What happens when a country can't pay?

Explained simply: the dollar jar, the default, and why the fuel queues began.

You've probably heard that Sri Lanka "ran out of money" in 2022. That isn't quite right. It had rupees, and could print more. What it ran out of was dollars.

The dollar jar

Sri Lanka buys fuel, medicine and many foods from abroad, and the sellers want dollars. So the country keeps a jar of them: its foreign reserves. Tourism, exports and money sent home by Sri Lankans abroad fill the jar. Repaying foreign loans empties it.

When tourism collapsed in the pandemic and loan repayments kept coming, the jar ran low. Ships carrying fuel waited offshore to be paid, and queues formed at every station.

The default

In April 2022 Sri Lanka told its foreign lenders it would stop repaying them for now. That is a default. Picture a family announcing at a wedding that it can't pay back any relative this year: everyone hears, and nobody lends again until there's a plan.

A default isn't a technicality. It's the moment the whole world stops lending.

The plan came later, through an IMF programme and a long negotiation with lenders. We'll explain each of those steps in the next stories in this series.

An explainer by The Dosage.