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Sri Lanka has reached a preliminary debt restructuring deal with national creditors including India, Japan and France, paving the way for the bankrupt country to revive a stalled IMF loan programme after it secured a similar pact with China last month.

The Paris Club, which represents creditor nations, said in a statement that Sri Lanka had agreed “in principle” to restructure the debt it owed its non-Chinese bilateral lenders.

This will help the country, which defaulted on its debts last year, to ensure the next tranche of a $3bn IMF lending package agreed in March that has been stalled since September because of disagreements among lenders. The next disbursement is awaiting approval by the IMF’s executive board.

The agreement will “open the way for approval of the second disbursement under the [IMF] arrangement,” said the Paris Club. It said its creditor committee commended the Sri Lankan authorities “for their continuous efforts in implementing the reforms necessary for their country’s return to a sustainable path”.

Sri Lanka has foreign debts of about $40bn, the largest share of which is owed to Chinese lenders, with Japan, India and commercial bondholders also large creditors. Sri Lanka has yet to reach a deal with the commercial bondholders, which could yet slow down progress on the country’s economic recovery.

The Paris Club said it expected Sri Lankan authorities to “continue to engage with their private creditors to find as soon as possible an agreement”.

Sri Lanka in May 2022 became the first country in the Asia-Pacific to default on its debts in two decades, the result of domestic economic mismanagement and a surge in global inflation following the coronavirus pandemic and Russia’s invasion of Ukraine.

A sharp drop in foreign currency reserves led to shortages of imported food, fuel and medicine, devastating living standards on the island and triggering mass protests that ultimately toppled the government of then-president Gotabaya Rajapaksa.

His successor, Ranil Wickremesinghe, has vowed to return the island to normalcy. But progress on securing the IMF funds Wickremesinghe hopes will help to restore economic stability has been complicated by disagreements among creditors.

China, whose significance as a lender to the developing world has grown enormously through programmes such as its $1tn Belt and Road Initiative infrastructure scheme, has disagreed with established Paris Club creditors over how to supervise debt restructurings.

Beijing did not unite Sri Lanka’s Paris Club creditor committee and surprised lenders by announcing last month that its Export-Import Bank of China had agreed preliminary terms to restructure its own loans.

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