In Pictures: Sri Lanka’s economic crisis did not happen overnight

The new government Sri Lanka will have to wrap up negotiations with the International Monetary Fund at the earliest. Any dilly-dally on what the island nation has to do to get the funds will only prolong the agony. There is also the equally weighty matter of restructuring its sovereign debt.

First, the authorities have to bring a semblance of social order that has devastated the economy and brought its crucial tourism sector to a halt.

Analysts say economic mismanagement weakened Sri Lanka's public finances, leaving national expenditure in excess of income and the production of tradable goods and services at inadequate levels.

The situation was exacerbated by deep tax cuts enacted by the last government soon after it took office in 2019. Months later, the COVID-19 pandemic struck.

That wiped out much of Sri Lanka's revenue base, most notably from the lucrative tourism industry, while remittances from nationals working abroad dropped and were further exhausted by an inflexible foreign exchange rate.

Rating agencies, concerned about government finances and inability to repay large foreign debt, downgraded Sri Lanka's credit ratings from 2020 onwards, eventually locking the country out of international financial markets.

To keep the economy afloat, the government leaned heavily on its foreign exchange reserves, eroding them by more than 70 per cent in two years.

The crisis has crippled Sri Lanka, once seen as a model for a developing economy. Fuel shortages have led to long queues at filling stations as well as frequent blackouts, and hospitals have run short of medicine. Runaway inflation reached 54.6 per cent last month and could rise to 70 per cent, the central bank has said.

Despite the rapidly deteriorating economic environment, the Rajapaksa government initially held back from talks with the IMF.

Eventually, aware of the scale of the brewing crisis, the government did seek help from other countries, including India and China.

India has extended billions of dollars in loans to help pay for vital supplies. In all, New Delhi says it has provided support worth over $3.5 billion this year. China has said it supports efforts for the island nation to restructure its debt.

Earlier in 2022, Rajapaksa asked China to restructure repayments on around $3.5 billion of debt owed to Beijing, which in late 2021 also provided Sri Lanka with a $1.5 billion yuan-denominated swap.