Sri Lanka crisis: Colombo reaches debt deal with China

Sri Lanka has confirmed that it has reached a deal with China, to restructure $4.2bn (£3.4bn) of debt.

It has been trying to reach similar deals with a number of creditors to unlock the next tranche of a bailout.

Sri Lanka defaulted on its foreign debt in May 2022 amid its worst financial crisis in decades.

Soaring prices and shortages of essential goods sparked nationwide protests last year.

"We thank China Exim bank (Export and Import bank) for the support in resolving our country's debt situation," Sri Lanka's Finance Ministry said in a statement.

"This agreement constitutes a key milestone in Sri Lanka's ongoing efforts to foster its economic recovery."

The Ministry gave no further details on the terms of the agreement.

Sri Lanka has a total foreign debt of $46.9bn, 52% of which is owed to China, its largest lender.

Reaching a deal with all of its creditors will allow Sri Lanka to keep accessing funds from a $3bn bailout programme with the International Monetary Fund (IMF).

The next tranche - worth $330m - has been on hold since last month after Sri Lanka and the IMF failed to agree on the terms for its disbursement.

Hopes were high that Sri Lanka would reach a deal with other creditors at the IMF and World Bank annual meetings in Marrakech this week, but they have reportedly been struggling to reach a consensus.

They might be concerned that China managed to negotiate special terms with regards to the loans, according to Dhananath Fernando of Colombo based think tank Advocata.

If they got preferential treatment, it means another creditor will have the bear the burden, according to Mr Fernando.

Japan, India and France say they were not informed of the EXIM deal and have asked to be given the same terms as China in restructuring discussions.

China is known to cut these kinds of deals in secret and keep the details private.

Sri Lanka has said all its creditors will be treated equally, and requested lenders to reduce outstanding debt by 30%.

Colombo secured a $3bn loan from the IMF earlier this year. The World Bank agreed to a $600m loan in 2022.