It follows months of protests over soaring prices and a lack of food and fuel.
What is happening in Sri Lanka?
The price of everyday goods has risen sharply. Inflation is running at more than 50%.
There have also been power cuts.
And a lack of medicines has brought the health system to the verge of collapse.
The country doesn’t have enough fuel for essential services like buses, trains and medical vehicles. Officials say it does not have enough foreign currency to import more.
This lack of fuel has caused petrol and diesel prices to rise dramatically since the start of the year.
In late June the government banned the sale of petrol and diesel for non-essential vehicles for two weeks. It’s thought to be the first country to do so since the 1970s. Sales of fuel remain severely restricted.
Schools have closed and people have been asked to work from home to help conserve supplies.
Why is Sri Lanka’s economy in crisis?
Sri Lanka’s foreign currency reserves have virtually run dry, meaning it doesn’t have enough funds available to buy goods from other countries.
And in May it failed to make a payment on its foreign debt for the first time in its history.
The government blames the Covid pandemic, which affected Sri Lanka’s tourist trade – one of its biggest foreign currency earners. It also says tourists have been frightened off by a series of deadly bomb attacks on churches in 2019.
However, many experts say economic mismanagement is to blame.
At the end of its civil war in 2009, Sri Lanka chose to focus more on providing goods to the domestic market, instead of trying to break into foreign ones.
So, income from exports to other countries remained low, while the bill for imports kept growing.
Sri Lanka now imports $3bn (£2.3bn) more than it exports every year, and that is why it has run out of foreign currency.
At the end of 2019, Sri Lanka had $7.6bn (£5.8bn) in foreign currency reserves.
By March 2020 this had fallen to $1.93bn (£1.5bn) and recently the government said it had just $50m (£40.5m) left.
The government has also racked up huge debts with countries including China, to fund what critics have called unnecessary infrastructure projects.
Much of the anger for the economic crisis has been directed at President Gotabaya Rajapaksa and his brother, Mahinda, who he appointed to be prime minister, but dismissed in May.
President Rajapaksa has been criticised for big tax cuts he introduced in 2019. Finance Minister Ali Sabry has said these lost the government income of more than $1.4bn (£1.13bn) a year.
When Sri Lanka’s foreign currency shortages became a serious problem in early 2021, the government tried to limit them by banning imports of chemical fertiliser.
It told farmers to use locally sourced organic fertilisers instead.
This led to widespread crop failure. Sri Lanka had to supplement its food stocks from abroad, which made its foreign currency shortage even worse.
An IMF report in March this year said the fertiliser ban (reversed in November 2021) also hurt tea and rubber exports.
Does the government have a plan to solve the crisis?
President Rajapaksa is reported to have agreed to step down. Prime Minister Ranil Wickremesinghe has also indicated he would resign to make way for a unity government, but has not said when.
There are question marks over who is leading the country, and what can be done to restore order.
The speaker of Sri Lanka’s parliament told the BBC a new cross-party coalition government would need to be formed within a week of the president officially stepping down.
The government is in talks with the International Monetary Fund (IMF) to get a $3bn (£2.5bn) bailout.
The IMF – which works with its 190 member countries to stabilise the world economy – has said the government must raise interest rates and taxes as a condition of any loan.
Prime Minister Wickremesinghe has said the government is now so short of funds that it will be printing money to pay employees’ salaries, but he’s warned this will lead to further price hikes.
He’s also said state-owned Sri Lankan Airlines could be privatised, and the country is asking Russia and Qatar to supply it with oil at low prices to help reduce the cost of petrol.
How much foreign debt must Sri Lanka repay?
Sri Lanka’s government has racked up $51bn (£39bn) in foreign debt.
$6.5bn of that is owed to China, and the two countries are in talks on how to restructure the debt.
This year, it will be required to pay $7bn (£5.4bn) to service its overall debts, with similar amounts for years to come.
The World Bank has agreed to lend Sri Lanka $600m.
India has committed $1.9bn and may lend an additional $1.5bn for imports.
The G7 group of leading industrial countries – Canada, France, Germany, Italy, Japan, UK and the US – have said they will provide help to Sri Lanka in securing debt relief.
