* Plans for a $2.9-bln development loan, $1.3-bln bond
* Country faces BOP crisis after foreign outflows
* Sri Lanka plans to ease debt crisis after heavy borrowing (Adds details, comments)
By Ranga Sirilal
COLOMBO, May 31 (Reuters) - Japan will lend $4.2 billion to Sri Lanka through both a loan and bond financing for budgetary support in the next two years, including infrastructure development, the Indian Ocean nation's finance minister said on Tuesday.
The borrowing comes as Sri Lanka seeks to resolve its precarious balance of payments position after a sharp depletion of foreign exchange reserves - a legacy of massive debt piled up under the previous government.
"Japan has committed $2.9 billion at a low interest rate of 0.01 percent over the next two years, and it's up to us to utilise the full amount," Ravi Karunanayake told reporters in Colombo, on his return from a G7 meeting in Japan.
He said the repayment period for the $2.9-billion loan would be 40 years, adding that a $1.3-billion bond would also be issued in Japan.
On May 19, Karunanayake had said the total borrowing cost of Japanese funds would be 3.5 percent to 4 percent "with the exchange fluctuation risks and dollar swap".
Sri Lanka is heavily indebted, partly due to borrowing by the previous government during its nine-year tenure that ended in January 2015. It faces a balance of payments crisis, with around $2 billion in foreign outflows from the government securities market since October 2014.
Kurunanayake in the past has said the government will repay short-term expensive loans with cheaper long-term loans.
The government delayed its 2016 borrowing plan until it reached a deal with the International Monetary Fund (IMF) last month for a $1.5-billion bailout to help the $82.2-billion economy avert a balance of payments crisis.
Japan disbursed $2.69 billion to Sri Lanka between January 2006 and September 2014, Treasury data showed, putting it second only to China as a sovereign lender.
Sri Lanka has taken steps to ease the pressure on foreign debt repayment, such as a request that China swap some of the $8 billion it owes to Beijing for equity in infrastructure projects and an offer to sell stakes in its companies to Chinese firms.
It also plans to reform loss-making state-owned enterprises while raising taxes to boost government revenue, after repeated IMF requests. ($1=111.2200 yen) (Reporting by Ranga Sirilal; Editing by Shihar Aneez and Clarence Fernandez)