LONDON: Sri Lanka reached a draft deal with creditors to restructure $12.5 billion of international bonds, it said on Thursday, in a major boost to the island nation’s fragile recovery just two days before its presidential election.

The country defaulted on its foreign debt for the first time ever in May 2022, engulfed in a severe crisis and buckling under its high debt burden and dwindling foreign exchange reserves.

The agreement comes after Sri Lanka began a third round of formal debt restructuring talks with bondholders last week. The country had to renegotiate parts of a previous draft deal, which it announced in July, after objections from the International Monetary Fund and official creditors. Getting sign off from both is a prerequisite to executing the deal.

“Sri Lanka now expects to receive formal confirmation from IMF staff that the Agreement in Principle and the Local Option, taken together, are fully consistent with the parameters of Sri Lanka’s IMF-supported Program,” the Sri Lankan government said in a statement.

“In parallel, Sri Lanka will continue to work with the OCC and its secretariat to secure confirmation of compliance of the Agreement in Principle and the Local Option with the Comparability of Treatment principle,” it added, referring to the Official Creditor Committee.

Once Sri Lanka gets the formal sign-off from both parties, it said it would commit “its best efforts to expedite the implementation of the restructuring in respect of the bonds.” Its international bond prices rallied as much as 2 cents by 1004 GMT to bid between 53.3-54.5 cents on the dollar, Tradeweb data showed.

But the country’s razor-tight presidential race on Saturday cast some doubt over the fate of the final deal, as two front-runners have expressed interest in changing some terms of the country’s IMF bailout, which could also the bond restructuring.