Sri Lanka said it has reached a preliminary debt restructuring agreement with the Export-Import Bank of China, a crucial step towards securing the next tranche of IMF funds to help the country recover from a financial meltdown.China is the largest bilateral creditor to Sri Lanka, which last year became the first Asia-Pacific country in two decades to default on foreign debt of $41bn amid a severe economic crisis.

The agreement with Exim Bank covers about $4.2bn of the country’s debt and is the largest single portion of what it owes to Chinese lenders, according to IMF data.

The announcement, which did not outline any details about the restructuring, “will pave the way to a prompt economic recovery”, Sri Lanka’s finance ministry said. “The indicative terms agreed will provide the necessary fiscal space for Sri Lanka to implement its ambitious reform agenda.”