COLOMBO: Sri Lanka on Wednesday said it had reached an “agreement in principle” with its lenders, including China, to restructure nearly $6.0 billion in loans and unlock IMF funding for a bailout.

The country defaulted on its $46 billion debt in April last year after running out of foreign exchange to finance imports of even the most essential commodities, making life a misery for the island’s 22 million people.

The finance ministry said the deal included a mix of extending the tenure and reducing interest on some $5.9 billion in bilateral loans granted to the cash-strapped South Asian nation.

“This agreement serves as a key milestone in Sri Lanka’s ongoing endeavours to achieve public debt sustainability and to foster economic recovery,” Finance Ministry Secretary Mahinda Siriwardana said in a statement.

Sri Lanka in March secured a four-year $2.9 billion bailout package from the International Monetary Fund (IMF) subject to Colombo ensuring debt sustainability in line with agreed targets.

However, the release of a second $330 million loan instalment has been held up since September due to delays in securing a deal with foreign creditors.

Sri Lanka’s largest single bilateral lender China had been reluctant to take a haircut on its loans and instead had offered to extend the term of its loans and adjust down interest rates.

Monetary authorities in Colombo have dramatically hiked taxes and cut generous consumer subsidies to repair the country’s ruined finances in line with the IMF rescue plan.

The Washington-based lender of last resort has noted Sri Lanka’s “rapid” drop in inflation, from 70 percent in September last year to just 1.3 percent by September this year. But it also cautioned that Sri Lanka’s “full economic recovery is not yet assured”.