Saudi Press

Saudi Arabia and the world
Thursday, Mar 26, 2026

EXPLAINER: Why Sri Lanka's economy collapsed and what's next

EXPLAINER: Why Sri Lanka's economy collapsed and what's next

Sri Lanka’s prime minister says the island nation’s debt-laden economy has “collapsed” as it runs out of money to pay for food and fuel. Short of cash to pay for imports of such necessities and already defaulting on its debt, it is seeking help from neighboring India and China and from the International Monetary Fund.

Prime Minister Ranil Wickremesinghe, who took office in May, was emphasizing the monumental task he faces in turning around an economy he said is heading for “rock bottom.”

Sri Lankans are skipping meals as they endure shortages, lining up for hours to try to buy scarce fuel. It’s a harsh reality for a country whose economy had been growing quickly, with a growing and comfortable middle class, until the latest crisis deepened.

HOW SERIOUS IS THIS CRISIS?


The government owes $51 billion and is unable to make interest payments on its loans, let alone put a dent in the amount borrowed. Tourism, an important engine of economic growth, has sputtered because of the pandemic and concerns about safety after terror attacks in 2019. And its currency has collapsed by 80 percent, making imports more expensive and worsening inflation that is already out of control, with food costs rising 57%, according to official data.

The result is a country hurtling towards bankruptcy, with hardly any money to import gasoline, milk, cooking gas and toilet paper.

Political corruption is also a problem; not only did it play a role in the country squandering its wealth, but it also complicates any financial rescue for Sri Lanka.

Anit Mukherjee, a policy fellow and economist at the Center for Global Development in Washington, said any assistance from the IMF or World Bank should come with strict conditions to make sure the aid isn’t mismanaged.

Still, Mukherjee noted that Sri Lanka sits in one of the world’s busiest shipping lanes, and so letting a country of such strategic significance collapse is not an option.

HOW IS IT AFFECTING REAL PEOPLE?


Tropical Sri Lanka normally is not lacking for food but people are going hungry. The U.N. World Food Program says nearly nine of 10 families are skipping meals or otherwise skimping to stretch out their food, while 3 million are receiving emergency humanitarian aid.

Doctors have resorted to social media to try to get critical supplies of equipment and medicine. Growing numbers of Sri Lankans are seeking passports to go overseas in search of work. Government workers have been given an extra day off for three months to allow them time to grow their own food. In short, people are suffering and desperate for things to improve.

WHY IS THE ECONOMY IN SUCH DIRE STRAITS?


Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.

Much of the public’s ire has focused on President Gotabaya Rajapaksa and his brother, former Prime Minister Mahinda Rajapaksa. The latter resigned after weeks of anti-government protests that eventually turned violent.

Conditions have been deteriorating for the past several years. In 2019, Easter suicide bombings at churches and hotels killed more than 260 people. That devastated tourism, a key source of foreign exchange.

The government needed to boost its revenues as foreign debt for big infrastructure projects soared, but instead Rajapaksa pushed through the largest tax cuts in Sri Lankan history. (The tax cuts were recently were reversed.) Creditors downgraded Sri Lanka’s ratings, blocking it from borrowing more money as its foreign reserves sank. Then tourism flatlined again during the pandemic.

In April 2021, Rajapaksa suddenly banned imports of chemical fertilizers. The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices higher. To save on foreign exchange, imports of other items deemed to be luxuries also were banned. Meanwhile, the Ukraine war has pushed prices of food and oil higher. Inflation was near 40% and food prices were up nearly 60% in May.

WHY DID THE PRIME MINISTER SAY THE ECONOMY HAS COLLAPSED?


Such a stark declaration might undermine any confidence in the state of the economy and it didn’t reflect any specific new development. Wickremesinghe appeared to be underscoring the challenge his government faces in turning things around as it seeks help from the IMF and confronts criticism over the lack of improvement since he took office weeks ago. He’s also fending off criticism from within the country. His comment might be intended to try to buy more time and support as he tries to get the economy back on track.

The Finance Ministry says Sri Lanka has only $25 million in usable foreign reserves. That has left it without the wherewithal to pay for imports, let alone repay billions in debt.

Meanwhile the Sri Lankan rupee has weakened in value to about 360 to $1. That makes costs of imports even more prohibitive. Sri Lanka has suspended repayment of about $7 billion in foreign loans due this year out of $25 billion to be repaid by 2026.

WHAT IS THE GOVERNMENT DOING ABOUT IT?


Wickremesinghe has ample experience. This latest is his sixth term as prime minister.

So far, Sri Lanka has been muddling through, mainly supported by $4 billion in credit lines from neighboring India. An Indian delegation was in the capital Colombo on Thursday for talks on more assistance, but Wickremesinghe warned against expecting India to keep Sri Lanka afloat for long.

“Sri Lanka pins last hopes on IMF,” said Thursday’s headline in the Colombo Times newspaper. The government is in negotiations with the IMF on a bailout plan and Wickremesinghe said Wednesday he expects to have a preliminary agreement with the IMF by late July.

The government also is seeking more help from China. Other governments like the U.S., Japan and Australia have provided a few hundred million dollars in extra support.

Earlier this month, the United Nations began a worldwide public appeal for assistance. So far, projected funding barely scratches the surface of the $6 billion the country needs to stay afloat over the next six months.

