Sri Lanka's President said on Thursday his government has started debt restructuring discussions with China, an important step toward finalising an International Monetary Fund rescue of the island nation from its worst economic crisis.

President Ranil Wickremesinghe told Parliament on Thursday that the initial talks will continue after China's Communist Party congress meeting that begins on October 16.

Wickremesinghe, who recently returned from a trip to Japan, also said the Japanese authorities agreed to mediate the talks with China.

“China has been supporting us from ancient times and we believe they will do the same in these difficult times,” Wickremesinghe said.

Sri Lanka is nearly bankrupt and has suspended repaying its $51-billion foreign debt, of which it must repay $28 billion by 2027.

Sri Lanka has reached a preliminary agreement with the IMF for a $2.9-billion rescue package over four years. Finalisation of the rescue hinges on assurances from Sri Lanka's creditors on debt restructuring.

Sri Lanka borrowed heavily from China over the past decade for infrastructure projects that includes a seaport, airport and a city being built on reclaimed land. The projects failed to earn enough revenue to pay for the loans, a factor in Sri Lanka's economic woes.

China is not Sri Lanka's biggest creditor. It has a share of about 10 per cent of Sri Lanka's loans after Japan and the Asian Development Bank.

However, China's assent to restructure its loans is crucial because the US has insisted that China cooperates in the restructuring “openly and on comparable terms with each other”.

China has not committed to any restructuring, though it offered an additional loan.

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