Lanka is to pay off a $251m (£188m) Iranian oil debt by sending the country millions of dollars worth of tea every month.

The country will ship $5m of leaves to the country every month to settle the debt, in what is believed to be the first example of the beverage being used to settle a bill between governments.

Ramesh Pathirana, a government minister, said the payment method would circumvent sanctions imposed on Iran by the United Nations and United States because tea is deemed to be a foodstuff.

The unconventional payment method means no sanctioned banks will be involved, he added.

Sri Lanka has a major debt burden that has worsened after the pandemic ravaged the island’s critical tourism industry.

It is also suffering an exchange crisis, with foreign currency reserves falling two-thirds to just over $2bn since 2019, according to its finance minister.

The Sri Lankan government has sought to make foreign exchange swaps with China, Bangladesh, South Korea, and India in a bid to avoid going to the International Monetary Fund.

Officials have already banned imports of products including food and vehicles to stem the flood of money abroad amid extreme shortages which have grown so severe that Sri Lanka’s only refinery was closed down last month after it ran out of dollars with which to buy crude oil.

Sri Lanka’s plantation ministry said: “The recommended scheme will save Sri Lanka much-needed foreign currency since the settlement to Iran would be made in Sri Lankan rupees through the sale of Ceylon Tea.”

The country’s government unveiled new austerity measures in November as part of an attempt to curb soaring debts. Its economy shrank by 3.6pc during 2020, the worst fall on record.

It faces losing a key export market in the European Union, which is undertaking an investigation into alleged human rights violations in the country.