Sri Lanka's 2022 Economic Crisis

How Sri Lanka ran out of foreign currency in 2022, defaulted on its debts and suffered severe shortages, and how it began to recover.

In 2022, Sri Lanka experienced the worst economic crisis in its history since independence. The country ran out of foreign currency to pay for essential imports like fuel, food and medicine, defaulted on its foreign debt and saw mass protests that forced its president from office.

The causes

Several factors combined:

Large debts: the government had borrowed heavily abroad, including through international bonds.
Tax cuts: sweeping tax cuts in 2019 sharply reduced government revenue, and credit rating agencies downgraded the country.
Tourism collapse: the 2019 Easter Sunday bombings and then the COVID-19 pandemic devastated tourism, a key source of foreign currency.
Falling remittances.
The fertiliser ban: in 2021, the government abruptly banned chemical fertilisers to promote organic farming. Harvests of rice and tea fell significantly.
Delaying help: the government held off seeking IMF assistance and spent reserves defending the currency.

The crisis

By early 2022, foreign exchange reserves had nearly run out. Fuel queues stretched for kilometres, power cuts lasted hours a day, and prices of food and medicine soared. Inflation rose to around 70 percent. In April 2022, Sri Lanka announced it would suspend payments on its foreign debt. Mass protests led President Gotabaya Rajapaksa to flee the country and resign in July 2022.

Recovery

Sri Lanka secured an IMF programme of around 3 billion dollars in March 2023. The government raised taxes, raised electricity prices to cover costs, and began restructuring its debts. India provided around 4 billion dollars in support during the crisis, through credit lines and currency swaps. Inflation fell and growth returned in 2024, but living standards for many remained lower than before.

The fuel queue economy

When a country cannot pay for fuel imports, the effects spread everywhere. Buses stop, farmers cannot run pumps, fishing boats stay in harbour, and factories close. People spend whole days in fuel queues rather than working. A shortage of foreign currency becomes a shortage of almost everything.

Lessons

Economists point to the dangers of large foreign debt, sudden tax cuts without spending restraint, abrupt policy changes like the fertiliser ban, dependence on a few sources of foreign currency, and delaying outside help.

Blaming a single cause

Sri Lanka's crisis resulted from long-standing debt vulnerabilities combined with policy mistakes and external shocks. No single factor explains it; they reinforced one another.

Key takeaways

Sri Lanka ran out of foreign currency in 2022 and suspended foreign debt payments.
Debt, tax cuts, tourism collapse, a fertiliser ban and delayed IMF help contributed.
Shortages, inflation around 70 percent and protests led the president to resign.
An IMF programme, tax increases and debt restructuring supported recovery from 2023.