Sri Lanka’s new government will limit how much it can spend for at least the next two years, the prime minister said, as he seeks to balance campaign promises to ease tax increases and other austerity measures against the limits set by a $3 billion bailout program.
Despite an unprecedented mandate given to his government by a supermajority in parliament, President Anura Kumara Dissanayake has had to rein in tax cut plans for health and education due to conditions under a 2023 International Monetary Fund bailout, Harini Amarasuriya said on Tuesday.
She said her administration would walk that tightrope to maintain economic stability.
“We really need to think about all the different ways we can deliver, and not derail the recovery, managing it has been the most challenging,” Amarasuriya said in an interview at her Frangipani-affiliated office in Colombo, Temple Trees. “I would say 2028 is the critical year, because that’s when we come out of the IMF program.”
Dissanayake’s government came to power late last year in an election that ousted a ruling elite that voters blamed for bankrupting the nation and imposing unpopular austerity measures linked to the IMF bailout. Since taking office, Dissanayake and the IMF have renegotiated some of the terms of the bailout, such as allowing public sector wages to increase, allaying investor concerns that he would pull out of the IMF program altogether.
The comments by Amarasooriya, an academic who was appointed as Dissanayake’s No. 2 in September, come as the IMF is due to visit the island next month for the fourth review of the loan program, which is now about halfway through its term.
Sri Lanka’s economy has turned around in recent months, growing faster than expected in the last quarter and is expected to maintain expansion at around 5% in 2025. Moody’s and Fitch Ratings upgraded Sri Lanka’s credit rating in December, after completing a debt restructuring of its dollar bonds.
The Sri Lankan rupee, which had risen by 25% in the past two years, fell by about 1% this quarter. The nation’s dollar bonds gave investors a 4% gain this quarter, adding to a 133% return over the past two years.
The central bank on Wednesday kept the policy rate at 8% and expressed confidence that inflation would move towards the 5% target from the current deflationary environment, providing some relief to consumers.
Until the government has more freedom to spend, it will rely on targeted policies, Amarasuriya said. Towards that goal, she said, the administration hopes to create a database that will help better identify beneficiaries of welfare programs, which will take at least a year.
“We are working with a pre-existing database and we know it is flawed,” Amarasuriya said. The main objective of the exercise is to find out “how do we deliver benefits to the person at the bottom without causing a huge disruption and increasing public sector costs.”
