Cash-strapped Sri Lanka confirms major debt deal with China

The Sri Lankan government has confirmed that it has concluded a preliminary deal with China on the restructuring of its debts to Beijing, seen as a "big step" in the cash-strapped country's economic recovery.

In a statement issued on Wednesday, the Ministry of Finance said, “The Government of the Democratic Socialist Republic of Sri Lanka is pleased to announce that it has reached an agreement on the key principles and indicative terms of a debt treatment with the Export-Import Bank of China."

China holds about 52 per cent of Sri Lanka's USD 46 billion external credit.

The agreement in principle covers approximately USD 4.2 billion of outstanding debt, it said adding that it constitutes “a key step towards restoring Sri Lanka’s long-term debt sustainability and will pave the way to a prompt economic recovery”.

The terms of the restructuring agreed upon will provide the space for Sri Lanka to implement its reform agenda.

The government has expressed hope that it should also facilitate approval by the International Monetary Fund (IMF) of the second tranche of the USD 2.9 billion bailout of approximately USD 334 million.

“Yesterday marked a big step for Sri Lanka as we reached this landmark agreement in principle on debt treatment terms with our largest single creditor. We thank China Exim Bank for its support in resolving our country’s debt situation."

Sri Lanka was hit by its worst economic crisis in history when its foreign exchange reserves fell to a critical low and the public came out on the streets to protest the shortage of fuel, fertilisers and essential commodities.

This agreement constitutes a key milestone in Sri Lanka’s ongoing efforts to foster its economic recovery, the Secretary to the Treasury Mahinda Siriwardena said.

On Wednesday, State Minister of Finance Ranjith Siyambalapitiya said China's assurance to Sri Lanka to restructure its external debt is an important development for the debt-ridden country's economic situation.

He added that when Sri Lanka went into default in 2022 due to the economic crisis, the island’s outstanding external debt stood at around USD 46 billion.