Fuel shortages, massive debts, and protesters partying in the presidential palace: Here is what's going on in 'bankrupt' Sri Lanka

Protesters swim in the pool after storming President Gotabaya Rajapaksa's residence in Colombo.
Protesters swim in the pool after storming President Gotabaya Rajapaksa's residence in Colombo.
  • Sri Lanka has become a "bankrupt country" after running out of money, its prime minister said.
  • Protests have erupted after food prices soared and fuel supplies were rationed due to shortages.
  • The International Monetary Fund wants the situation to stabilize before resuming bailout talks.

The president of Sri Lanka, Gotabaya Rajapaksa, 73, resigned on Thursday after fleeing to Singapore in the wake of widespread protests across the island nation sparked by dire shortages of fuel, medicines and huge rises in the cost of basic foodstuffs in recent weeks.

The prime minister, Ranil Wickremesinghe, is now acting president until a new head of state is elected.

So what has gone wrong with Sri Lanka's economy – and how might its problems be solved?

What triggered the protests in Sri Lanka?

Vladimir Putin's invasion of Ukraine earlier this year sent the cost of oil, natural gas and commodities such as grain soaring globally. Sri Lanka's economy was already poorly managed, according to many experts, and the price rises have proven to be the straw that breaks the camel's back. 

Rajapaksa's older brother Mahinda has also served as president and their family has governed Sri Lanka for much of the past 20 years. Their decision to borrow huge sums from China in particular, partly for infrastructure projects of questionable value, and what the Financial Times has described as failed economic policies, caused Sri Lanka to default on its debt in May.

What is a default?

A default occurs when a government stops making interest payments to its creditors. In Sri Lanka's case it owes $51 billion, the FT reported, and has become the first country to default since the Ukraine war began. Other less wealthy countries where a greater proportion of spending goes on food could also follow suit, economists fear.

What are the consequences?

Earlier this month Wickremesinghe said Sri Lanka was now a "bankrupt country," CNN reported.

Because it has run out of foreign currencies such as US dollars, Sri Lanka can no longer pay for imports of fuel and food. People have been told to work from home in a bid to save energy, schools have closed and electricity supplies have become unreliable. Sales of petrol have been restricted, creating huge queues of rickshaw taxis trying to fill up in cities like the capital Colombo.

Rickshaw drivers queue for fuel in Colombo on Wednesday.
Rickshaw drivers queue for fuel in Colombo.

A state of emergency is now in force, raising fears about the military's actions in a country where a long-running conflict between government forces and the Tamil Tigers only ended a little more than a decade ago.

Hannah Ellis-Petersen, the Guardian's south Asia correspondent, who is reporting from Colombo, told its First Edition newsletter that Sri Lanka's problems were "not just Covid-19 or the war in Ukraine, or global inflation" but largely the consequence of what the newspaper called "reckless spending and endemic corruption."

What happens now?

The president's resignation does not signal the end of the economic crisis given that inflation is running at more than 50% and the central bank has been printing money to pay for additional borrowing, which is not sustainable.  

"The government doesn't have enough money to meet expenditure, and doesn't have the dollar reserves to fund imports," Nishan de Mel of Verité Research, a Colombo-based think-tank, told the FT.

The economy has also been deprived of tourism income after but the government kept its borders closed until late 2021 with a "zero-Covid" policy that echoed China - long after neighboring nations reopened.

What is being done to help Sri Lanka?

The International Monetary Fund had been finalizing a bailout for Sri Lanka before the president's and prime minister's residences were stormed last weekend by protesters who partied and took a dip in their swimming pools.

The IMF wants the situation to stabilize before talks resume, but the political vacuum complicates that process and means imports of fuel and food are unlikely to resume immediately.

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