COLOMBO: Sri Lanka signed a deal with Japan on Friday (Mar 7) to restructure US$2.5 billion in loans, marking the first agreement with official creditors who had pledged debt relief to the cash-strapped nation last year.

Japan said it was granting concessions on a 369.45 billion yen (US$2.5 billion) loan under a comprehensive debt treatment plan, which the International Monetary Fund considers essential for Sri Lanka's economic recovery.

"The development of Sri Lanka, which is located at a strategic point in the Indian Ocean, is essential for the stability and prosperity of the entire Indo-Pacific region," the Japanese foreign ministry said in a statement.

"Japan intends to further contribute to the sustainable development of Sri Lanka."

Colombo's finance ministry said Tokyo had played a "pivotal role" in helping Sri Lanka restructure its debt.

"Its leadership, commitment, and constructive engagement have been instrumental in helping Sri Lanka navigate the challenges of economic recovery," the ministry said in a statement.

Sri Lanka announced last June that it had reached an understanding with all its bilateral lenders to delay repayments until 2028.

Formal agreements were delayed due to protracted negotiations, making Friday's deal with Japan the first with an official creditor of the South Asian nation.

China remains Sri Lanka's largest bilateral lender, accounting for US$4.66 billion of the US$10.58 billion borrowed from other nations. Japan is the second-largest, with just over US$2.5 billion in loans.

Sri Lanka had concluded debt deals with the Export-Import Bank of China and the China Development Bank last year.

Japan is the first country in the 17-member Official Creditor Committee (OCC) of Sri Lanka to ink a debt deal, Sri Lankan officials said. Beijing is not a member of the OCC.

The government of leftist President Anura Kumara Dissanayake, which came to power in September, had hoped to finalise debt deals before the end of last year.

The island nation defaulted on its US$46 billion external debt in April 2022 after running out of foreign exchange to finance even the most essential imports, such as food and fuel.

Its economy has since recovered following an IMF rescue package and the implementation of austerity measures aimed at repairing the government's ruined finances.

In November, Dissanayake announced that Sri Lanka would honour a deal secured by his predecessor to restructure US$12.55 billion in international sovereign bonds, a key condition for maintaining the US$2.9 billion, four-year IMF bailout loan.

A majority of private creditors to the South Asian nation agreed in September to a 27 per cent haircut on their loans.

Sri Lanka secured its IMF bailout in 2023 after doubling taxes, withdrawing energy subsidies, and raising the prices of essential goods to shore up state revenue.