rather than imported conservation agendas, with explicit alignment to country-level Nationally Determined Contributions and biodiversity strategies.
India occupies a particular vantage point in this architecture. As a creditor through its EXIM Bank Lines of Credit programme, India is already a practitioner of development finance with deep relationships across South Asia, Africa, and the Indian Ocean. Embedding nature-conditioned restructuring into that portfolio, alongside its G20 advocacy on sustainable finance and its own subnational Inclusive Wealth experimentation, would position India as an architect of the next-generation debt-nature framework rather than a passive participant in it.
The strategic point is that sovereign debt, development, and conservation are not competing priorities to be sequenced; they are interlocking systems that have been mismeasured as separate. Once natural capital enters the debt-sustainability ledger, fiscal relief and ecological resilience stop looking like a trade-off and become complements. Read together, the three parts of this series make a single argument: India’s contemporary economic transformation is better understood, and better governed, when its productivity, financial, and sovereign architectures are all read through the same inclusive-wealth lens.
Soumya Bhowmick is a Fellow and Lead, World Economies and Sustainability at the Centre for New Economic Diplomacy (CNED) at the Observer Research Foundation.
Disclaimer
This article draws on expert consultations supported by the SYLFF Research Grant (SRG) from the Tokyo Foundation in 2025 and 2026. The author was eligible for this grant as a former SYLFF Fellow at the master’s level at Jadavpur University, and the grant has enabled the author to advance work on the Inclusive Wealth Framework through consultations at UNEP headquarters in Nairobi and with other relevant organisations in India and abroad.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Dr. Soumya Bhowmick is a Fellow at the Centre for New Economic Diplomacy (CNED) at the Observer Research Foundation (ORF). He completed industry- endorsed Ph.D. ...
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