As Cyclone Ditwah exposes the hidden cost of climate shocks, a Colombo-based think tank says Sri Lanka must build disaster protection directly into future debt agreements.
Sri Lanka should seriously consider issuing debt instruments that include disaster or climate clauses which automatically suspend repayments when natural disasters occur, the Centre for a Smart Future has suggested in the aftermath of Cyclone Ditwah.
While Sri Lanka’s immediate economic pathway remains largely locked under the International Monetary Fund programme, the post-cyclone reality has highlighted an unavoidable truth. Any future debt arrangements Sri Lanka enters must include flexibility to cope with climate shocks that can instantly strain public finances.
“As Sri Lanka plans its gradual return to international capital markets post-restructuring, we must recognise the need for future debt instruments to incorporate climate-contingent mechanisms,” Co-founder Anushka Wijesinha writes in an OP-ED.
One such option is Climate Resilient Debt Clauses (CRDCs), which allow the automatic postponement of debt service when specific climate disasters occur. These clauses evolved from “hurricane clauses” pioneered by Caribbean nations during debt restructurings. Grenada’s 2015 hurricane bond was triggered in late 2024, suspending US$12 million in interest payments.
“Major multilateral development banks including the World Bank, Inter-American Development Bank, and Asian Development Bank now offer CRDCs to eligible countries, typically allowing two-year principal and/or interest payment deferrals when parametric triggers are met.”
Another model highlighted is Jamaica’s use of catastrophe bonds. In April 2024, Jamaica issued a US$150 million catastrophe bond through the World Bank. “The bond covered four hurricane seasons through December 2027 and was structured with parametric triggers based on storm intensity and location.”
When Hurricane Melissa struck Jamaica as a Category 5 storm in late October 2025, the bond conditions were met, triggering a full US$150 million payout to the Jamaican government.
“This capital arrived within days not months or years providing immediate resources for emergency response and early recovery without requiring new borrowing, lengthy negotiations with creditors, or budget raids on development programmes,” Wijesinha says.
He explains that catastrophe bonds are not loans but pre-funded insurance. “When the parametric trigger is met, investors forfeit their principal, which flows to Jamaica. If no qualifying storm occurs during the coverage period, investors receive their principal back at maturity. This structure means Jamaica never ‘repays’ the payout.”
Sri Lanka previously experimented with disaster relief through the National Insurance Trust Fund, but the process was discontinued after premium payments were halted due to underwriting concerns.
Although cyclones making landfall in Sri Lanka are relatively rare, with only 16 recorded over about 125 years, Cyclone Ditwah was an exceptional event. Originating unusually close to the island and following a rare south to north path, it has renewed calls for climate-resilient debt and fiscal planning.
