The ban on the Tamil Tigers could be lifted

In addition, "progress on the peace front should significantly improve business confidence and strengthen the willingness of the international community to enhance growth in Sri Lanka", he added, referring to the government's recently agreed truce and the forthcoming peace talks with the Tamil Tigers.

In a bid to reverse last year's 1.3% shrinkage of the economy and achieve 3.5% growth this year, the government is pushing through tax, finance and labour reforms.

Cost cutting aims to slash the budget deficit from last year's 10.8% of gross domestic product to 8.5%.

The government has begun reforming Sri Lanka's indebted state owned banks and its loss making state owned enterprises.

In addition, the IMF loans have enabled the government to prevent a slide in the country's cash reserves which stood at $1.34bn late last year.

Further assistance

When the latest tranche is included, the IMF will have passed on $190m of the $235m standby loan.

The facility has been extended to 19 August.

The reforms should prepare the ground for a longer-term loan from the IMF, which the government is expected to apply for before the end of the year.

Push for peace

Prime Minister Ranil Wickremesinghe has agreed to consider lifting a ban on the Tamil Tigers to clear the way for peace talks.

Norway's deputy foreign minister and peace envoy to Sri Lanka, Vidar Helgesen, is set to meet with Sri Lanka President Chandrika Kumaratunga who leads the government coalition together with the prime minister who is also her rival.

The president's support for lifting the ban on the Tamil Tigers is vital for a deal, though she has previously objected to this unless the Tigers lay down their arms.