Sri Lanka, China agree to restructure $4.2 billion of debt

Sri Lanka said on Thursday it has reached an agreement with the Export-Import Bank of China to cover about $4.2 billion of the island nation's outstanding debt while talks with other official creditors stall.

Sri Lanka is struggling with its worst financial crisis in more than seven decades after its foreign exchange dwindled to record lows, forcing the country to default on its foreign debt last May.

China is Sri Lanka's largest bilateral creditor, owed about $7 billion.

The agreement with China EXIM Bank will assist Sri Lanka in getting past the first review of the International Monetary Fund (MF) program in the coming weeks and in securing the release of a second IMF tranche of about $334 million, its finance ministry said in a statement.

A debt rework deal between Sri Lanka and countries including Japan, India and France was also expected this week. But those countries and the IMF were surprised on Tuesday when Sri Lanka struck a deal with China. The three nations request comparability of debt treatment with China.

Sri Lanka's creditors are struggling to reach consensus on the nation's debt and finding an agreement during this week's IMF and World Bank meetings could be difficult, a senior Japanese official said on Wednesday.

Members of the creditor committee now need to see details of the agreement Sri Lanka reached separately with China - its largest single creditor - before finalizing their proposal, said a source with direct knowledge, who asked not to be named because the talks are private.

Sri Lanka started negotiating with its bondholders and key bilateral creditors including China, Japan and India last September, parallel to moving forward on a $2.9 billion bailout from the IMF.

"This agreement constitutes a key milestone in Sri Lanka’s ongoing efforts to foster its economic recovery,” the statement added. “In the next few weeks, the Sri Lankan authorities and China EXIM bank will actively work on formalizing and implementing the agreed parameters of the debt treatment.”

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