In recent days, thousands of Sri Lankans have taken to the streets to demand the resignation of President Gotabaya Rajapaksa.
The island nation is facing its worst economic crisis since gaining independence from Britain in 1948 and is facing food shortages, soaring prices and power cuts.
Sri Lanka’s central bank has announced it can no longer make payments on its foreign debts.
The government is now pinning all its hopes on a bailout from the International Monetary Fund.
Why is there an economic crisis in Sri Lanka?
Sri Lanka’s problems come down to the fact that its foreign currency reserves have virtually run dry.
It means it cannot afford to pay for imports of staple foods and fuel, leading to acute shortages and very high prices.
The government blames the pandemic, which all but killed off Sri Lanka’s tourist trade – one of the island’s biggest foreign currency earners.
It also says tourists were frightened off by a series of deadly bomb attacks on churches three years ago.
However, many experts say economic mismanagement is to blame.
At the end of its 30-year civil war in 2009, Sri Lanka chose to focus more on reviving its domestic markets rather than boosting exports to the rest of the world. Income from abroad remained low, while the bill for imports kept growing. Nowadays, Sri Lanka imports $3bn (£2.3bn) more every year than it imports.
The government also racked up huge amounts of debt to fund what critics have called unnecessary infrastructure projects.
At the end of 2019, Sri Lanka had $7.6bn (£5.8bn) in foreign currency reserves, but by the end of March 2020, that figure had dwindled to only $1.9bn (£1.46bn).
How did the government respond?
When he came to power in 2019, President Rajapaksa decided to cut taxes. This meant the government had less money to buy foreign currency on the international markets to increase its reserves.
When Sri Lanka’s currency shortages became a really big problem in early 2021, the government tried to stop the outflow of foreign currency by banning all imports of chemical fertiliser, telling farmers to use organic fertilisers instead.
This led to widespread crop failures.
Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.
Since then, the government has banned the import of a wide range of “non-essential” items – from cars to certain types of food and even shoes.
One way that countries can boost their exports is to cut the value of the currency, but the government refused to let the Sri Lankan rupee fall against other currencies.
It finally did so in March 2022, and the rupee fell more than 30% against the dollar.
How much foreign debt must Sri Lanka repay?
Sri Lanka’s government has amassed foreign debts of $51bn (£39bn) and needs to raise $7bn (£5.4bn) in foreign currency this year simply to make the interest payments on its debt pile. It will have to make similar payments for years to come.
However, the central bank says Sri Lanka’s foreign currency reserves have sunk so low that it can no longer afford to make payments on its foreign debt. It says it needs the money to buy essential imports such as fuel.
It says foreign creditors will have to accept payment in Sri Lankan rupees or wait until the International Monetary Fund (IMF) comes up with a rescue package.
The next debt repayment is in July and is for $1bn (£770bn).
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What is the political situation?
Mass protests flared up in early April with people calling for President Rajapaksa to resign, which he has refused to do.
People are furious because the cost of living has become unaffordable. They are paying up to 30% more for food compared with a year earlier, which has led to some people having to cut down not only on what food they buy, but also the number of meals they eat every day.
Shortages of fuel have seen long lines at petrol stations, while the crisis has also hit public transport services.
“Earlier I used to get a bus in 15 minutes, now I have to wait one to two hours. Sometimes the bus stops midway with no fuel,” one woman told the BBC.
As demonstrations grew, the president imposed a curfew, a draconian emergency law and a ban on social media. However, when these failed to keep protesters off the streets, he withdrew the measures.
President Rajapaksa then sacked everyone in his cabinet apart from the prime minister, Mahinda Rajapaksa, who is his brother. He also sacked the governor of the central bank.
The president asked opposition MPs to help form a new government, but they have refused. Instead, more than 40 MPs aligned to the ruling coalition in parliament have left it.
What help can Sri Lanka get from abroad?
In March, Sri Lanka’s government asked the International Monetary Fund (IMF) for a bailout. Talks are due to start in mid to late April.
The new central bank governor, P Nandalal Weerasinghe, will lead the negotiations between the government and the IMF. He says Sri Lanka’s debts need to be rescheduled if it is to avoid a default.
Meanwhile, Sri Lanka is being helped by friendly neighbours such as India. It has begun supplying fuel to Sri Lanka on a $500m credit line.
China has agreed to bolster Sri Lanka’s foreign currency reserves by swapping the Sri Lankan rupee for its currency, the renminbi.
Sri Lanka has also taken loans from countries like Japan and Bangladesh.
