Sri Lanka says it has reached an agreement on the key principles and indicative terms of a debt treatment with the Export-Import Bank of China (Exim Bank).

In a press release on Wednesday (Oct. 11), the Ministry of Finance, Economic Stabilization & National Policies announced that the agreement in principle covers approximately USD 4.2 billion of outstanding debt.

The ministry said the agreement constitutes a key step towards restoring Sri Lanka’s long-term debt sustainability and will pave the way to a prompt economic recovery.

The indicative terms agreed are expected to provide the necessary fiscal space for Sri Lanka to implement its ambitious reform agenda.

Sri Lanka commended the engagement and continuous support of China Exim Bank in reaching this agreement in principle, which demonstrates a mutual commitment in line with the goal/objective of restoring public debt sustainability consistent with the IMF-supported program.

Sri Lankan authorities are hopeful that this landmark achievement will provide an anchor to their ongoing engagement with the Official Creditor Committee and commercial creditors, including the bondholders.

It should also facilitate approval by the IMF Executive Board of the first review of the IMF-supported program in the coming weeks, allowing for the next tranche of IMF financing of about USD 334 million to be disbursed.

Speaking in this regard, Treasury Secretary Mahinda Siriwardana said it was a “big step” for Sri Lanka as it reached this “landmark agreement in principle” on debt treatment terms with the island’s largest single creditor.

“We thank China Exim Bank for the support in resolving our country’s debt situation. This agreement constitutes a key milestone in Sri Lanka’s ongoing efforts to foster its economic recovery.”

Over the next few weeks, the Sri Lankan authorities and China Exim bank will be actively working on formalizing and implementing the agreed parameters of the debt treatment, the press release read further.

The statement came a day after China’s Foreign Ministry spokesman Wang Wenbin told a regular press briefing in Beijing about the deal involving the Exim Bank and Sri Lanka which he said was reached in September. However, he had not given details on how the debt was resolved.

“Chinese financial institutions have fully participated in creditors’ meetings as observers, maintain friendly communication with other creditors and have shared developments on debt disposal,” Wang had said.