Bloomberg - Sri Lanka’s new government will be restricted in how much it can spend for at least the next two years, the prime minister said, as it looks to balance campaign pledges to unwind tax increases and other austerity measures against limits set by its $3 billion bailout program.

Despite an unprecedented mandate that handed his government a supermajority in parliament, President Anura Kumara Dissanayake has had to rein in plans to lower taxes on health and education because of conditions under the 2023 International Monetary Fund bailout, Harini Amarasuriya said Tuesday.

Her administration will walk that tightrope to maintain economic stability, she said.

“Having to really think through all the different ways in which we could deliver, and not take the recovery off the track, that has been the most challenging to manage,” Amarasuriya said in an interview at Temple Trees, her frangipani-lined office in Colombo. “2028 I would say is the critical year because that’s when we come out of the IMF program.”

Dissanayake’s government swept to power late last year in elections that ousted a ruling elite blamed by voters for bankrupting the nation and foisting it with unpopular austerity measures linked to the IMF bailout. Since taking office, Dissanayake and the IMF have renegotiated some of the bailout’s conditions, such as allowing higher public-sector salaries, while allaying investors’ concerns that he would scrap the IMF program altogether.

The comments by Amarasuriya, an academic who was appointed Dissanayake’s No. 2 in September, come ahead of an expected visit by the IMF to the island nation next month for a fourth review of the loan program, now roughly at its halfway point.

Sri Lanka’s economy has turned a corner in recent months, growing faster than expected last quarter and with expansion expected to sustain at around 5% in 2025. Moody’s and Fitch Ratings upgraded Sri Lanka’s credit rating in December after it concluded debt restructuring of its dollar bonds.

The Sri Lankan rupee is down about 1% this quarter after surging 25% in the previous two years. The nation’s dollar bonds have handed investors a 4% gain this quarter, adding to the 133% return in the previous two years.

The central bank on Wednesday left the policy rate at 8% and expressed confidence that inflation will move toward the 5% target from the current deflationary environment, which is providing some reprieve for consumers.

Until the government has more freedom to spend, it will rely on targeted policies, Amarasuriya said. Toward that goal, she said the administration is looking to create a database to help better identify beneficiaries of welfare programs, which would take at least a year.

“We are working with a pre-existing database, which we know is flawed,” Amarasuriya said. The main aim of the exercise is figuring out how “we benefit the person at the lowest level without creating a huge upheaval, without ballooning the cost of the public sector,” she said.