Strengthening Sri Lanka’s ecosystem for climate and disaster risk management and finance

This weADAPT article is an abridged version of the original text, which can be downloaded from the right-hand column. We highlight some of the report’s key messages below, but please access the original text for more comprehensive detail, full references, or to quote text. 

Introduction

As a developing tropical island nation, Sri Lanka is particularly vulnerable to climate change impacts and compounding crises that affect its human and environmental systems, including the COVID-19 pandemic, supply chain disruptions, economic recession, changes in policies, and rising cost of living. Agriculture, which is at the heart of Sri Lanka’s food systems, is also among the country’s most climate-vulnerable sectors. Farmers are faced with climate and disaster risks as well as indirect or compounding risks that exceed their current adaptive and coping capacities.

This SLYCAN Trust report maps and analyses Sri Lanka’s current risk management and finance ecosystem, with a focus on climate and disaster risk finance and insurance (CDRFI) in food systems. It is based on national stakeholder engagement as well as case studies in the dry zone districts of Anuradhapura and Trincomalee.

It identifies priorities and recommendations for enhancing the country’s current CDRFI ecosystem and strengthening adaptive strategies, mobilizing risk finance and investment, empowering affected communities, and building mid- and long-term resilience.

Methodology

The findings, insights, and recommendations compiled in this report are based on desk research and a comprehensive data collection and consultation process conducted by SLYCAN Trust between January 2020 and October 2022. Overall, the research and capacity-building activities comprised 17 national and inter-national consultations, workshops, dialogues, and webinars; 20 expert consultations and group meetings; two training of trainers (ToT) workshops; two extensive field surveys; and numerous interviews, individual meetings, and auxiliary data collection.

A total of 1,300 participants from all relevant sectors were engaged throughout the workshops, with an additional audience of more than 8,000 people for events live-streamed online. On the local level, more than 600 crop farmers, livestock farmers, youth, women from farming communities, and other food system actors were interviewed and engaged.

Individual activities under the project focused on different aspects of the CDRFI ecosystem and its key actors in Sri Lanka, including the apex agencies for climate change, disaster management, agriculture, finance, sustainable development, and meteorology. Starting with stakeholder mapping and an analysis of the enabling environment, the current state of play was identified and findings then validated through in-depth engagement with relevant stakeholder groups.

Climate risks to food systems

Sri Lanka’s food systems are faced with a variety of risks that are either caused by climate change or directly or indirectly related or exacerbated by it. Furthermore, impacts and actions in food systems are also influenced by risks to other sectors, including the financial system, entrepreneurship, trade, development, and cross-cutting aspects.

Out of the surveyed farmers in Anuradhaprua and Trincomalee district, 92% reported impacts related to high temperatures or heat waves, 88% to rainfall changes, 81% to water scarcity or droughts, and 70% to groundwater scarcity. Other key climate-related impacts reported by the survey respondents include increasing prevalence of pests and diseases (88%), soil degradation or depletion (71%), and heavy winds or storms (61%).

Sri Lanka’s CDRFI ecosystem

Sri Lanka’s enabling environment for CDRFI comprises institutions, laws, regulations, policies, plans, and guidelines, as well as sources of finance and support for smallholder farmers, rural households, and other actors in food system supply and value chains. There are several instruments and mechanisms in place, but there is still significant potential for enhancement of the existing framework, including through adoption of modern technology, swift implementation of policies, enhanced coordination and cohesion, and multi-actor partnerships to close gaps.

Regulatory environment, policies and plans

Sri Lanka has a legal framework that governs finance and (re)insurance. However, there are opportunities to better address regulatory requirements and specific CDRFI instruments.

In general, legal and regulatory risk is a major barrier to private sector involvement in CDRFI solutions. To facilitate and enhance the availability of effective and innovative risk transfer instruments, it is vital to have a regulatory framework that can minimize, avert, and address relevant risks and provide legal certainty for insurers, and ensure consumer protection mechanisms for the insured.

Sri Lanka also has several policies and plans related to climate risk and food systems. Key documents such as the Climate Prosperity Plan, the National Environment Policy, the Nationally Determined Contributions, or the National Adaptation Plan all include commitments and provisions related to risk transfer and the strengthening of insurance-based solutions as well as other relevant financial instruments.

CDRFI systems

Sri Lanka’s existing CDRFI ecosystem comprises a range of instruments and mechanisms, including a compulsory crop insurance scheme, a national natural disaster insurance, a loan protection scheme, and social protection systems. Farmers enrolled in the compulsory crop insurance have the possibility to buy additional voluntary insurance for other crops, livestock, storage, equipment, implements, and health/accidents. These risk transfer mechanisms provide a degree of protection against key climate risks (such as floods, droughts, dry spells, excess water, pests, diseases, and wild elephant attacks), but are indemnity-based and sometimes slow to pay out.

Emerging technologies

Smallholder farmers in Sri Lanka currently have only limited adoption of modern technology; however, there is significant potential to use low-cost or cost-effective emerging technologies and innovations.

A table summarizing challenges, constraints, gaps, and needs related to CDRFI in Sri Lanka can be found on p.51 of the report.

Priorities and recommendations

Food systems in Sri Lanka are facing three primary categories of risks: production risks, climate and disaster risks, and market risks. Smallholder farmers and other food system stakeholders are attempting to address these risks through traditional risk management practices and a limited adoption of new methods and technologies. However, overall household resilience and financial capacities remain low.

Based on inputs from key actors, the following priorities for enhancing food system resilience and CDRFI solutions have been identified:

• A risk-aware, climate-smart, and resilient food system that provides livelihoods and entrepreneurship opportunities.
• A consistent and transparent institutional, policy, and regulatory environment that enables inclusive and participatory CDRFI solutions.
• Universal basic financial, political, and economic literacy as well as a pool of qualified human resources.
• Modernized livelihoods that leverage emerging technologies and foster innovation towards enhanced risk management and resilience.
• A national financial system that is stable, transparent, and efficient with consistent and predictable policies, allowing access to stable foreign exchange flows.
• A paradigm shift from agricultural credit to a more dynamic and robust rural financial system with a range of available financial products and services.

Four main recommendation areas have been compiled:

1. Innovation: To create an enabling environment that incentivizes innovation and enables different actors to introduce new technologies and mechanisms. This also includes strengthening access to information across the supply chain and tightening linkages between producers and markets, as well as enhancing access to rural credit and loan facilities.
2. Mindset shift: To overcome challenges of low literacy and trust, this pathway focuses on mainstreaming climate risk into the education and training system as well as public awareness creation to foster key literacies related to climate risk, finance, and insurance. It also includes greater acknowledgement of food system livelihoods and the formal recognition of environmental benefits and social capital.
3. Multi-actor partnerships: This key pathway addresses issues around coordination, coherence, exchange, and integration by strengthening the enabling environment and creating forums, platforms, and spaces for different actors to connect and collaborate. This also serves to make it easier for stakeholders to invest and creates more fertile grounds for the private sector to engage.
4. Inclusive processes: Building on existing networks and relationships, this pathway works towards greater trust and confidence in CDRFI solutions and aims to incorporate actors across the supply chain into various processes to give them ownership and a voice. This also includes special provisions for youth and women to address existing inequities and barriers.