Sri Lanka on Tuesday announced it had defaulted on its $51 billion external debt, in what the crisis-stricken nation called a "last resort" after running out of foreign exchange to import desperately needed goods.

The island nation is grappling with its worst economic downturn since independence, with regular blackouts and acute shortages of food and fuel.

Sri Lanka’s central bank said on Tuesday it had become "challenging and impossible" to repay external debt, as it tries to use its dwindling foreign exchange reserves to import essentials like fuel.

The country's reserves have slumped more than two-thirds in the past two years, as tax cuts and the COVID-19 pandemic badly hurt its tourism-dependent economy and exposed the government's debt-fueled spending.

Street protests against shortages of fuel, power, food and medicine have gone on for more than a month.

"We need to focus on essential imports and not have to worry about servicing external debt," Central Bank of Sri Lanka's governor, P. Nandalal Weerasinghe, told reporters.

"It has come to a point that making debt payments are challenging and impossible."

Weerasinghe said the suspension of payment would be until the country came to an agreement with creditors and with the support of a loan program with the International Monetary Fund (IMF).

Sri Lanka's finance ministry said in a statement that creditors, including foreign governments, were free to capitalize any interest payments due to them from Tuesday or opt for payback in Sri Lankan rupees.

"The government is taking the emergency measure only as a last resort in order to prevent further deterioration of the republic's financial position," the statement said.

It added that the immediate debt default was to ensure "fair and equitable treatment of all creditors" ahead of an IMF-assisted recovery program for the South Asian nation.

The crisis has caused widespread misery for Sri Lanka's 22 million people and led to weeks of anti-government protests.

International rating agencies had downgraded Sri Lanka last year, effectively blocking the country from accessing foreign capital markets to raise much-needed loans to finance imports.

Sri Lanka had sought debt relief from India and China, but both countries instead offered more credit lines to buy commodities from them.