Sri Lanka's Prime Minister says the island nation's debt-laden economy has "collapsed" as it runs out of money to pay for food and fuel.

Short of cash to pay for imports of such necessities and already defaulting on its debt, the country is seeking help from neighbouring India and China and from the International Monetary Fund (IMF).

Prime Minister Ranil Wickremesinghe, who took office in May, has emphasised the monumental task he faces in turning around an economy he said was headed for "rock bottom". 

Sri Lankans are skipping meals as they endure shortages and lining up for hours to try to buy scarce fuel.

It's a harsh reality for a country whose economy had been growing quickly, with a growing and comfortable middle class, until the latest crisis deepened.

How serious is this crisis? 

The government owes $US51 billion ($73.9 billion) and is unable to make interest payments on its loans, let alone put a dent in the amount borrowed.

Tourism, an important part of economic growth, has sputtered because of the pandemic and concerns about safety after terror attacks in 2019.

Its currency has collapsed by 80 per cent, making imports more expensive and worsening the already out-of-control inflation.

Food costs have risen 57 per cent, according to official data.

The result is a country hurtling towards bankruptcy, with hardly any money to import fuel, milk, cooking gas and toilet paper.

Political corruption is also a problem; not only did it play a role in the country squandering its wealth, but it also complicates any financial rescue for Sri Lanka. 

Policy fellow and economist at the Center for Global Development in Washington Anit Mukherjee said any assistance from the IMF or World Bank should come with strict conditions to make sure the aid isn't mismanaged.

He noted Sri Lanka sat in one of the world's busiest shipping lanes, so letting a country of such strategic significance collapse was not an option. 

How is it affecting real people? 

Sri Lanka normally has plenty of food, but now people are going hungry. 

The United Nations World Food Program said nearly nine of 10 families were skipping meals or skimping to stretch out their food, while 3 million were receiving emergency humanitarian aid.

Doctors have resorted to social media to try to get critical supplies of equipment and medicine.

Growing numbers of Sri Lankans are seeking passports to go overseas in search of work.

Government workers have been given an extra day off for three months to allow them time to grow their own food.

In short, people are suffering and desperate for things to improve.

Why is the economy in such dire straits? 

Economists say the crisis stems from domestic factors such as years of mismanagement and corruption.

Much of the public's ire has focused on President Gotabaya Rajapaksa and his brother, former prime minister Mahinda Rajapaksa.

The latter resigned after weeks of anti-government protests that eventually turned violent.

Conditions have been deteriorating for the past several years.

In 2019, Easter suicide bombings at churches and hotels killed more than 260 people.

That devastated tourism, a key source of foreign exchange.

The government needed to boost its revenues as foreign debt for big infrastructure projects soared, but instead Mr Rajapaksa pushed through the largest tax cuts in Sri Lankan history — cuts that were recently reversed. 

Creditors downgraded Sri Lanka's ratings, blocking it from borrowing more money as its foreign reserves sank.

Then tourism flatlined again during the pandemic.

In April 2021 Mr Rajapaksa suddenly banned imports of chemical fertilisers.

The push for organic farming caught farmers by surprise and decimated staple rice crops, driving prices up.

To save on foreign exchange, imports of items deemed to be luxuries were banned.

Meanwhile, the Ukraine war has pushed prices of food and oil higher.

Inflation was near 40 per cent and food prices were up nearly 60 per cent in May. 

Why did the Prime Minister say the economy has collapsed? 

Such a stark declaration might undermine any confidence in the state of the economy, but it didn't reflect any specific new development.

Mr Wickremesinghe appeared to be underscoring the challenge his government faces in turning things around as it seeks help from the IMF and confronts criticism over the lack of improvement since he took office weeks ago.

He's also fending off criticism from within the country.

His comment might be intended to try to buy more time and support as he tries to get the economy back on track.

The Finance Ministry says Sri Lanka has only $US25 million ($36.2 million) in usable foreign reserves.

That has left it without the means to pay for imports, let alone repay billions in debt.

Meanwhile, the Sri Lankan rupee has weakened in value to about 360 to $US1.

That makes costs of imports even more prohibitive.

Sri Lanka has suspended repayment of about $US7 billion ($10.1 billion) in foreign loans due this year out of $US25 billion to be repaid by 2026.

What is the government doing about it? 

Mr Wickremesinghe has ample experience entering his sixth term as prime minister.

So far Sri Lanka has been muddling through, mainly supported by $US4 billion ($5.8 billion) in credit lines from neighbouring India.

An Indian delegation was in the capital Colombo this week for talks on more assistance, but Mr Wickremesinghe warned against expecting India to keep Sri Lanka afloat for long.

"Sri Lanka pins last hopes on IMF," a Colombo Times newspaper headline read.

The government is in negotiations with the IMF on a bailout plan and Mr Wickremesinghe said he expected to have a preliminary agreement by late July.

The government is also seeking more help from China.

Other governments like the US, Japan and Australia have provided a few hundred million dollars in extra support.

Earlier this month, the United Nations began a worldwide public appeal for assistance.

So far, projected funding barely scratches the surface of the $US6 billion the country needs to stay afloat over the next six months.

To counter Sri Lanka's fuel shortage, Mr Wickremesinghe told The Associated Press in a recent interview he would consider buying more steeply discounted oil from Russia to help tide the country through its crisis.