To counter Sri Lanka’s fuel shortage, Wickremesinghe told The Associated Press in a recent interview that he would consider buying more steeply discounted oil from Russia to help tide the country through its crisis.

Newsletter

Related Articles

Saudi Press
0:00
0:00
Close
Trump Set for Palm Beach Return Following Saudi-Backed Summit in Miami
Saudi Arabia Accelerates Yanbu Oil Exports Toward Five Million Barrel Target
Report Highlights Saudi-US Security Discussions as Trump Administration Evaluates Iran Strategy
Saudi Arabia’s Humain Commits Three Billion Dollars to Elon Musk’s xAI in Strategic Technology Push
Saudi Arabia Signals Firm Shift in Iran Policy, Declares Coexistence No Longer Viable
Saudi Clubs Prepare Major Push to Sign Mohamed Salah Amid Growing Transfer Speculation
Saudi Arabia Rejects Claims It Seeks to Prolong Regional Conflict
Saudi Arabia Condemns Iranian Actions and Signals Firm Shift Toward Stronger Response
Saudi Arabia Reassesses Strategic Approach as Regional Tensions with Iran Intensify
Pakistan Reaffirms Strong Support for Saudi Arabia Following High-Level Visit
Saudi Arabia Expands Regional Trade Links by Opening New Land and Sea Routes to UAE
World Economic Forum Delays Saudi Conference as Regional Conflict Disrupts Global Agenda
Saudi Arabia and UAE Signal Potential Entry into Iran Conflict if Critical Infrastructure Is Targeted
Global Firms Accelerate Expansion into Saudi Arabia as Economic Reforms Gain Momentum
Global Labour Pressure Mounts as ILO Faces Calls to Reject Saudi Bid to Dismiss Migrant Worker Complaint
Gulf Powers Move Closer to Entering Iran Conflict as Regional Pressure Intensifies
Saudi Arabia Breaks Ranks with Regional Allies Over Response to Iran Escalation
Saudi Arabia Moves Closer to Direct Role as Iran Conflict Intensifies
World Economic Forum Postpones Jeddah Meeting Amid Escalating Regional Tensions
Saudi Crown Prince Reportedly Urges Trump to Sustain Military Pressure on Iran
Trump to Deliver Keynote Address at Saudi-Backed Investment Summit in Miami Beach
Saudi Arabia and Kuwait Press Ahead With Energy Agreements Despite Regional Conflict
Can Saudi Arabia’s Yanbu Port Replace Hormuz? Capacity Limits Test Critical Oil Lifeline
Saudi Arabia Detects Ballistic Missiles as Regional Tensions Escalate in Gulf
Saudi Aramco Reduces Oil Shipments to Asia for Second Consecutive Month
Saudi Aramco Reduces Oil Shipments to Asia for Second Consecutive Month
Saudi Arabia and UAE Push Ahead With Major Deals Despite Iran-Related Uncertainty
Formula One Cancels Bahrain and Saudi Arabia Grands Prix Amid Escalating Regional Tensions
Pakistan Signals Strategic Realignment Toward Saudi Arabia Amid Regional Tensions
Saudi Arabia Cuts Oil Shipments to Asia as Regional Conflict Disrupts Key Export Routes
Saudi Arabia Moves to Contain Regional Escalation as Houthis Signal Readiness to Join Conflict
Saudi Arabia Signals Independent Nuclear Strategy Unaffected by Iran Tensions
Saudi Arabia Signals Independent Nuclear Strategy Unaffected by Iran Tensions
Egypt Reaffirms Strong Support for Saudi Arabia as Sisi Condemns Iran’s Gulf Attacks
Saudi Stocks Close Higher as Tadawul Index Gains 0.55% on Broad Sector Strength
Iran Fires Ballistic Missiles Toward Riyadh as Gulf Conflict Intensifies
Barcelona Midfielder Marc Casadó Attracts €40 Million Interest from Saudi Clubs
Strait of Hormuz Tensions Rise as Saudi Arabia Opens Key Air Base to US Forces
Saudi Arabia Confronts Strategic Turning Point as Iran Conflict Redefines Regional Alliances
Saudi Arabia Intercepts Missile as Two Others Land in Remote Area Without Casualties
Saudi Expulsion of Iranian Military Attaché Raises Doubts Over Fragile Riyadh–Tehran Rapprochement
Saudi Arabia’s Strategic East–West Pipeline Gains Global Attention as Energy Routes Face Growing Risks
Iran Reportedly Reduces Strikes on Saudi Arabia Amid Concerns Over Strong Retaliation
Saudi Arabia Criticises Israeli Strikes in Southern Syria Amid Rising Regional Tensions
Egypt and Saudi Arabia Warn Iran’s Actions Threaten Stability Across the Gulf
Egypt and Saudi Arabia Warn Iran’s Actions Threaten Stability Across the Gulf
Saudi Arabia Unveils Comprehensive 2026 Roadmap to Streamline Company Formation
Saudi-UAE Tensions Reveal Emerging Rivalry at the Heart of Gulf Power Dynamics
Saudi Arabia Launches Gulf Maritime Support Initiative to Safeguard Shipping
Saudi Arabia Expands US Military Access as UAE Braces for Prolonged Iran Conflict
×