Sri Lanka's economic collapse and default

Sri Lanka had run persistent budget deficits averaging around 7% of GDP through the decade before its crisis, financed increasingly through foreign commercial borrowing and bilateral loans, including significant Chinese lending for large infrastructure projects that often failed to generate returns commensurate with their cost. Deep tax cuts introduced in 2019 further eroded government revenue just as the COVID-19 pandemic devastated tourism, one of the country's main sources of foreign currency, and foreign reserves fell to under $2 billion by early 2022, covering less than a month of imports. Unable to secure enough foreign currency to pay for essential imports, Sri Lanka unilaterally suspended payments on its external debt in April 2022, the first sovereign default in its history, while inflation soared past 70% and severe shortages of fuel, cooking gas, and medicine spread nationwide. Mass protests over the economic hardship forced the resignation of the prime minister in May and then, after protesters stormed the presidential palace, President Gotabaya Rajapaksa fled the country and resigned in July 2022, leading to an IMF-backed recovery program under new leadership.